Growing Up to be a Fiduciary


After more than 25 years in the financial advice world it appears to me our industry is finally growing into adulthood.  For the first time, all financial advisors must now conduct business in a manner appropriate to the incredible responsibility allowed us by our clients.  Simply put, the industry will require itself (thanks for the nudge Uncle Sam!) to put a client’s interests first in the recommendation and implementation of financial strategies and plans.  Seems pretty straightforward right?  Apparently only if this level of diligence DOES NOT get in the way of the advisor making his Mercedes lease payment (name your indulgence here).  I have been asked many times by friends and clients – ‘hasn’t this always been a rule?’  Well no, but it should have been.

Hasn’t this always been a rule?

Last week the Department of Labor Rule regarding a uniform standard for defining a fiduciary went into effect (technically this only applies to retirement accounts…for now).  And in spite of all the lobbying and hand-wringing by certain elements of our industry, this is a very necessary and positive step forward.  When reading an article in Barron’s a couple of weeks ago, (link below) it became clear to me that this is another important evolution in the industry, and the change will create winners and losers.  And, you guessed it, the potential losers are making all the noise.

For virtually my entire career I have been operating in the fiduciary environment of a bank trust company, a fee-only advisory firm or a single family office.  It never occurred to me we needed someone to define fiduciary for us – regardless of whether or not the legal distinction of a trustee was required.  All day every day, including Saturdays and Sundays, you did the right thing for the client.  End of story.  But given the financial largess available to a high producing advisor, there are plenty of ways to live in the gray area.

So how does an advisory firm inoculate its practice from the implications of this new rule?  Simple.  It evaluates how it is paid for services and what incentives are in place that might cause the firm or its employees to trip the fiduciary wire.  The firm then ensures the strategies utilized and the products recommended are the most likely to allow the client to achieve the financial objectives established.  Beyond that, there are some documentation requirements and procedural changes that a compliance consultant will give you heartburn over – but those are only painful on the front end.  The end result is a better business and client service model.

So as the Fiduciary Rule goes live, know that it is yet another necessary and appropriate evolution.  And if you get frustrated by the change, just remember that the industry brought this on itself over time by often not acting in the client’s best interest.

Going forward, clients will demand the fiduciary standard be a part of every practice, and the advisors that seize the moment will be the winners in the transition.


For more thoughts on ways to evolve your investment approach click here.



Recommended reading:

BARRON’S - Fiduciary Standard Goes Live at Long Last by Cheryl Winokur Munk


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