For decades, the term "fiduciary" was essentially hidden within the language of our state and federal RIA guidelines, and somewhat foreign to the average financial planning client. Now, though, the term has been debated and at least provisionally defined in the financial services industry. More important, it is starting to enter consumers' consciousness.

The publicity has come from sources like NAPFA, the Center for Fiduciary Studies, the FPA's recent high-profile lawsuit against the SEC and a number of journalist-advocates at consumer finance magazines—which have all raised public awareness of the merits of working with an advisor who embraces legal and regulatory fiduciary obligations. We are also seeing a surge in the number of advisors moving toward the fiduciary model.

For advisors who practice as fiduciaries, however, there could be a significant downside to this surge in fiduciary-related awareness. Several studies have shown that most clients believe that their advisor is held to fiduciary standards even if he or she actually is not. In addition, clients are likely to think that the profession has the fiduciary concept defined in some detail. If you ask them what fiduciary means to them, you will likely hear something like the following:

• You work solely in their interest and only in their interest.
• You will always do what's right for them.
• You are completely competent at financial planning and investment management.
• You know your own limits.

For once, consumers are pretty much on target. If you look up the term on Wikipedia, fiduciary duty is the highest standard of care. A fiduciary is expected to be extremely loyal to the person to whom they owe the duty (the "principal"): they must not put their personal interests before the duty, and must not profit from their position as a fiduciary, unless the principal consents. The fiduciary relationship is highlighted by good faith, loyalty and trust. The word itself originally comes from the Latin fides, meaning faith.

What's more, financial advisors may be raising the implied fiduciary bar by marketing their services with key words like "trust," "relationship," and "wealth management." So even if they are not legally required to act as fiduciaries, you could certainly argue that they are creating an ethical obligation.

Will the profession be able to meet these expectations? In a broader context, the whole fiduciary debate simply codifies a reality that has existed for a long time: Advisors tend to become successful only when they begin to think of the world around them in terms of an opportunity to serve. In this sense, the growing interest in all things fiduciary can be seen as an evolution of attitudes toward work—away from a self-serving goal-orientation and toward individual and community service.

Let me stop and say, I don't intend to give a detailed lesson about fiduciaries; for that, simply read anything by Scott Simon of Morningstar Advisor or by Donald Trone of Fiduciary 360. But we are now at a point where our clients understand it and the industry is rapidly moving that way. Perhaps, though, with all the legal discussion and compliance manipulation and adherence, we as individuals might lose sight of what it really means to work and serve in another's best interest.

Each advisor must devise a solution to the ethical challenges ahead. Unfortunately, there has been no consistent model to help us think through the nature and degree of fiduciary preparedness we have achieved thus far. The issues each advisor will need to explore can be broken down into what I believe are the four cornerstones of any business model: company and owner; marketing; operations and financials. Your approach to each cornerstone can be defined with a few simple questions whose answers will help you gauge how prepared you are to embrace fiduciary obligations.

Rather than asking yourself whether you have answered these questions correctly, use them to get a clear picture of your business practices. Are you the advisor you want to be?

Part One: Company and Owner

These questions will help you figure out where you are going and what you want personally.

• Do you and/or your partners maintain the same prudent personal financial lifestyle relative to your resources that you advise for your planning clients?
• Do you have an uncomfortable amount of debt, such that if something uncontrollable or controllably bad were to happen in your life, you would be forced to make business decisions that could affect your clients?
• Do you know your own biases as an investor and planner? Do you make yourself consciously aware of those biases before you present recommendations to your clients? Do you tell clients that it's possible your own risk tolerance may impact your recommendations?
• How is your chosen physical health? Are you taking conscious steps to eat well, exercise and avoid dangerous habits?
• How many hours do you spend on continuing education, business improvement and simply thinking and reading to make yourself a better professional?

Part Two: Marketing

Carefully examine what you're telling the world about who you are and what you do.

• Do you say no to clients who do not meet your profile? If a client isn't a match, do you attempt to help him or her find a competent referral?
• Do you clearly disclose the dollar amount of compensation you receive? Or do you write it off with the excuse that "clients don't want to know" or "it's in their best interest not to have them question our fees all the time"?
• Do you publicly advertise your AUM as a way to attract business? Do you know that, by doing so, you could also become a target of hackers and identity thieves?
• When a client calls and frustrates you or your staff, how do you react? What do you or your staff say about that person when she or he hangs up the phone or leaves the office? Is your conversation negative, degrading or mocking?
• Do you describe your services as wealth management? Do you offer the true definition of wealth management—meaning more than just simply investment management for the wealthy. Rather, wealth management should refer to in-depth financial plannng, incorporating coordinated aspects of cash flow, insurance, taxes, investments, retirement, estate planning and other goals, all in a customized, client-specific process and service. Or do you use the phrase because prospective clients like the sound of it?
• Do you consider it appropriate to pay referral fees? Do your clients think it's okay?

Part Three: Operations

Analyze how you provide financial planning and investment management, and how you run your systems and procedures.

• Where do you get research, continuing ed and other education? In-house? Do you search out third-party independent research?
• Are the portfolios you recommend to clients consistent with your own holdings in your personal account?
• Are you still referencing certain types of "rules of thumb" research that have been disputed time and again? For example, are you using Morningstar's star ratings to sell investment management, without explaining or interpreting them?
• Do you keep all advice and implementation in-house, or do you refer clients to better resources and specialists when you find them? If you keep all services in-house, are you confident that you are the best choice for your clients in all capacities?
• Do you know the names of your clients' children? If needed, do you maintain a software program to remind you of your clients' personal life stories?
• Do you have actively managed funds in the portfolio? If so, is it because you believe that they are alpha-producers, or to serve your client's need to talk about his or her investments?
• If you have an independent broker-dealer, are you confident you can offer your clients all the best investment options? Are the B-D fees for service fair relative to a third-party custodian?
• Does the custodian or broker-dealer you use provide best execution? If not, are the problems small enough to outweigh the benefit of a switch? Do you regularly explore this issue for your clients?

Part Four: Financials

How you utilize your income and allocate expenses will affect client relationships.

• Do your clients know exactly how much they pay you each year and the year past? If not, would you consider telling them?
• Do you have any compensation coming from your B-D simply for sticking around?
• If you charge clients a percentage of assets, do you keep ample reserves to maintain your staffing and client service in the event that markets turn south for a while?

Conclusions

Obviously, these questions and issues are just a starting point for self-analysis, or at the very least, a rousing partners meeting. There is no singly right answer to any given question. Others will arise as the planning profession moves forward in the fiduciary discussion. The point is that our profession is at a crossroads, where many advisors will embrace the fiduciary challenge and others will choose not to either for personal or business reasons.

Many advisors will find that the answers to these questions are obvious. We all have a lot to learn from them they know who they are, and why they practice the way they do. Others will feel challenged, and recognize that there are levels of fiduciary commitment yet to be reached. And more will be confused by the issues raised by these questions, or feel like they're irrelevant to the more important activities of representing their company or promoting their own financial interests. The publicity surrounding the fiduciary term will force us all to make basic decisions about ourselves. Our collective response will have a major impact on the evolution of the profession and most important, on clients' confidence in our services.

Michael Dubis is a fee-only financial planner and investment manager in Madison, Wis., and presides over a firm of the same name. The writer thanks Robert Veres and Charles Hinners for their feedback and contributions.