Backers of a stronger fiduciary standard for financial professionals want to certify a clearer distinction between advisors who are duty-bound to put their clients' financial interests first and others in the industry whom they tend to characterize as self-serving salespeople.

The Institute for the Fiduciary Standard has convened a working group to develop a set of best practices that could translate into a credentialing or certification process through which advisors could represent themselves as verified fiduciaries.

The institute's president, Knut Rostad, argues that the understanding of the term "fiduciary" has become distorted, both in the mindset of the investing public and among regulators and other participants in the policy debates on the issue taking place in Washington.

"In recent times the meaning of fiduciary has become transformed. Investors have become confused, skeptical or downright distrustful of many financial professionals, even true fiduciary advisors," Rostad said on a conference call with advisors and reporters. "Investor misconceptions persist about what is different between product sellers and advice givers, and what these services cost. These misconceptions are pervasive."

So Rostad's group convened a board of industry experts to develop a set of fiduciary best practices, which the institute is in the process of finalizing and intends to release at the end of this month as part of a series of events and discussions during its fourth annual "Fiduciary September."


The principles address fiduciary conduct on a variety of fronts, and are organized under the broad categories of "technical" criteria, comprising areas like education, expertise and experience, and "ethical" matters such as character, honesty and transparency.

Under that framework, the best practices would require advisors to describe their businesses in ways that would be more understandable to investors, including clearer disclosures about how they are compensated and conflicts of interest.

Chris Cannon, chief investment officer and chief compliance officer at FirsTrust, a wealth-management firm headquartered in Daytona Beach, Fla., where he is also a partner, explains that the best practices are meant to introduce some uniformity into the arena of financial advice, and "to provide the ability to operate as a fiduciary following these guidelines/standards regardless of your business model."

Some of the best practices are fairly straightforward, such as the assertion that advisors should include language in their services agreements affirming that all of their interactions with clients are governed by the fiduciary standard spelled out in the 1940 Investment Advisers Act.

Advisors adhering to the best practices would also be required to establish a "reasonable basis" for providing advice that is in the best interest of the client, factoring in distinct factors like the client's goals and other circumstances, such as age and risk tolerance.

But some of the other best practices get more complicated, such as those involving matters of compensation and would appear to exclude certain business models on their face.


The institute is proposing a general ban on fiduciary advisors engaging in principal trading, save for when "a client initiates an order to purchase the security on an unsolicited basis," and is calling for fulsome disclosures of "unavoidable conflicts," as well as an acknowledgement that "material conflicts of interest are incompatible with objective advice."

Another best practice holds that fiduciary advisors must "avoid compensation in association with client transactions," such as commissions and 12b-1 payments. The institute is further proposing: "If such compensation is unavoidable, demonstrate how the conflict is managed and overcome and the product recommendation and compensation serves the client's best interest."

That principal would almost certainly stand as a bridge too far for the big wirehouses and regional broker-dealers, but that's part of the point -- to draw a clear distinction between fiduciary advisors and what the authors see as product pushers, according to Bryan Beatty, a CFP and partner at Egan, Berger & Weiner, an advisory firm based in Vienna, Va.

"If you work as an employee of a Merrill Lynch or a wirehouse, it's going to be very, very difficult for you to actually meet these standards, and we're okay with that," Beatty says. "But there is a great grey area in the middle, in the independent broker-dealer world -- the LPLs, the Voyas, the Ceteras -- where they actually can design their own business model."

Apart from the formal best practices Rostad's group is finalizing for advisors, he is calling on industry practitioners to elevate the issue in their own interactions with clients. He envisions that grass-roots effort as a counterweight to the fiduciary debates in Washington that likely aren't closely watched by most Main Street clients, and perhaps even threaten to water down the investor protections already in place.

"Fiduciary advisors need to lead a resurgence of fiduciary principles," Rostad says, "not by lobbying Washington, per se, as much as by educating investors in the public square."

Kenneth Corbin is a Financial Planning contributing writer in Washington.

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