F.A.Q. Regarding The Term "Fiduciary"
What is a Fiduciary?
The term fiduciary has been well established in common law for hundreds of years. Interestingly enough though, it has never been "defined" in federal or state law and often, it’s left to the courts and "others" to interpret what "fiduciary" and being a fiduciary actual entails. It’s also interesting to note that; while many organizations pushing for financial planner regulation as a separate and distinct entity are lobbying Washington at this time to impose the fiduciary standard on stockbrokers and other salesmen, they are lobbying AGAINST a clear and unambiguous definition of the term by Congress.
CFP Board defines fiduciary as: "One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client."
Conceptually, a fiduciary must always place the interests of the other party before his own. As a State registered investment adviser in California, Taylor & Associates (TA) is required by law to act in a fiduciary capacity in its dealings with clients. This includes providing each client and prospective client with a document called the ADV Form Part II, which clearly spells out, among other things, the types of services offered, methods of compensation accepted, the capacity in which the advisor is offering products and services, and most importantly any conflicts of interest and how these conflicts are handled and mitigated.
Conflicts of interest? But they don’t exist in a fiduciary relationship... do they?
Of course they do and any advisor who claims to be free of any conflict should be approached with a great deal of skepticism. Insurance agents have conflicts of interest because their entire industry is based on commissions earned for products sold, as is the brokerage business. Does this mean all insurance salesmen are bad? NO, just conflicted. A good insurance salesman will declare his conflicts and his compensation and many other conflicts can be reduced by remaining independent and not just subscribing to, but actually having a personal ethical code. In the wake of the recent Bernie Madoff scandal, many organizations have begun demanding ethics reform in the financial services business, what most fail to recognize is, you cannot regulate ethics!. You either have them, or you don’t.
What does California law say about "fiduciary"?
California law does not define fiduciary even though it obligates Registered Investment Advisers to act as fiduciaries. Employing an Investment Adviser registered in California does, however, provide a client or prospective client with the most important tool in any planner / client relationship... "INFORMATION"!
Most importantly, it requires the adviser to make significant disclosures others such as insurance agents and stockbrokers are not required to make. It restricts the planner in the way in which he may advertise his/her practice by prohibiting certain forms of advertising often used by salesmen to promote their products and services such as "client testimonials", where happy clients sing the praises of their wonderful planner. Additionally, CA law also requires a planner to maintain a written code of ethics and act as a fiduciary when acting in the capacity of an investment adviser, AND to fully disclose when he/she is NOT acting as a fiduciary. Many of the problems experienced in the recent past with large wirehouse brokers were, for example, that they would bait customers with promises of fiduciary financial planning, then "implement" the investment portion of the plan as "non-fiduciary" brokers while charging approximately the same fees a fiduciary adviser did, basically abusing an SEC exemption for certain fee accounts deemed not to be advisory accounts. Ongoing abuses caused the Financial Planning Association (FPA), in a very bold move for which they should be forever remembered, to sue the Securities Exchange Commission. Quite unexpectedly, the courts found in favor of the FPA and the SEC rule was subsequently lapsed and no longer exists. Registered Investment Advisers at the State level are also subject to regulatory examination by the CA Dept. of Corporations, whereas insurance agents, for example, are not subject to any kind of examination or audit unless consumer complaints are received and acted upon.
So, who has defined "Fiduciary" and how does this help?
CFP® Certificants and NAPFA fee-only planners both subscribe to a "voluntary" code of ethics that includes an obligation to act as fiduciaries and are required by their respective organizations to place the clients interests first. The Financial Planning Association has also adopted the CFP Board standards of Practice for its members and, as such, also support the voluntary fiduciary standard. NAPFA members even have a "Fiduciary Oath" in writing, which they distribute to their clients and prospects and I must admit, it’s rather impressive. Please bear in mind though that these are marketing gimmicks and; it is well settled in law that a voluntary code of ethics cannot be enforced in the courts to impose a higher liability on any individual because higher standards are to be encouraged. In the case of NAPFA and the FPA, the strongest sanction for ethics violations is revocation of membership. In the case of CFP® Certificants, revocation of the CFP® Certification marks is the ultimate sanction. Please note however, that this is not a bar on practice as a financial planner and also bear in mind my previous comments, you cannot regulate ethics. Ask Madoff, as a former chairman of the NASDAQ exchange he sat on many boards including ethics and disciplinary boards in his many years and what we learned was, he didn’t personally practice what he preached.
One more note, Mrs Shapiro the head of the Securities Exchange Commission is pushing for the introduction of a fiduciary standard for stockbrokers that will soon come up for debate. My personal opinion on this is; if stockbrokers (salesmen) were held to a fiduciary standard, then there would be no more salesmen in the financial services industry, meaning the cost for financial products and services would explode and the price for many Americans would be far too high. Having salesmen in our business is NOT the problem... having "salesmen" who hold out as something they are not because current regulations allow them to, THAT’S the major problem! One should practice Caveat Emptor (let the buyer beware) in all things and that includes the choice of a financial planner or investment adviser.
When is Taylor & Associates acting a Fiduciary?
The nice thing about required disclosure and written agreements is, both the client and the planner fully understand the nature and scope of the relationship from day one. There is little ambiguity in a written document that sets forth exactly what services will be covered during the engagement and what services will not. CA Registered Investment Advisers are required to mutually agree upon the scope of the engagement and execute a written contract BEFORE any services are provided. Taylor & Associates acts as a fiduciary when providing financial planning and investment advisory services including asset allocation and portfolio monitoring services.
When is Taylor & Associates not acting as a Fiduciary?
Never really... Any services provided by "Taylor & Associates" pursuant to a written financial planning or investment advisory agreement fall under the fiduciary mantel as required by State law. Separately, Nigel B. Taylor, CFP® offers certain services as an individually licensed insurance agent that would not generally fall under a statutorily mandated fiduciary mantel because he is acting as an agent for the companies he represents. However, Mr. Taylor minimizes conflicts of interest by remaining an independent, not captive agent and fully disclosing all income earned in his individual capacity to ensure transparency. Additionally he has agreed to abide by CFP Board's code of ethics, requiring him to act as a fiduciary in all his dealings with consumers including in the sale of life, health, disability and long-term-care insurance matters.
Remember, one cannot purchase insurance without an agent involved. If you are going to purchase insurance, why not hire a competent professional with a higher education in the field of financial planning.
Finally, in California, any person offering "fee" advice in insurance matters must be licensed as a Life & Disability Analyst and over 95% of all planners offering such advice are doing so illegally in California. How can I say this with authority? There are thousands of fee planners in California and only 32 or so Life & Disability Analysts. Please read my article on this topic by clicking here, Don't give your business to planners who commit criminal acts in the name of "Unbiased Advice". They are unlicensed and have never taken any State sponsored examination to test their knowledge of insurance matters, nor can they demonstrate any ascertainable standard of competence or continuing education in insurance matters. Before hiring a financial planner, ask them whether they are insurance licensed. Risk management is an integral part of any financial plan and as a licensed life agent I would be happy to assist you with your risk management needs. Please call me directly at 310. 260. 1126
Nigel B Taylor, CFP®
CA Insurance License Nr 0716446
