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Financial Planners as Fiduciaries

Posted by Kathy Stewart on May 08, 2013 in Fiduciary Excellence

Permalink | Comments (2)     

>>>>We know that investors often assume that their financial advisor is a fiduciary.  That might be accurate or not depending on the circumstances.  Trying to simplify the explanations is perhaps a bit cumbersome.  Those who offer financial planning services, in situations unrelated to ERISA’s realm, like other financial advisors, may or may not have a fiduciary duty to their clients depending on the specifics of the engagement.  Financial planners, much like other functional fiduciaries, are deemed to have fiduciary responsibility when their activities fall under the definitions found in applicable laws, regulations, or professional standards that impose a fiduciary standard of care.

To illustrate, let’s look at two distinct non-ERISA situations.

The first situation involves a financial planner whose practice is restricted to preparing cashflow and budget statements.  In general, there is no fiduciary duty (unless extenuating circumstances such as a relationship involving reliance or control leads to fiduciary status imposed under common law or other statutes).  In the absence of such common law relationship or other statutes, no fiduciary relationship exists because there are no regulations governing those particular activities that impose a fiduciary standard.  In this limited situation, then, there would be no applicable fiduciary obligation.

In the second, more-common scenario, once the planner begins to offer advice on securities for compensation as a regular part of his or her business, or performs other activities governed by a law or regulation that imposes a fiduciary obligation, the planner may be considered a fiduciary.  In relation to investment activities, a planner would be subject to regulation under the Investment Advisers Act of 1940 and, consequently, would need to register as an investment adviser.  His or her fiduciary obligations would then flow from the Advisers Act (or similar state statute, depending on the size of the business*).  In fact, SEC Interpretive Release 1092 drafted in 1987 defined the registration requirements of financial planners. SEC staff analyzed the services offered by financial planners and arrived at the conclusion that they must register as investment advisers when investment advice is a central part of their service offering. 

*Financial planners who manage less than $100 million, don’t manage investments but provide investment advice, or otherwise are not subject to SEC registration, will likely be required to register as investment advisers under state laws.  Most states require registration of financial planners who provide investment advice.  Two states – Maryland and Washington – go even further under their “holding out” provisions by requiring those who describe themselves as financial planners to register, even if they do not provide investment advice. 

Certain individuals who provide financial planning services may also fall under any number of exemptions from registration, such as the case of a registered representative who may offer limited financial planning advice solely incidental to brokerage services without charging a separate fee.  In providing such brokerage services, the registered representative would be subject to the suitability standard and normally not be considered a fiduciary.  Another example would be the planning services provided by an individual working for a bank’s trust department who would be subject to an exemption under the Advisers Act, but still be subject to a fiduciary standard under other laws and regulations.

Professional obligations can also alter the fiduciary status of the financial planner.  Once a planner becomes a CFP® certificant, CFP Board’s Standards of Professional Conduct impose certain obligations of a certificant including the duty to observe the fiduciary standard of care as defined by CFP Board.  CFP Board  Standards impose a baseline, non-fiduciary standard of care  in all situations requiring a certificant to place the interest of the client ahead of his or her own, and impose the fiduciary standard;  to act in utmost good faith in a manner he or she reasonably believes to be in the best interest of the client when a certificant renders  financial planning services or material elements of financial planning.

In light of the fact that investor information is confusing on the matter, the general points for you to remember are that financial planners are regulated on a functional basis related to activities performed rather than on a professional basis by virtue of their status as financial planners.  In addition, they are subject to the same hodgepodge of law and regulation regarding their fiduciary duties as others in the financial industry, and a determination of their fiduciary role is not always an easy task.  Keeping it all straight can help investors understand and make critical evaluations when choosing to work with those who are in a fiduciary role.


Kathleen Stewart
May 15, 2013

While it is possible for many in the financial services industry to do what is in the best interest of the client, there are a variety of situations that allow even those who desire to act in a client’s best interest to follow a lesser suitability standard in making recommendations.  A registered representative, or broker, who is generally not in a fiduciary role, may desire to act in the client best interest.  Furthermore, the broker must deliver recommendations consistent with financial needs and circumstances of the client.  However, the suitability standard does not require that a broker place the interest of the client ahead of others. 
The broker’s duty of loyalty is not primarily owed to the client and permits a broker to recommend products and services that, while not violating law and regulations, do not place the interest of the client ahead of his own. Therefore, product recommendations to a client may be motivated, at least in part, by a desire to earn higher commission. 
When a financial advisor happens to have fiduciary obligations, the duty of loyalty is owed to the client and comes with the requirement to act in the client’s best interest.  A CFP® certificant delivering a recommendation in connection with a financial planning engagement, for example, is obligated under the fiduciary standard of care and other CFP Rules of Conduct to deliver recommendations in the best interest of the client and to place the interest of the client ahead of his own.
In short, obligations required of a non-fiduciary acting under the appropriate legal or regulatory standards may not address conflicts in the duty of loyalty.  Therefore, the advice and recommendations offered by someone acting in a fiduciary role may differ as a result. 

Donald Creech CFP AIF
May 17, 2013

All advisers have a fiduciary duty established in centuries of contract and common law. It is to their employer. A contract with a BD or insurer is an employment contract. If it was not, there would be no duty to supervise. The fiduciary duty to the employer has priority over any duty to a consumer of services. That is why there is a suitability standard for securities sales reps. A fiduciary, like an attorney, cannot have split loyalty. Redefining suitability to be equal to fiduciary duty at the SEC level will merely open up years of litigation and create even more confusion for the consumer public.

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