The question – although simple – has no answer because the CFP Board of Standards, the department of labour and the Securities and Exchange Commission do not have a shared definition for the term ‘fiduciary’. The SEC is expected to provide clarification in late 2013 or early 2014.
A New York adviser observed: “People get into the business to make money. The vast majority choose to earn their income by being paid for helping clients make progress towards their goals. It is ethical behaviour. It makes sense. Satisfied clients bring in more assets. They refer their friends.”
Now consider the famous quote attributed to IBM’s Tom Watson: “If you have a one-in-a-million failure rate, what do you tell the millionth customer?” Clients who feel victimised vote with their feet. Some write letters of complaint. Some sue.
If a broker places orders and an adviser offers advice, most industry professionals want to be advisers. The problem develops when you ask: who does the adviser work for? Does the adviser work for the person who writes the cheque? If so, the adviser works for the client. Does the adviser work for their firm, because the firm issues their paycheque? If so, they are an agent of the firm. If that is defined up front, fine. The public does not know if titles are similar. Sometimes the client only learns who bears what degree of responsibility after something goes wrong.
Registered investment advisers are keen to institutionalise a fiduciary standard. The adviser works for the client acting in the client’s best interests. All fees are transparent. They offer a range of options, including those not available from their firm. Consider the lawyer/client relationship – the lawyer takes instruction from the client.
The benefits to the client are obvious. How far is the standard applied? If the adviser collects a fee for providing advice, offers a range of options and the client chooses ones purchased away from the adviser, does the adviser have a fiduciary responsibility?
Where does performance fit in? Will Rogers quipped: “Buy some good stock and hold it till it goes up, then sell it. If it doesn’t go up, don’t buy it.” Does fiduciary responsibility extend to not making as much money because another alternative ended up performing better? Some people can be smart on hindsight – “So many factors were obvious, you should have anticipated...”, etc.
The wirehouse world has traditionally held itself to the suitability standard. Recommendations should be appropriate for the client’s stated risk factors and objectives. This allows advisers to limit recommendations to products available at their firm. This makes sense if the ongoing relationship will be in-house.
The word “fiduciary” implies liability. Most would agree if a client followed instructions and the investments went drastically awry, someone should be accountable, and it is not the client – at least in their minds. They took advice – the adviser should be held accountable.
The flaw in this argument centres on discretion. Consider two extremes: