New Pandora's box?

Touted fiduciary mode could increase liability

Nov 10, 2003 @ 12:01 am

By Rick Miller

A rallying cry from various corners of the financial planning profession calls upon planners to embrace the mantle of fiduciary.

David Yeske, president of the Financial Planning Association, urged attendees at the Denver- and Atlanta-based group's annual FPA conference last week in Philadelphia to "think and act like a fiduciary at all times, whether or not the law says you are."

That message has been echoed by Steven Kanaly, immediate past chairman of the Arlington Heights, Ill.-based National Association of Personal Financial Advisors. In a parting column last month to the association's fee-only-planner members, he wrote: "I feel there is one word that sums up our future: `fiduciary."'

Greater risks?

However, fulfilling that fiduciary role - particularly if a professional does not have a legal obligation to do so - opens advisers to greater risks and liabilities.

"I don't see any benefit at all," says Herbert Daroff, a lawyer and planner with Baystate Financial Services LLC in Boston, who was present at Mr. Yeske's speech. "I think it ascribes a higher level of risk to the planner than the planner should assume."

Mr. Daroff says he would rather tell clients he's a certified financial planner and what that entails, "without necessarily elevating, for a marketing term, that somehow I am a fiduciary, whether I am or I'm not."

The broad challenge laid out by Mr. Yeske was controversial because it was directed to everyone who holds themselves out as financial planners.

"People argue about fiduciary [status], whether or not you should be a fiduciary, whether or not you're required to be a fiduciary at all times in dealing with your clients," Mr. Yeske tells InvestmentNews.

"I wanted to cut through all that and say, `We should not even care about the legal status. We should not even be nitpicking the legal technicalities. We should just accept the fact that we need to put our clients' interests first at all times."'

In response to the concern about added risks, Mr. Yeske says: "We work with powerful forces in people lives, and liability is going to go along with that. Live with it."

Stephen "Tony" Batman, chairman of the FPA's steering committee created to form a separate broker-dealer association, says: "No reputable broker-dealer would disagree" that registered representatives must "place the client interests first."

He adds: "I agree with Dave Yeske in the spirit of fiduciary. In the context of a legal fiduciary, it does present some problems for registered representatives and broker-dealers that must be dealt with on a case-by-case basis." Mr. Batman, chairman and CEO of 1st Global Inc. in Dallas, says he is giving his own opinion and not speaking on behalf of the still-unformed association.

Some say the fiduciary designation is not for everybody.

"You've got thousands and thousands of advisers out there that will never adopt that [fiduciary] model," such as registered representatives of businesses, says Mark Tibergien, a principal with Moss Adams LLP in Seattle.

"Not only is there more liability in that, there is more responsibility as well. If you're going to assume the role of fiduciary, you better damn well be qualified to perform as a fiduciary, and I don't think that is within everybody's means."

From a legal standpoint, a fiduciary has the duty of "loyalty" and "care" to their clients, explains Catherine Holmes, partner at Jeffer Mangels Butler and Marmaro LLP in Los Angeles. "Loyalty" means the fiduciary cannot act in their own interest unless the client consents to it, and "care" is the duty of what a "prudent" person would do under the circumstances.

Under the Investment Advisers Act of 1940, a registered investment adviser is automatically deemed to be a fiduciary, says Ms. Holmes. Representatives of broker-dealers, banks and insurance companies are not necessarily deemed fiduciaries under the laws that apply to them, she adds.

But whether someone is an investment adviser or a registered rep, actions can supersede any formal definition, says Nancy Lininger, founder of The Consortium in Camarillo, Calif., a compliance and marketing consulting firm for investment advisers and broker-dealers.

"I think what you see more often is people saying, `Well, I don't want to be a fiduciary.' But they've taken so much responsibility and authority over the client that they actually are and can't get out of it," she says. "Once the client sues you, and you get taken to court, the attorneys are always going to try to prove that you are a fiduciary, and you should have acted in the client's best interest."

way to increase business

Leaders of the FPA and the NAPFA believe that the future of financial planning hinges on more planners' moving toward a fiduciary-type relationship with their clients.

With increasing competition in the advice market, Mr. Kanaly, vice chairman of Kanaly Trust Co. in Houston, wrote in the NAPFA newsletter that fee-only advisers who emphasize their role as fiduciaries will be able distinguish themselves from the "big investment houses and banks" that are also trying to "position themselves as comprehensive financial advisers."

In his view, the fiduciary role of fee-only planners should entail advising on even "non-domiciled assets."

"There's no way that a Merrill Lynch broker is willing to be, or capable of being, a real fiduciary as I have described it," wrote Mr. Kanaly.

Later, he added, "all of us in NAPFA will face difficult decisions about how to grow our businesses, either through working even harder to find prospects who've never used an adviser, becoming affiliated with other types of professionals, acquiring someone else's practice or poaching each other's clients. It's not a pretty picture.

`something unique'

"It's my belief that being fiduciaries is one answer to this dilemma. We are offering something unique to our clients, and the trust that comes with that fiduciary commitment gives us a competitive edge."


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