FIDUCIARY Defined

My Comments: A quick check using your smart phone will reveal that this word, used as a noun, means “… a person to whom property or power is entrusted for the benefit of another.” In addition, it can be used as an adjective, an example of which is fiduciary capacity or fiduciary duty or fiduciary obligation.

In my years as a financial planner and investment advisor, I early on assumed a fiduciary role in my relationship with clients. For me, this means an ethical, legal and moral obligation to do only that which is in a clients best interest.

This distinction is important these days as there are “Wall Street” companies working very hard and spending millions of dollars to enable their employees to function as ‘advisors” to members of the general public, and not be held to a fiduciary standard. From a marketing perspective, they want their salesmen and brokers to call themselves “advisors” and not be held to a fiduciary standard. Unlike those of us not affiliated with Wall Street who are fiduciaries when we call ourselves “advisors”.

An analogy from my past is when I tried to earn a living for several months as a salesman for a local car dealership. I was allowed to say virtually anything I wanted to a potential customer, the objective being to sell a car. That was to the benefit of the dealership, and if the buyer got what he wanted, that was an incidental benefit.

When I became a salesman for a life insurance company, it was suggested that I not tell lies, but beyond that, all that mattered was how many policies could I sell. The more I sold, the more money the company made, and if I crossed certain thresholds, I got more money and more goodies. Great trips to the south of France, etc.

Along the way, I increasingly wanted to be held in high regard by my peers who happened to be CPAs and attorneys. By law, if you are a CPA or a member of the bar, you are, by definition, a fiduciary. But in the insurance world, it wasn’t until the invention of the designation Certified Financial Planner, that the fiduciary role was assumed. If you were awarded a CFP designation, you effectively swore that your conduct going forward was as a fiduciary.

This now causes no amount of angst among the Wall Street crowd as many of their salesmen and brokers have been awarded CFP designations which at a personal level makes them fiduciaries but at the corporate level, they are not. How to remedy this apparent contradiction and conflict of interest?

For a time, there was an attempt to force the folks behind the CFP designation to create a CFP Lite, meaning some folks could use the CFP designation in their relationships with clients without being held to a fiduciary standard. That idea eventually fell apart.

The pressure behind this problem is that companies that sell financial products don’t want to be held accountable and be financially liable if a dispute happens and their salesman or broker, someone they have encouraged to be identified as an “advisor”, did something NOT IN THE CLIENTS BEST INTEREST, and it’s now come back to bite them.

My reasons for writing about this are that (a) I consider myself a fiduciary and for many years now have held myself out as a fiduciary in my advisor/client relationships; (b) I don’t have the resources to lobby the Securities and Exchange Commission, the SEC, to give me an out if I make a mistake, (c) I like being able to hold my head high and have the respect of my peers in the legal, accounting, and advisory community; and (d) I’m tired of not working and living on a level playing field. And I suppose I can stress it’s not in my clients best interest to be faced with this arcane conundrum which potentially puts their financial and legal future at risk.

Here’s a full definition I found several years ago that you might find helpful.

Fiduciary Responsibility: A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. [2] The fiduciary duty is a legal relationship of confidence or trust between two or more parties, most commonly a fiduciary or trustee and a principal or beneficiary. In the case of insurance the fiduciary duty is between the agent and his or her client. One party (the agent) acts in a fiduciary capacity to another (the insured). In a fiduciary relation one person justifiably reposes confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter. In such a relation good conscience requires one to act at all times for the sole benefit and interests of another, with loyalty to those interests. In other words, the agent cannot consider commissions above the interests of the client.

A fiduciary duty is the highest standard of care at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (called the principal): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents. The word itself comes originally from the Latin fides, meaning faith, and fiducia, trust.

When a fiduciary duty is imposed, equity requires a stricter standard of behavior than the comparable tortuous duty of care at common law. It is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where his fiduciary duty conflicts with another fiduciary duty, and a duty not to profit from his fiduciary position without express knowledge and consent (acknowledging, for example, that a commission will be paid). A fiduciary cannot have a conflict of interest. It has been said that fiduciaries must conduct themselves “at a level higher than that trodden by the crowd” and that “the distinguishing or overriding duty of a fiduciary is the obligation of undivided loyalty.”

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