History Provides Hope for Institute for the Fiduciary Standard’s New Best Practices

While reforming large financial services institutions and their executives may be a tall order, Rostad and the IFFS believe reforming the industry from the ground up—starting at the advisor level—is a lot more doable, and consequently more promising.

By now, you may have read about the 12 Best Practices for Fiduciary Advisors, although they have been tweaked a bit. According to Rostad, the Institute has three focuses: 

• to identify concrete actions or “deeds,” that establish one as a “fiduciary advisor;
• to make these deeds reasonable for practicing advisors in the real world (as opposed to theoretical standards);
• to encourage advisors to disclose that they will perform these actions for every client, in their Form ADVs, and publicly on their websites. 

Here is what following the finalized Best Practices will require of an advisor: 

1. Put into writing that fiduciary duties apply at all times – not just sometimes.
2. Give advice that’s reasonable – and explain the advice in writing if asked.     
3. Put important agreements and disclosures in writing.
4. Provide estimates of total client fees and costs in writing at the start of the relationship and then afterwards annually on request.                              
5. Avoid conflicts – and if not possible disclose in writing, manage, and for important conflicts, get client consent to proceed with conflicted transactions .
6. Avoid principal trades – unless the client initiates a request.
7. Avoid compensation from client transactions – and, if not possible, show how the product recommendation serves a client’s best interest                
8. Avoid gifts and entertainment that are not minimal and occasional.                   
9. Have the appropriate base and ongoing education to render competent advice.
10. Use an investment policy statement or process and provide a sample if asked.
11. Make sure fees and expenses are reasonable.                         
12. Affirm in writing adherence to Best Practices and the Best Practices can be met.

The hope of the Institute is that as a growing number of advisors publicly adhere to these principles, and the media picks up on their actions, increasing public awareness, the rest of the financial services industry will have to adopt similar standards in order to compete.

There is some historical precedent for this kind of a grass-roots approach: Back in 1971, a group of mutual funds salesmen met in the Chicago O’Hare Hilton. The booming stock market of the 1960s, known at the time as the “Go-Go Market,” had taken a nosedive two years earlier, taking the new mutual fund business down with it. 

There was considerable anti-Wall Street, anti-financial services sentiment in the country, and those salesmen were looking for a new way to better serve their clients—and equally importantly, distance themselves from traditional, big firm sales. Their solution was to create the profession of “financial planning,” essentially the same comprehensive approach to personal finance that’s still in use today. 

They changed the financial services industry.

Perhaps that’s the problem: as financial planning has gone “mainstream,” it’s lost its distinction from what goes on at Wall Street investment banks, and at virtually every broker-dealer and retail bank across the country.

But maybe the IFFS’s Best Practices will create a new wave of client-centered advisors, who will restore public confidence in the profession of financial advice.