Ingraining Fiduciary
Principles into Your
Financial Planning Practice
Duane R. Thompson, AIFA®
Senior Policy Analyst, fi360
Session Overview
• The fiduciary standard exists for the benefit of society, professionals, and,
most importantly, the individuals who rely upon fiduciaries.
• The core fiduciary duties of loyalty and care are the ethical foundation
underlying laws, regulations, and professional standards governing
planning practitioners.
• Regulatory developments in particular shape the fiduciary standard and
affect your planning activities.
• This session is based upon FPA’s “Fiduciary Implications of Financial
Planning” program.
Learning Objectives
• Understand fiduciary roles, responsibilities, and regulations as applied to
financial planners.
• Recognize the benefits to client and planner that can be achieved by
properly embedding fiduciary processes in a financial planning practice.
Historical Perspective
…[W]e cannot do everything ourselves; different people are
more capable in different matters.
…[I]n cases where we ourselves cannot be present, the vicarious
faith of friends is substituted; and he who impairs that
confidence, attacks the common bulwark of all men, and as
far as depends on him, disturbs the bonds of society…
–Cicero, 106-43 BC, Oration for Sextus Roscius of Ameria
Professional Expectations of
Fiduciaries Remain High Today
“A trustee is held to something stricter than the morals of the
market place. Not honesty alone, but the punctilio of an honor
most sensitive, is then the standard of behavior [for fiduciaries].
… Uncompromising rigidity has been the attitude of courts of
equity when petitioned to undermine the rule of undivided
loyalty by the ‘disintegrating erosion’ of particular exceptions. …
[The fiduciary standard] will not consciously be lowered by any
judgment of this court.”
- Judge Benjamin Cardozo
Meinhard v. Salmon, 1928
5
Common Law and Statutes
Define Fiduciary Obligation
AngloAmerican
common law
Congress
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Common law
of trusts
State trust
laws
ERISA
Advisers Act
Fiduciary
Standard
6
The Fiduciary Standard
Continues to Evolve
19th Century
20th Century
Congress
Passes
Statute
Property
Dispute
Court
Interpretation
Court
Interpretation
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Case Law
Precedent
Agency
Rule
Enforcement
or Lawsuit
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Fundamental Fiduciary
Duties – Loyalty and Care
• Loyalty – Obligation to serve the client’s best
interests
• Care – Obligation to act with the skill, care,
and good judgment of a professional
Duties Associated With the Fiduciary Standard
Fiduciary
Standard
Duties of
Loyalty and
Care
Duty of Loyalty
Avoid /
Manage
Conflicts
Disclosure
Proxy
Policy
Best
Execution
Principal
Trades
Reasonable
Fees &
Expenses
Duty of Care
Suitability
Safeguard
Client
Assets,
Privacy
Procedural
Prudence
Due
Diligence
Monitoring
RecordKeeping
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Duty of Loyalty – Financial
Planning Applications
• Focus on the client’s best interests when researching
client’s situation and financial goals.
• Develop recommendations based solely on the
client’s goals and objectives.
• Identify and disclose direct and indirect sources of
compensation.
• Document how conflicts are resolved in favor of the
client.
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10
Duty of Care – Financial
Planning Applications
• Understand basic requirements of the law and regulations.
• Act consistently in accordance with fiduciary principles when
laws or rules do not specifically address appropriate conduct.
• Apply a consistent data-gathering process to address all
subject areas in the scope of engagement.
• Employ a prudent due diligence process to select third-party
service providers.
• Suitability of investment advice -- focus upon a prudent
investment due diligence process as opposed to chasing
performance.
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11
How Does Fiduciary Status
Typically Arise?
1. “Named fiduciary” in trust or ERISA plan
documents
2. Provide investment advice in a professional context
3. Exercise discretion over client property
4. Have the authority to delegate duties to a cofiduciary
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12
Fiduciary Roles
• Stewards – manage the overall decision-making process
• Advisers – provide advice that is material to decision-making
in a professional context (with compensation, based upon
superior skill).
• Investment Managers – make investment decisions and
select the individual securities to implement a specific
investment mandate
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13
Functional Fiduciaries
• It’s not what you call yourself that’s decisive, it’s
what you do.
• If you exercise discretion or give personalized advice
for compensation, you are a fiduciary.
• You are a fiduciary to the extent you perform
fiduciary functions.
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14
GAO Report on Financial
Planning
• Dodd-Frank Wall Street Reform Act called for GAO Study.*
• Conclusions of the GAO Report:
– No direct regulation of financial planners exists per se and no
additional layer of regulation over financial planners is warranted at
this time.
– Financial planners are primarily regulated by federal and state
investment adviser laws.
– Financial planners are subject to broker-dealer and insurance laws
when “acting in those capacities.”
*Government Accountability Office Report submitted to Congress in January 2011
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15
SEC, State Definition of RIA
includes Planners
Financial planners are RIAs – therefore you are an investment
fiduciary.
• SEC Interpretive Release 1092 (1987): planners give investment advice;
must register as IAs.
• State “holding out” provisions capture planners for their investment
advisory activities
• Planners receive asset management fees
• Most complaints focus on investment losses
• Regulator inspections focus on investment activity
IN Definition of an Insurance
Consultant
‘Consultant’ means a person who:
(A) holds himself or herself out to the public as being engaged in the
business of offering; or
(B) for a fee, offers;
any advice, counsel, opinion, or service with respect to the benefits,
advantages, or disadvantages promised under any policy of insurance that
could be issued in Indiana.
