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Gimme an "F"


The time has come for all financial planners to accept a fiduciary responsibility for their clients--before Congress does it for them.


August 1, 2003



Have you embraced the "F" word yet? No, I'm not talking about the Anglo-Saxon expletive. I'm taking about the legal-sounding Latin derivative that separates the men and women from the boys and girls in the financial services industry--fiduciary.


"Fiduciary," as described in Black's Law Dictionary, means a relationship in which one may not "exert influence or pressure upon the other, take selfish advantage of his trust, or deal with the subject-matter of the trust in such a way as to benefit himself or prejudice the other . . . business shrewdness, hard bargaining, and astuteness to take advantage of the forgetfulness or negligence of another being totally prohibited . . ." In the financial advisory business, in other words, to be a fiduciary means the duty to put your clients' interests ahead of your own.


If you're an RIA, a bank trust officer, or a member of NAPFA, you're already a fiduciary. And you probably feel somewhat morally superior but at a considerable marketing disadvantage to stockbrokers and insurance agents who are exempt from having a fiduciary duty to their clients but often sell themselves to clients verbally and in advertising using language that suggests they are, in fact, fiduciaries.


Maybe, just maybe, all that's about to change. It seems that a once-in-a-lifetime confluence of events has occurred in Washington that could result in the some of the most groundbreaking financial legislation since the Great Depression spawned the Securities and Exchange Acts of 1933 and 1934 and the Investment Advisor Act of 1940. The collapse of the stock market following the dotcom bubble, the failure of the securities and accounting industries to protect the investing public in widely publicized corporate failures, and a post-9/11 patriotic drive to do something have combined to motivate Congress to take some action, while reducing the financial services establishment's influence to stop it.


The result is H.R. 1000, known as the Boehner bill, which passed the House in May. Four versions of the same bill are currently working their way through the Senate. Written as an addition to the Employee Retirement Income Security Act of 1974, the Boehner bill would create the category of "fiduciary advisers" for any RIAs, registered reps, bank trust officers, and insurance agents who advise the participants of qualified plans, such as 401(k)s.


The bill currently states, "The term 'fiduciary adviser' means, with respect to a plan, a person who is a fiduciary of the plan by reason of the provision of investment advice by the person to the plan or to a participant or beneficiary." Many observers believe that when this bill becomes law (which seems unanimously expected, in one form or another), it's only a matter of time before the courts or Congress itself will expand the role of fiduciary advisers to include non-qualified plans and eventually anyone seeking financial advice.


Of course, nowhere is the devil more in the details than on Capitol Hill. In this case, the issue is whether Congress will require fiduciary advisers truly to be fiduciaries. If it doesn't, then all that it will have accomplished is to hand the hungry wolves on Wall Street and in Hartford a new set of sheep's clothing in which to dupe even greater numbers of unsuspecting clients that their reps and agents have their best interests at heart.


That's what concerns the FPA's Director of Government Relations, Duane Thompson, who put the issue more tactfully in a letter to Congress. "The FPA clearly supports the goal of [H.R. 1000] to make such advice more accessible to [retirement] plan participants . . . However, since the primary ethics requirement of CFP practitioners and FPA members is to place the interest of the client ahead of the adviser--and this is not necessarily the case with other entities who might qualify in certain instances as 'fiduciary advisers'--we believe that the bill as currently drafted falls short."


But if, and admittedly it's a pretty big if, the final version of this bill contains language that actually makes qualified plan advisers true fiduciaries, and that fiduciary status gets extended to all advisers, then we are looking at a brave new world of financial advice. "Once signed into law, the Boehner bill will cause registered reps to adhere to the fiduciary standards of care established in ERISA and the Uniform Prudent Investor Act, at least in the qualified plan world," says Alexandria, Va.-based planner Tom Grzymala. "It may be just a struck gavel away before the courts mandate that broker-dealers and their reps have to adhere to the same fiduciary standards for all their accounts, qualified and otherwise."


Gryzmala, who is also an Accredited Investment Fiduciary Auditor, for the past three years has been involved in securities litigation as an expert witness, testifying in cases involving suitability, fraud, and fiduciary responsibility. "As Wall Street strives to restore credibility and transparency to its badly tarnished image, we need at least [the fiduciary role of the Boehner bill] and probably a lot more to become law."


For the financial planning community, such a law would at least level the playing field with other "advisers" who are exempt from the fiduciary requirement under the 1940 Act. It might also drive some major firms or even entire industries out of the "advice" business, revealing them as the product distributors they really are rather than the providers of objective financial advice they purport to be.


Legally requiring financial advisers to be fiduciaries would also cause some long overdue soul-searching within the financial planning community. Both the FPA and the CFP Board, for instance, while ethically requiring their constituents to put their clients' interests ahead of their own, have never actually acknowledged a full fiduciary duty. NAPFA is the only advisory organization that has officially accepted this highest duty of client responsibility (it did so over 10 years ago). In this new environment, the two largest bodies in financial planning would have to decide once and for all whether their members are part of the distribution chain or on the clients' side of the table.


Regardless of what Congress does, the time has clearly come for accepting a fiduciary duty on behalf of all financial planning clients. Industry pundits like Harold Evensky and Mark Hurley have been gnashing their teeth for years about how the financial planning community can't possibly compete with the marketing might of Wall Street. Now we have the answer.


First, we need to accept fiduciary responsibility for all financial planning clients (including CFPs and FPA members). Then we need to launch an industry-wide advertising campaign unveiling financial planners as the only financial advisers who accept a fiduciary duty to their clients, along with a succinct explanation of what that means. If Congress is ready to understand the difference, financial consumers surely are. And it will put financial planners on the leading edge of the coming fiduciary issue--where they should have been all along.


Editor-at-Large Bob Clark observes the financial planning world from Santa Fe, N.M.






-Bob Clark















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