The word fiduciary stems from the Latin root word fīdere, to trust. Applied to financial advisors, the term fiduciary ethos describes the “leadership behaviors, core values, and decision-making process an advisor uses to make recommendations that are in the best interest of the client.”
As a consumer and investor, you would hope that a fiduciary standard is widely upheld. It is not. Brokers and other sales people operating largely in a transaction mode merely have to recommend products that meet suitability standards. By virtue of net worth, income level, liquidity level, or some other criteria, a product may be deemed suitable, and no disclosure of conflicts of interest is required. Heavily loaded or proprietary house products may be pushed based on compensation incentives, sales quotas, or other mandates, even if more appropriate products are available.
Regulators are considering application of a fiduciary standard to all financial advisors, including insurance agents and brokers employed in large Wall Street firms. The Financial Planning Association (FPA) has campaigned for the universal application of fiduciary standard for all financial advisors, yet the idea remains controversial. Companies with captive sales forces that sell house brands do not like the idea at all.
Ethos leadership behaviors may be framed within a 6-step process. Anyone who gives advice to another, including you “talking to yourself,” can follow the six steps. Taken from the book Fiduciary Ethos: Living In A Fiduciary World, Volume One: Investment Management by Donald B. Trone (Strategic Ethos, Mystic, CT, 2010),
- Step one is to define the roles and responsibilities of decision-makers. An advisor should provide appropriate solutions based on holistically explored goals and objectives, rooted in inductive and deductive reasoning, with personal biases recognized and neutralized. If in a conversation you feel like a target in a shooting gallery, or you are being pressured for a decision, fiduciary ethos is not being applied.
- Step two, analyze. Deep analysis is required to understand your goals, objectives, challenges, opportunities, problems, constraints, relationships, and capabilities, so that interrelated and practical judgment can be brought to the fore.
- Step three, strategize. An essential leadership behavior is one of innovation, evaluating the big picture from a macro- and micro-viewpoint, the advisor as a creative and opportunitistc problem solver. What is your tolerance for risk, for example, and have all risk factors been explained and placed in perspective? What is the best alternative to be applied to the challenge or opportunity?
- Step four, formalize. What strategy represents the greatest probability that your goals and objectives will be achieved?
- Step five, implement. What resources are available to power the selected strategy? Is the policy to be followed well defined, written down, and agreed to by all parties? Have tools and methodologies been selected, explained as to application, with service agreements in place that do not contain provisions that can conflict with the objectives?
- Step six, monitor. Is there a dynamic, synergistic, and earnest process to insure that you and your advisory team stay on task, and make course corrections as necessary? Much damage is done by “hit and run” sales tactics or one-time engagements that do not provide for on going service, diligence, and follow up. Is there a process for periodic qualitative reviews of decisions made and decision makers?
Ethos leadership standards should be applied to every facet of financial services, indeed any service relative to your health, wealth, and spiritual well being. A fiduciary standard of care should be applied to investment management, estate and trust planning, gifting and philanthropy, business planning, and family matters. With the aging of America and rising concern amongst family members, social workers, caregivers, and regulators over abuse of the elderly, nothing less than a strict fiduciary ethos should be accepted.
That such ideas remain controversial should be unacceptable, period!
Lewis J. Walker, MBA, CFP, CRC
Past national president of The Institute for Certified Financial Planners
Norcross, Georgia 30092