With increasing frequency we read or hear about corporate malfeasance, individual wrongdoing and just plain bad behavior by folks in the financial services industry. With that background in mind, our firm recently participated in a planning session with nine other wealth management firms. One not-so-surprising conclusion: The domestic planning component of our business will become more regulated because of self-governing mechanisms that aren't working. 

If this conclusion is correct, how can firms prepare for "über-regulation" and turn this into a business advantage? While our firm can't prevent hidden misbehavior or malfeasance, we can start by exercising appropriate due diligence and operate in a manner consistent with the highest professional fiduciary standards available today.

What? Me Worry?

If you are a financial planner or advisor, you should be worried about the regulatory future. In most developed countries, but not the United States, the central government regulates the giving of financial advice. Many who read this column are subject to some combination of FINRA, SEC and state regulation for investments and insurance. These regulatory organizations, especially the state agencies, could easily expand their authority to the giving of financial advice. If a big state such as California, Florida, Illinois, New York, Pennsylvania or Texas enacts regulation, others are likely to follow.

An investment advisor, as defined by the Investment Advisers Act of 1940, is "a professional responsible for managing comprehensive and continuous investment decisions." This includes people who hold themselves out as wealth managers, financial advisors, trust officers, financial consultants, investment consultants and financial planners. If you have one of those titles on your business card, you are most likely covered by the 1940 Act. Here's what it means:

In a landmark 1963 case, SEC v. Capital Gains Research Bureau, the U.S. Supreme Court held that the antifraud provisions and legislative history of the Advisers Act reflected "congressional recognition of the delicate fiduciary nature of an investment advisory relationship." In the same case, the Court stated that the Advisers Act reflects "congressional intent to eliminate, or at least to expose, all conflicts of interest, which might incline an investment adviser-consciously or unconsciously-to render advice which was not disinterested."

Under the Microscope

More recent thoughts on this topic come from Jonathan Clements, who wrote in The Wall Street Journal: "In the years ahead, millions of baby boomers will roll out of the workforce, clutching their 401(k) balances and looking to generate maximum retirement income. That's a tricky task-and a good financial advisor could be a great help. But, unfortunately, the investment advisory business just doesn't inspire confidence. In fact, given a choice between signing on with the typical financial advisor and simply dumping everything into a hodgepodge of Treasury bonds, it's an easy decision: I'd take the Treasuries every time."

For those who still don't see the regulatory writing on the wall, this is from the Uniform Prudent Investor Act of 1994: "The prudent investor standard applies to a range of fiduciaries, from the most sophisticated professional investment management firms and corporate fiduciaries, to family members of minimal experience. Because the standard of prudence is relational, it follows that the standard for professional trustees is the standard of prudent professionals."

This statement leads us to the Restatement of Trusts 2d § 174 (1959), where we find: "The trustee is under a duty to the beneficiary in administering the trust to exercise such care and skill as a man of ordinary prudence would exercise in dealing with his own property; and if the trustee has or procures his appointment as trustee by representing that he has greater skill than that of a man of ordinary prudence, he is under a duty to exercise such skill. Case law strongly supports the concept of the higher standard of care for the trustee representing itself to be expert or professional."

Fiduciary Certification

Clients looking for a trusted advisor have not been able to do much to ensure that the advisor is a professional fiduciary. Repeated surveys of our clients indicate they are concerned with trustworthiness, reliability, focus on their issues and placing their interests first: In a word, they want a professional fiduciary.

Therefore, I wanted The Monitor Group to be set apart as a firm meeting the highest available fiduciary standards using the equivalent of the "Good Housekeeping Seal of Approval." I tested my idea of adhering to published standards by discussing it with clients. Not surprising, both clients and prospects agreed this was a positive step in building and maintaining their confidence about our business behavior.

Thus, if you want a steady stream of qualified prospects, one part of your marketing equation must be your ability to assure these folks of your fiduciary qualifications and status. I didn't have to look far for a group involved with fiduciary standards. In Pittsburgh, the Center for Fiduciary Studies (www.fi360.com) has developed domestic and international standards for fiduciary behavior for investment advisors, stewards and managers. They are currently the best standards available. The Center is one of a group of international sponsors of the Center for Fiduciary Excellence (CEFEX), located in Toronto (www.cefex.org). CEFEX uses ISO-like standards to audit and annually certify investment advisors, stewards and managers. By the time you read this, our firm should have joined the small number of CEFEX-certified firms following an audit lasting a couple of months.

Of course, CEFEX certification would simply be clever advertising if nothing else happened. But some certifications are a self-fulfilling prophecy: Twenty-four years ago when I got involved in financial planning, it wasn't clear how the different designations and certifications would influence a potential client's decision. As the CFP Board defined practice standards and ethics, however, it became clear how we had to operate. Now, we face the same issues with fiduciary behavior. We've got the standards in place, and it's time to behave.

I decided to promote our certification, while organizing our processes, procedures and systems to conform to the high fiduciary standards. Along with other firms in the Zero Alpha Group, a business consortium in which we participate, we published a paper entitled Fiduciary Matters. It details the standards and activities of professional fiduciaries, discusses methods to evaluate firms for their level of competence and compliance and serves as an excellent discussion of why we became CEFEX-certified. It's gone to every client and prospect.

How long will it be before some financial crisis happens as a result of bad behavior in our industry, which precipitates significant regulatory intervention? Maybe not tomorrow, but some day. Where do you think investors will turn to ensure that firms will behave according to mandated fiduciary requirements? To CEFEX-certified firms, of course. I see fiduciary certification becoming an integral part of best practices for financial advisory and wealth management firms, just as the CFP certification became a necessary part of our business years ago.

The Bottom Line

If you still aren't convinced, a comment from a Center for Fiduciary Studies publication summarizes it well: "The real professional will provide a level of care that exceeds what is deemed acceptable by the rest of Wall Street...It's about projecting ethical and objective advice...[it] can best be defined as a melding of a fiduciary standard of care with industry best practices. It also is about honing investment skills and mastering the art of communication, command and control...Investors are not going to lower their expectations of their investment advisors. In fact, their expectations are likely to rise as a result of diminishing retirement security."

Are you certifiable?

Glenn G. Kautt, CFP, EA, AIFA, is a financial planning practitioner and president of The Monitor Group, a wealth management firm in McLean, Va. He can be reached at kautt@themonitorgroup.com.