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Fiduciary Accountability—Liable To Give The Best Advice

By Jim Miller, CFP, Senior Trust Officer

Including the word “fiduciary” in the title of an article will generally deter all but the most diligent reader from proceeding to the text that follows. So if you are still with me, please give yourself a pat on the back. Now for the second test: this entire article is about fiduciaries. Nevertheless, I encourage you to continue in order to learn information that is critical for consumers of financial services.

The Issue

The primary participants are those financial service providers who have assumed the role and responsibilities of being a fiduciary and those who have not. The issue being disputed is whether brokers can represent themselves to the public as financial advisers and consultants without being subject to the fiduciary standard. Currently brokers at most large brokerage firms are not fiduciaries and are held to a much lower standard; a suitability standard.

Fiduciary Standard: A fiduciary has an obligation and responsibility to provide advice that is in the client’s best interest. A fiduciary is responsible for conducting due diligence on alternative investments to select the best options for the client. If something goes wrong, an investor need only allege a breach of fiduciary duty and force that financial service provider to demonstrate that the relationship of trust and confidence was not, in fact, breached.

Suitability Standard: This standard does not require or hold the financial service provider responsible for providing the best investment options known by them, but merely suitable alternatives. The investor is primarily responsible for making investment decisions and conducting his/her own due diligence to determine the best choice. If something goes wrong, it is the burden of the injured investor to prove that under a particular set of facts and circumstances, an individual financial service provider might be deemed to have owed that investor a fiduciary duty.

Incidentally, everywhere I turn I see and hear advertisements from national financial organizations demonstrating how their primary focus is providing advice to their clients that will help them accomplish what is most important in their lives. Yet, these same national financial firms have vigorously fought to avoid regulation that would require them to become fiduciaries. Their argument to the regulators is that the advice they provide is incidental to selling investments.

Webster’s Dictionary defines incidental as: Occurring merely by chance or without intention or calculation; being likely to ensue as a chance or minor consequence.

When will investors start asking the question: “Why do you represent yourself as an impartial advisor protecting my best interests when you are not willing to take on the responsibility of being a fiduciary?”

Recently the Securities and Exchange Commission, which regulates the brokerage industry, decided that brokerage firms will be able to avoid the fiduciary role, but they will be required to disclose that financial planning is “incidental” to selling. If I was asked to prepare this disclosure, it would read something like this: We spend enormous amounts of marketing dollars to create the perception of being the impartial advisor helping clients with their most important goals in life. However, that’s really only a small part of what we do. What we really do is sell stuff!

Merchants Trust Company has been a fiduciary for more than 130 years. We have always seen this role of responsibility as critical to developing trusting relationships with our clients. If we are not required to protect our clients’ best interests, why should we expect them to trust our advice?

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