The word fiduciary has caused heartburn for most advisors. It is not the promise to act in clients’ best interest that scares most advisors; it is the task of proving that this was actually done that causes the pain. How is it possible to show that the motivation behind a recommendation is the client’s interest and not the compensation the advisor earns?
Thank You, DOL!
While many are celebrating the striking down of the Labor Department’s fiduciary rule and the introduction of the SEC’s less intrusive best-interest proposal, it should be noted that these events have had an irreversible effect on the public awareness of a fiduciary relationship. The appeal of having an assurance that the advisor acts in the client’s best interest is irresistible to consumers. Make no mistake: The public is aware, and if given the choice, clients will always go with the fiduciary advisor.
Prior to the demise of the fiduciary rule, many institutions and advisors had established fiduciary practices that they can now use as a powerful strategic advantage to grow their business. The superior standard of care provided by a fiduciary relationship is a winning differentiator in the investment and insurance business.
Making ‘Fiduciary’ Into a Must-Have Feature
Advisors who see only the threat of a fiduciary relationship are headed to the dustbin of history, while those who recognize the opportunity will use its appeal to bring in assets at an awe-inspiring pace.
Advisors can now differentiate themselves with an achievable promise. In the existing structure, advisors who convince clients of their expertise by offering superior results, better protection or a financial plan cannot guarantee success with any of these. In fact, these are aspirations at best, and required disclosures reveal that recommendations based on past patterns may or may not repeat.
A Better Way
Promising a superior standard of care through a fiduciary relationship is achievable. It creates an asset gathering powerhouse, capable of capturing assets from advisors who fail to meet the standard of fiduciary comfort.
However, success with a fiduciary relationship requires that exposure to fiduciary risks are mitigated and that the benefits are aggressively promoted.
Fiduciary Risk Mitigation: The Wrong Way
Traditional fiduciary risk mitigation strategies cancel out the benefits!
First on the traditional mitigation list is, “Nothing in writing should have the word fiduciary.” This obviously cripples the usefulness of a fiduciary relationship. You must be able to boldly and repeatedly say at every available opportunity, “I am your fiduciary.”
The second traditional fiduciary risk mitigation is to limit the areas where fiduciary responsibility applies, often limiting applicability to only what regulations require. This approach may actually be less effective for asset gathering than the first (omitting the term), because limiting the scope raises suspicions of mischief in the areas declared to be non-fiduciary. Once disclosed, non-fiduciary activities become highly visible. Clients will want to know why these areas are omitted. An answer of “so you can’t sue me” is unlikely to win business.
State and federal regulations permit fiduciary relationships even when they don’t require it.