Are Some Advisors Selectively Applying the Fiduciary Standard?

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

The heated nature of the rhetoric surrounding the fiduciary standard has reached a new high, focusing on whether investment advisors should offer certain investment products and how they should be compensated. We contend that firms must also consider whether their succession plans and service offerings meet the fiduciary standard.

The rhetoric has been fueled by the recent decision of the Department of Labor to apply this often misunderstood standard to professionals who are advising retirement plans and accounts. Increasingly, consumers of financial advice are realizing that receiving investment advice from an advisor subject to the fiduciary standard is substantially different from receiving advice from an advisor subject to the less rigorous suitability standard. The former must always place a client’s interests first; while the latter may recommend investments that are “suitable” for a client even if those investments are not in the client’s best interests.

The recent hype also is attributable to an increasing number of fiduciary advisors actively marketing and trying to educate clients and prospects about the difference in the two standards. In fact, some of these marketing efforts are taking the form of outright preaching about the superiority of the fiduciary standard and disdain for advisors who follow the suitability standard.

Yet, it is not clear that all advisors subject to the fiduciary standard – even those who actively crusade for it against the rival suitability standard – understand the full extent of their obligations as fiduciaries. Sure enough, they are likely to understand the fundamental concept, that they must put their clients’ interests first as they provide investment advice. But how far are they willing to take their understanding of the “best interests” concept?

Consider from the perspectives of succession and service the example of an advisory firm, “FiCo,” that legally is subject to the fiduciary standard. The firm offers basic investment advice to its clients and is operated by a handful of principals who, for the past 30 years and with the support of a few administrative employees, have been offering roughly the same scope and level of advice.

A fiduciary view of FiCo’s succession challenge

FiCo is doing satisfactory work for its clients, but suppose that its principals, despite now being in their sixties, have avoided any succession planning because they have been comfortable running their own firm and do not want to think about anyone else “taking over.” In their minds, by acknowledging that someone else could take over – even at some unknowable point in the future – they would consciously or subconsciously be losing some of the security that they feel about their own value.