As many are already aware, the fiduciary issue has become an SEC hot topic relative to the standard to which each financial advisor will be required to adhere. Depending on which side of the debate you’re on, whether you are an advisor or broker, each of your opinions is colored by your own biases. As such, I’d like to share my perspective on the fiduciary debate when viewed through the lens of a slightly different, yet meaningful and relevant professional code of standards, as I believe it underscores the need for a distinct difference to be made between a fiduciary advisor and a broker/salesperson.
In the realm of the long-time prestigious designation known as the Certified Public Accountant (CPA), the word “independent” resonates across the entire discipline as one of the three main accepted auditing standards. “The auditor must maintain independence (in fact and appearance) in mental attitude in all matters related to the audit,” per the U.S. Generally Accepted Auditing Standards. It’s the phrase “in fact and appearance” that resonates with great similarity between the auditing profession of a CPA and the investment advising profession of a financial advisor. I believe it further helps make the case as to why there should be a distinct difference made between a fiduciary advisor and a commission-based broker/salesperson.
The financial advisor profession is a little confusing because, currently, anyone selling insurance, annuities or mutual funds, a stock broker, registered investment advisor, or anyone with the letters CFP, CFA, CIMA or other combination after their names, can all call themselves a “financial advisor.” How in the world within one profession can there be such a vast amount of conflicting overlaps for the term ‘financial advisor’?
Furthermore, how can we expect the general public to know the difference between an investment advisor and a salesperson, if both can be called financial advisors? Should both types of financial professionals legitimately be able to say they offer financial advisory services if only one is subject to a fiduciary standard? In medicine, this would be akin to allowing physicians in general practice to act as heart specialists anytime they have a patient with a heart issue; or allowing nurses to perform surgery for a doctor. This isn’t accepted practice, so why should we tolerate lesser standards in the financial arena?
A CPA is qualified to provide auditing work to any third-party client if they wish to do so. However, there is a standard for each audit engagement to which a CPA must adhere and they have to be independent in fact and appearance in order to provide that audit service. Sowhy is this independence so important?
If an audit report is written on the financials of any publicly traded company, there’s an opinion provided with regard to how well that company’s financials are presented. Every day, many people make judgment calls on that company’s financial assets, liabilities, overall position, and even the company’s growth potential, based partly on the audit report opinion provided by a CPA. Consequently, the need for a completely independent in fact and appearance auditor, is necessary to maintain the public credibility on how well a company’s financial statements present as a whole.
So what does this have to do with financial advisors? I believe the two are quite similar in nature.
Per Wikipedia, the term fiduciary relates to “a legal or ethical relationship of confidence or trust regarding the management of money or property between two or more parties. It is also someone who has undertaken to act for and on behalf of another in a particular matter which gives rise to a relationship of trust and confidence.” Therefore, I believe a fiduciary should be a “fiduciary in both fact and appearance,” and not just some of the time, but all the time. There should be no gray area!
No one should be allowed to wear both hats in the financial advising world. Either you provide financial planning, investment advice and/or asset management services comprehensively under a “fiduciary standard in both fact and appearance” all the time, or you sell products only as a broker/sales erson adhering to a suitability standard. Those that choose a business model which adheres only to a suitability standard should be required to fully disclose and advertise that they are not fiduciaries and cannot plan, advise or manage assets under the appearance of a fiduciary capacity.