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Practice Management > Compensation and Fees

Fiduciary Self-Assessments: Hype or Help?

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Some years ago, HighTower Advisors CEO Elliot Weissbluth showed me a simple—but powerful—graph of the difference between brokers and independents that he’d developed. In the graph, the Y axis represented “client centeredness,” while the “X” axis represented “investment sophistication” (including access to sophisticated investments). As you’ve probably guessed, while the brokers scored high on “sophistication,” their client-centered numbers were low; and although independents scored well on the “client centered” scale, they lagged in investment sophistication.

Although Elliot’s point was that he created HighTower to help advisors to score high in both categories, to me his graph also illustrates the issue at the heart of the current “fiduciary” debate: just because an advisor is knowledgeable and sophisticated doesn’t mean he/she is using that expertise to his/her clients’ advantage. Which raises the question of whether organizations that provide “professional credentialing,” without verifying professional behavior (such as the CFP Board and fi360) are really benefiting investors—or simply providing professional sounding marketing tools for less-than-professional advisors. 

With these thoughts in mind, I sat down to read the Institute for the Fiduciary Standards’ proposed “Self Assessment Verifications to Evaluate Adherence to Best Practices for Fiduciary Advisors,” which as been available on its website for evaluation and comment since April 12 of this year. With the release of its “Best Practices for Fiduciary Advisors” back in September, the Institute raised the bar for what it means to be a fiduciary financial advisor. The question on the table now is whether a “self-assessment” of adherence to those practices is another step forward, or yet another opportunity for “non-fiduciary” advisors to appear as if they are fiduciaries. 

The 12 “self-assessments,” are statements attesting to compliance with the Best Practices, made to the Institute, that include the actual language with which each is communicated to the advisor’s clients. Most of them are pretty straightforward: and some even expand upon current fiduciary law. 

For instance #1: “Affirm that the fiduciary standard under the Advisers Act of 1940 and common law principles govern all professional advisory client relationships at all times.”

The emphasis was added by me to highlight the addition of what I would call a “fiduciary only” status. That is, a requirement that dually registered advisors and/or CFPs refrain from exercising their legal or contractual duty to wear a “fiduciary” hat when providing investment advice or creating a financial plan, but take off that client-centered hat when “selling” the investments to implement that advice or plan. This requirement alone would revolutionize the financial services industry—as evidenced by the enormous push back against the Department of Labor’s recent rule imposing a similar requirement for just IRA rollovers. 

And #2: “Establish and document a ‘reasonable basis’ for advice in the best interest of the client.”

Once again, this practice not only requires that advisors act in the best interest of their clients, but that they document it—communicate this “reasonable basis” to the client.

Currently, one of the industry debates that falls into this category is whether more expensive, actively managed funds are ever in clients’ best interest. Like many advisors I know, I believe that many of them can be, and this practice allows for them—as long as the advisor can reasonably demonstrate why.

And as I wrote in my Feb. 10 blog “Will Active Share Be the Robo-Advisor Killer?” tools such as Active Share can demonstrate that many active funds can be reasonably expected to outperform their indexed competitors. 

Of course, some of the “practices” are straightforward:

#3 Communicate clearly and truthfully, both orally and in writing;”

#4 Provide a written statement of total fees and underlying investment expenses paid by the client. Include any payments to the advisor or the firm or related parties from any third party resulting from the advisor’s recommendations

#5 Avoid conflicts and potential conflicts

#6 Abstain from principal trading unless a client initiates ands unsolicited order

#8 Avoid Gifts or Entertainment that are not minimal and not occasional

#9 Ensure baseline knowledge, competence and ongoing education appropriate for the engagement

#10 Institute an investment policy statement

#11 “consider peer group ranking in ensuring underlying investment expenses are reasonable.” 

In my view, the only problematic Practice is #7, which addresses the thorny issue (see the BICE requirement of the DOL’s new rule) of sales: “Avoid compensation in association with client transactions. If such compensation is unavoidable, demonstrate how the conflict is managed and overcome and the product recommendation and compensation serves the client’s best interest.”

For starters, sales commissions are never “unavoidable.” Many RIAs today refer their clients to unaffiliated insurance agents or stockbrokers to get commission-paying products.

This arrangement provides clients with an objective third party to verify the appropriateness of the product and the reasonableness of the commission. Without this objective advisor, the client is at the mercy of the commission-charging broker or agent, both of whom by law represent their respective “employers”—the BD or insurer—during the transaction: legally wearing the “two hats” which practice #1 forbids

Finally, there’s Practice #12, which in my view is the best of them all.

The advisor affirms in writing adherence to Best Practices, and attains written affirmation from the firm that these business practices may be met by the advisor.

Getting a written “affirmation” from an RIA firm that an advisor can and will meet these practice standards is a slam dunk. But I’d bet dollars to donuts that there isn’t a chief compliance officer at a BD in the country who would allow their firm to issue such a letter, even if the rep in question was Mother Teresa. 

Which means that, at the very least, the vast majority of the financial advisors who complete all 12 of the Institutes’ affirmations will be owners or employees of independent RIAs: who don’t take commissions, and who already meet virtually all of these best practices, by virtue of their duties under the ’40 Act.

So, not only are these self-assessments not likely to give “professional cover” to non-professional advisors: they will more than likely provide a substantial marketing boost to professional, fiduciary advisors across the country. 


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