Exemptions:
–
–
–
–
Attorneys
Insurance producers
Trust officers
Actuaries and CPAs
Fiduciary Duties Defined in
Case Law
Investment advisers are fiduciaries
SEC v. Capital Gains Research Bureau (1963, U.S. Supreme Court) –
Investment advisers are fiduciaries to their clients. Unlawful for
adviser to engage in fraudulent, deceptive, or misleading conduct.
Disclosure of conflicts/best execution
In the Matter of Arleen Hughes (1948, D.C. App. Ct.). Acting as fiduciary,
dually registered adviser failed to disclose adverse interests, including
securities sold out of inventory, and best price execution.
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18
Fiduciary Obligations of
CFP Certificants
“A certificant shall at all times place the interest of
the client ahead of his or her own. When the
certificant provides financial planning or material
elements of financial planning, the certificant owes
to the client the duty of care of a fiduciary as
defined by CFP Board.”
-- CFP Board Standards of Professional Conduct, Rule 1.4
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OK, so I’m a fiduciary. Now
what?
• Responsibilities can come from contractual obligation,
statutes , regulations or common law court decisions.
• Determining that you are a fiduciary leads to other key
questions:*
– To whom am I a fiduciary?
– What are my guiding principles (duties) and responsibilities
(scope of engagement)?
– What are the consequences of failure to exercise fiduciary
obligations?
* SEC v. Chenery, 318 U.S. 80, 85-86 (1943)
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Fiduciary Standard Varies by
Law and Regulation
ERISA Fiduciaries
Advisers
Brokers
Federal
State
Federal
State
Organizational
Organizational
Individual
Individual
* Source: Mercer Bullard, fi360 2010 Annual Conference Presentation
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Fiduciary Responsibility under ERISA and the
Advisers Act
Factor
ERISA Fiduciary
Investment Adviser
Conflicts of interest
Prohibition and disclosure
Disclosure and client
consent
Self-dealing
Generally prohibited
Disclosure and client
consent
Private right of
action
Participants may sue fiduciaries
for violating ERISA; tax and
financial loss penalties
No private right of action for
violation of the Act;
restitution of advisory fees
Duty to diversify
Plan must generally offer
diversified investment options
Broad discretion
Compensation
Must be reasonable
Negotiable
Fidelity bond
Required
Not required
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Registered Representatives –
Beefed-up Suitability Rule
Revised FINRA suitability rule (July 2012) adds fiduciary elements:
• Time horizon, liquidity added as factors
• Enhanced due diligence on customer profile
o age
o investment experience
o risk tolerance
• Recommendation to hold a security (not just buy or sell)
• Includes investment strategies in addition to individual securities
• Recommendations consistent with ‘customer’s best interests’
Financial Planner Oversight
Securities and Exchange Act of 1934
Investment Advisers Act of 1940
ERISA
Bank and State Trust Laws
State Insurance Consultant Laws
Federal and State Common Law
FPA Standard of Care
Core Fiduciary Duties
•
•
•
•
Put client’s best interests first
Act with due care and utmost good faith
Do not mislead clients
Provide full and fair disclosure of all material
facts
• Disclose and fairly manage all material conflicts
of interest
Loyalty
Care
CFP Board Definition of a
Fiduciary
“One who acts in utmost good faith, in a
manner he or she reasonably believes to be
in the best interest of the client.”
-- Standards of Professional Conduct, Terminology section
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26
CFP Board Definition of a
Conflict of Interest
“A conflict of interest exists when a [CFP®]
certificant’s financial, business, property and/or
personal interests, relationships or
circumstances reasonably may impair his/her
ability to offer objective advice,
recommendations or services.”
-- Standards of Professional Conduct, Terminology Section
CFP® Rules of Conduct Related
to Conflicts
Rule 1.4 – At all times place the interest of the client ahead of his or her own
(baseline standard of care). When providing financial planning services, act in a
manner the planner reasonably believes is in the best interest of the client (CFP
Board’s fiduciary definition).
Rule 2.2 – Requires timely disclosure of all conflicts having potential to materially
affect a relationship when CFP® professional knows, or should have known, of a
conflict.
Rule 4.1 – Requires the CFP® professional to treat clients fairly and services with
integrity and objectivity
Best Practices*
– acknowledgement and consent from a client should be obtained
– conflicts may not all be handled through disclosure
*Source CFP Webinar on Managing Conflicts of Interest , February 2013
Benefits of Achieving
Fiduciary Excellence
• Consumer expectations
– all financial services agents act in best interest of clients
• Client benefits
– superior knowledge, skill, and/or management of a professional
• Professional benefits
– client satisfaction
– competitive advantage over non-fiduciaries
– personal satisfaction as a true professional
Benefits of Integrating Fiduciary
Principles into Your Practice
• Enhance client satisfaction: Clients seek trustworthy and
competent advice above all else.
• Mitigate risk: Reduce regulatory, litigation, business, and PR
risks.
• Increase practice efficiency: Well-defined fiduciary processes
aligned to generally accepted investment theories are
efficient and effective.
Questions?
Duane Thompson, AIFA®
Senior Policy Analyst, fi360
www.fi360.com