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MAKING CENTS OUT OF THE NEWS
Blog #21
(June 3rd, 2010)
To Be Or Not To Be a Fiduciary? That is the Question.
Should the Fiduciary Standard –Apply All Investment Managers?
By Tom McAllister, CFP®
Gaining an ear and getting to "yes" are two different things, we FPA members are learning.
As my professional organization, the Financial Planning Association, lobbies on behalf of financial planners, I realize we've gained an ear. Members of Congress and their staff all now know what financial planning is. It may take a while, on the other hand, to achieve everything the Coalition on Financial Planning would like as part of the financial reform legislation now under consideration. According to FPA president, Tom Potts, CFP, “We are laying the foundation for the future.”
The FPA and the Coalition have put forth the Financial Planning Association's Five Standards of Care: 1) to put the client’s best interests first; 2) to not mislead clients; 3) to act with prudence; 4) to avoid conflicts of interest; and 5) to disclose and manage unavoidable conflicts in the client’s favor.
Members of Congress are puzzled when a group like ours comes to them and says: “We want regulation.” Usually, it’s the other way around, with professional groups protesting “We don’t need regulation; we’re already covered.” In fact, that’s the confusion we have been trying to clarify. We now have a recognized, regulated profession of financial planning.
Mr. Potts, along with FPA CEO, Marv Tuttle (whom I have known more than 25 years), contends that the five standards of care spell out fiduciary duty, with no "fine lines" or small print needed. Individuals who function as investment advisors deliver services in a fiduciary manner. Accepted standards create a safe harbor for practitioners who can operate within that system. We in the FPA believe in reasonable liability but not unintended liability. There is only one question to be answered about every transaction in the financial planning process: Is this the way you should conduct business with a client?
For years it was mistakenly supposed that the debate about who was or wasn't practicing financial planning centered around commission vs. fee compensation. Commission compensation is NOT contrary to fiduciary standards. (For many years I used a fee and commission business model. About five years ago I switched to a fee only basis and no longer do commission business.) As an organization, The FPA is compensation-neutral and business model-neutral. It’s not so much about commissions and fees as it is about how one conducts business with clients. The Menendez amendment now moving through Congress clearly states that imposing a fiduciary standard does not preclude compensation through commissions.
Public trust has been shaken among consumers due to the Madoff, Ponzi and Arthur Nay schemes, as well as Marcus Schrenker and other scandals which I have written about here several times. I, along with the other financial advisors and institutions in the FPA are asking what we can do to restore confidence in the investment banking system and in the money management business which make up our professional world. There is a window of opportunity to make serious changes right now, and to rid our barrel of bad apples.
I am in complete agreement with our organization's CEO Marv Tuttle, who says, "We’re looking into how we can help our own members and others in financial services step up and answer the questions that are coming up". How should our members honor this fiduciary standard? How will they understand the legal, compliance and liability issues attached to that?
Traditionally, the word fiduciary has been discussed relative to investment management and trust, but it has never really been talked about in financial planning. "So we came out with our standard of care", observes Tuttle, "which led us down the path of helping our folks with best practices."
“To reach our destiny," Tuttle continues, "we have to cooperate, but we’re not going to sacrifice our standards. The key to commonality is the fiduciary issue. That’s what makes financial planning a profession—it’s a calling, not a job.”
As a pioneer Certified Financial Planner now in my 36th year of practice, I am proud to be a part of this movement!
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