Fiduciary Redux II

Every year or so, I feel the need to write an article about the Fiduciary Standard because large financial firms or regulators muddy the differences between true fiduciary firms and product salespeople like stockbrokers and insurance agents. In January 2017 I wrote on this topic when the Department of Labor introduced new regulations (which were later rescinded). In January 2015 I wrote about the different regulatory schemes for brokers vs fiduciary advisers.

The SEC has recently issued ‘Regulation Best Interest’ (or Reg BI) and the CFP® Board will introduce a new Code of Ethics and Standards of Conduct this Fall which obligates CFP® professionals to provide financial advice under a fiduciary standard. So, it is a great time to review the Fiduciary Standard of Care again and provide some context for news stories that you will see over the next several months.

What is a Fiduciary Duty? A Fiduciary Duty is a legal concept which traces its history to English common law and even to Roman law. Simply put, a Fiduciary Standard of Care represents the highest level of care including a duty of care and a duty of loyalty. It is a Principles Based standard of conduct (as opposed to a Rules Based standard) meaning that a Fiduciary is bound to act in the best interest of his or her clients whether or not there is a specific regulation covering a situation.

Why is the Fiduciary Standard in the News? On June 5th, the SEC approved Reg BI which requires broker-dealers making a recommendation to a retail customer to act in the best interest of the customer at the time the recommendation is made. Broker-dealers also must disclose conflicts of interest, and, importantly, mitigate or eliminate those conflicts.

While the goal of having all financial advisors work in the Best Interest of their clients is one that we whole heartedly endorse, let’s be clear, a Best Interest standard is not a Fiduciary Duty, it does not include a duty of loyalty meaning that the best interest standard is limited to the time of the recommendation. The best interest standard applies at the transaction level and the fiduciary standard applies at the relationship level. Our concern is that the new regulations dilute the term Fiduciary and create confusion for investors.

On a more positive note, on October 1, 2019, the updated CFP® Code of Ethics and Standards of Conduct will expand a true fiduciary duty of care to nearly 85,000 CFP® Professionals including many stockbrokers and insurance agents. Previously, a CFP® was held only to a fiduciary standard while providing financial planning (allowing the broker to remove the ‘fiduciary’ badge when selling products). Now the fiduciary standard applies at all times when providing financial advice. Needless to say, insurance companies and broker dealers are not happy with these changes and have threatened to have their representatives relinquish the mark. With four CFP® professionals on staff, we have always acted as fiduciaries at all times and we are pleased with these changes.

Over the next year you are likely to hear more and more financial salespeople discussing these standards. At Armor, our commitment has been and remains on the Principle with a duty of care and a duty of loyalty. Our commitment to the Principle is defined by our Fiduciary Pledge:

  • We will always put the clients’ best interests first, ahead of our own and those of our firm and its employees. We will always act as a fiduciary.
  • We will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional. When selecting investments, we will act as the client’s agent, seeking the best investments at the best prices at all times.
  • While neither we nor anyone can promise superior investment returns, we will provide impartial advice.
  • We will always be truthful with our clients, providing full and fair disclosure of all important facts, including our compensation from all sources, as well as fees we pay to others on our clients behalf.
  • We will always seek to avoid conflicts of interest. We will fully disclose any potential conflicts, and place the client’s interest first at all times.
Nothing contained in this publication is intended to constitute legal, tax, securities or investment advice, nor an opinion concerning the appropriateness of any investment, nor a solicitation of any type and does not guarantee future results. The information contained in this publication should not be acted upon without specific legal, tax and investment advice from a licensed professional. Past results are not indicative of future performance.