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January, 2020 |

What is Fiduciary Duty?

January 15, 2020 | By | No Comments

A Fiduciary Duty” is an obligation to act in the best interest of another party. A “Fiduciary” is a person acting in a fiduciary capacity and is held to a high standard of honesty and full disclosure in regard to the client and must not obtain a personal benefit at the expense of the client.

In the world of financial planning, we are fortunate, in most circumstances, to have professionals who put forth a fiduciary duty to their clients. This is not necessarily uncommon, but it is critical to a client to know that the recommendation being made by the planner/advisor, are free of conflicts of interest.

In and of themselves, conflicts of interest are not necessarily bad. They become bad when there is a failure to disclose the nature of the conflict. As a very vivid example, I am a fee-only financial advisor who sells no product and receives no referral fees. Is it possible that I could have conflicts of interest? The answer of course is yes, but the key to the regulations are intended to be sure that the advisor discloses those conflicts so the client can make an intelligent decision as to what’s best for them, not the advisor.

A good example might be a sales-professional who has convinced the client she needs $1 million of term life insurance. One insurance company may pay her a 10% commission, another company pay a 15% commission and let’s say another pays a 25% commission. Let’s go one step further and assume for the moment that the quality of the insurance product is the same in each and every case.

Does the sales professional have an obligation to disclose that the commissions differ by the company selected? I truly believe the answer is yes and once the client understands that the policies have the same level of quality, the client and the sales professional can decide as to how to proceed from there.

As noted above, a conflict of interest, may or may not exist when the recommendation made by an advisor provides an undisclosed financial incentive to the advisor. Regardless of whether proportional to the recommendation made to the client, it is something that needs to be disclosed.

The brokerage industry has fought this definition for years and continues to do so. Thanks to the NAPFA (National Association of Personal Financial Advisors), the CFP Board of standards and other organizations who claim to represent the client, we have attempted to warn the general public to specifically request from any advisor any conflicts of interest that may exist before implementing any recommendation

This leads to what I believe is how recommendations are developed. In our world, where products are not sold by me or other members of NAPFA, we begin with a written plan. What’s interesting about a comprehensive financial plan is that it will identify the need for product. Since we don’t sell product, we will then turn to the client and their professionals or recommend other professionals who have served our client’s needs in the past.

Most financial plans cannot be completed without the sale of product, with rare exception. Product in and of itself is not bad. In fact, it is necessary in probably 90% of the situations in which I’ve been involved both in financial planning and pre-and post-retirement planning.

Begin with a written plan. Before you buy any product to protect your family or implement a plan, ask the advisor if they have any conflicts of interest. If you are already beyond that point, weather it is life insurance, long-term care insurance, annuities or investments, etc. ask the advisor how he/she arrived at his/her recommendation.

If it fits in with your own thinking and has been justified to your satisfaction, then go ahead and purchase the product.