- A client completes a financial plan. They invest a lump sum. The funds are asset allocated. Professional money managers are hired for different segments. The portfolio automatically reallocates as needed. The adviser has run a Monte Carlo analysis showing a range of probable outcomes and the likelihood of each. It is a discretionary relationship. It sounds like fiduciary responsibility means accepting liability for the outcome.
- A client completes a financial plan. They invest a lump sum. The adviser chooses investments. The client never speaks to the adviser again. No letters or calls are returned. No discretion is involved. No changes are ever made to the portfolio. Maybe the client did answer the phone but always refused to follow advice. The client is upset with the result. How does fiduciary responsibility apply? It is difficult to hold the adviser liable if the client never agreed to any changes.
Courts and disciplinary hearings address this question often. In the absence of a definition (or assumption) of a fiduciary standard, the issue could be decided on intent. Firms and advisers keep excellent records, contacts and attempts are tracked. If an adviser shows he intended to provide the best advice possible, and proactively reached out, yet the client did not respond or refused advice, it makes the case that the adviser put the client’s interests first.
Until a standard definition of “fiduciary” is issued, business continues as usual. Once a standard is in place many outcomes are possible. With a strict standard, the investor would have recourse if they do business with a planner or adviser bound by the standard. A less strict standard would also have its merits as legal definitions are rarely one-size-fits-all: consider that the Honours List recognises achievements at different levels; at the other extreme, serious crimes are graduated by degree.
Possible outcomes of a strict fiduciary standard
- Wirehouse firms move to a fee-only system for advice. Clients might or might not invest with the firm providing advice. This requires changes in compensation plans.
- Firms ask clients to opt out of the fiduciary relationship. In the US clients agree to arbitration when they complete the new account paperwork.
- Today firms use disclaimers to specify they do not offer legal or accounting advice. Financial planning in a fiduciary context is added.
- Firms exit the financial planning business. They provide guidance held to a different definition while working outside this framework.
- Financial planning is outsourced. Planners may choose to bring their plan to an adviser who helps with implementation.
Possible outcomes of a non-strict fiduciary standard
- Definition includes more than one level of fiduciary advice. Registered investment advisers advertise how they adhere to the highest level. Wirehouse firms use the word but qualify it.