Insights from the experts in investment fiduciary responsibility.

Financial Planners as Fiduciaries

Posted by Kathy Stewart on May 08, 2013

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>>>>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.

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