Financial advisors are facing real risk when they hold themselves out as a fiduciary and a comprehensive planner, when in fact, they might not be able to meet either of those promises. However, this risk wasn’t always as prevalent. The field of financial planning has grown and developed dramatically in the past 100 years. Its origins were rooted in a very limited product world, but now it’s branched out to encompass a more diverse mix of advice and product solutions. Traditionally, financial planning mostly revolved around safe investments and insurance products, predominantly life insurance. Over time, stocks, real estate, trusts, bonds, certificates of deposit and other options became more widespread. Then, processes began to develop, and advisors moved beyond just investments or insurance and soon found themselves providing advice about financial planning in a much broader sense. With this expansion also came risks around how financial advisors will represent themselves to the public.
Despite the changing landscape, laws have struggled to keep pace. Until recently, laws often focused too much on the suitability of an individual product for the client and failed to consider the growing area of financial advice. The somewhat recent focus on planning and process has been highlighted by the emergence of the U.S. Department of Labor’s conflict-of-interest rule, commonly referred to as the “DOL fiduciary rule.” Some see the DOL rule as an aggressive attempt to regulate both advice and the product world at the same time, which could fundamentally change how advisors behave in today’s financial environment.
The push toward a fiduciary standard of care by the DOL, coupled with discussions at the state level and at the Securities and Exchange Commission level about broader fiduciary standards, has caused some soul-searching by financial advisors. Many now believe that financial professionals need to adopt a broader array of products and services and the skill sets to complement them. The idea is that a true financial advisor should provide expert advice that takes into consideration the totality of a client’s goals, assets, position and needs. This has led to two potential problems for the marketing and positioning of advisors. First, many advisors now advertise that they’re “fiduciaries.” However, in reality that advisor might not be held to any federal or state fiduciary standard, despite the advisor’s self-proclamation of acting as a fiduciary. Second, advisors have started to stretch their services to cover education planning, investments, insurance, retirement income planning and debt management. Sometimes, when marketing this broad range of financial services, the advisor will state that he’s a “comprehensive financial planner.” Being a “comprehensive” financial advisor sounds appealing. However, it isn’t clear if the advisor can rise to this lofty goal.
No Singular Fiduciary Standard
One of the biggest misconceptions out there regarding the fiduciary role is that there’s a singular or uniform fiduciary standard. In fact, there are many different fiduciary standards. While the core principle of all fiduciary standards revolves around acting in the best interest of the client, ward or principal, that’s basically where the uniformity stops. There are: (1) state-level fiduciary standards that vary from state to state; (2) trust fiduciary standards that vary from one type of trust to another; (3) attorney fiduciary standards; (4) investment fiduciary standards; (5) the DOL fiduciary standard; and (6) medical doctor fiduciary standards. How people can get paid, the services they can provide, what’s prohibited and what’s allowed in the relationships can vary significantly.
So when a financial advisor states that he’s a fiduciary, what standard he’s held to, if any, isn’t always clear. For instance, while a CFP might hold out as a fiduciary, there’s often no federal or state law holding the planner to a fiduciary standard. And the only remedy for a CFP holder’s violation of a rule of the CFP Board is the board’s revocation of the holder’s license to use the CFP certification mark. An advisor who reaches out as a fiduciary but doesn’t perform with due care might be liable for a breach of an express or implied contract or for a negligent misrepresentation. But absent a written or oral promise or statement that describes or refers to at least an implied duty or obligation of care, for some planners there might not be a law that imposes a duty to serve the client’s interest. A breach of contract claim here could also be hard to win because it might be unclear how to show how the advisor breaches a contractual fiduciary requirement or what the exact damages are for the breach. This issue could be somewhat mitigated in the future if the SEC passes a fiduciary requirement, but that’s been slow moving for almost a decade now.
Next, the question arises as to whether an advisor should claim he provides “comprehensive” advice. (I have to admit that I’ve pushed this notion in the past and still have trouble not doing so while writing this piece.) The idea of a comprehensive advisor feels and sounds good, but it’s probably inaccurate. The more I have thought about this, the more I don’t think that advisors can live up to the statement. Does any advisor really provide comprehensive financial advice? The answer is probably no. Does the advisor deal with insurance, home equity (including reverse mortgages), refinancing, debt management, credit cards, loans, retirement plan distributions, retirement plan setups, individual retirement accounts, taxation, retirement savings, qualified longevity annuity contracts, investment allocation, and the list goes on and on. Now, there’s no doubt some advisors will read this and say, “Hey, I do all those things!” But, in reality, there are still areas you probably miss, areas that you don’t even think of doing. For instance, how well versed are you in cryptocurrencies and digital asset management? Do you even want to be involved with that? And where does the definition of “comprehensive” financial planning even start or end? However, the notion of being a broad-based advisor who provides advice and helps the client in setting up a financial plan is a noble profession. But, it’s the wording, the use of the term “comprehensive” that might be an issue.
Lastly, should a fiduciary financial advisor ever try to be “comprehensive” in nature? Well, if you take a look at other fiduciary professions, law and medicine, you won’t see reference to “comprehensive” legal or medical advice. You’ll see generalist planners, both in law and medicine, but what they do is spot the issues and get help from other professionals. The fiduciary relationship invokes duties of care, loyalty and prudence. But, can you be prudent without limiting the scope of your specialization or client engagement? A fiduciary planner can agree to limit the scope of their engagement, but a blanket statement like “comprehensive” might be impossible to fulfill. A fiduciary advisor that wants to provide financial planning can specialize by limiting its scope of engagement and by acting as the coach or quarterback of a planning process. Once issues are identified, the advisor can go out and get other professional assistance. But, a fiduciary should act prudently within the agreed-on scope, and putting some limitations on the scope would also appear prudent.
Clarity Is Needed
So where does this leave the financial advisor today? With a push towards a fiduciary standard, clarity is needed as to what that standard and term will mean, how it will be enforced and how the advisor will meet its requirements. Now, not all aspects of financial planning need to adhere to a fiduciary standard, and the added costs of a fiduciary level of care aren’t always beneficial to consumers. Advisors also need to be careful of their wording, language, and how they represent themselves to their clients. Can you adhere to the standard you promote to clients? Are you meeting the expectations you set? Or, instead, should you be limiting your services and offerings in the client engagement letter so the client has realistic and proper expectations? This is probably the way to go. Advisors need to clearly explain their expertise, services and standard of care by creating parameters around their services and appropriately setting client expectations upfront. This enables clients to grasp the value they’re receiving.