“Fiduciary.” One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.
The Standards require that all CFP® professionals who provide financial planning services will be held to the duty of care of a fiduciary, as defined by CFP Board. Since some CFP® professionals are not involved in providing financial planning services to clients, it would be inappropriate to hold these individuals to a duty of care that may not apply to their professional activities. While CFP Board’s fiduciary standard is reserved for financial planning services, the Standards nevertheless require a high duty of care for all CFP® professionals in any type of client relationship: “A CFP® professional shall at all times place the interest of the client ahead of his or her own.” [See Rule 1.4]
What Is a Fiduciary and Does It Matter?
In most businesses, there are cycles and trends that pop up now and again and create a buzz. Typically, in the wake of a big event, there is hype surrounding buzzwords and wherever you go, or whenever you log in to social media, you are likely to hear about it. You have probably been bombarded of late with information or opinions on gun control, school safety, flu vaccines and the “me too” movement. As financial planners, we rarely encourage following the “hype,” but must consider that there is always something to learn from the buzz.
A question we are asked often from our prospects is “Are you a fiduciary?” Despite its importance, it is the first time in more than a decade in business that we have been asked the question on a consistent basis. The truth of the matter is it is an excellent, and relevant, question… certainly buzz-worthy.
What is a Fiduciary?
According to the CFP® Board, a Fiduciary is one who acts in the utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client. In other words, a fiduciary must put their clients’ interests above their own.
Why It Matters
Imagine that you were working with a financial advisor. Stu came highly recommended by a family member and you put your trust in him. He invested your money in a number of funds that had a decent return, so you feel rather comfortable with the relationship.
Fast forward a few years: your cousin is working toward her CFP® and has offered to do a free review of your investment portfolio. She finds that the expenses on your funds are exorbitantly high and have subsequently, performed significantly lower than similar funds from other companies. She points out a few funds that he could have used that were nearly identical but with much lower fees and with them, your portfolio would have doubled already. You call Stu and learn that he is out on his yacht for the afternoon but will be available the following day when he returns from a golf outing.
How does that make you feel? Your trusted advisor put you in a product that was significantly more beneficial to him than it was to you. All of a sudden, he’s not so trusted and it’s probably going to be difficult to trust again. Unfortunately, this has become a common theme in the industry.
Let’s go back to the buzz about the flu. The flu has been rampant, and you are anxious to get a flu shot. You understand that there is a limited supply and rush to make an appointment with your doctor. Your doctor spends some time talking about the flu shot with an emphasis on the negative effects. As you are walking out, after declining the flu shot, the doctor’s mother walks past you in to the last patient room. While you are settling your account, you overhear the nurse request the last flu shot dose for the doctor’s mother. Suddenly, you don’t feel so confident in your doctor. Was he acting in your best interest, or his?
This is why the fiduciary standard is so very important. As Certified Financial Planners (TM), engaged in the business of Financial Planning, we are required by both the CFP® board and Investment rulings to act as a fiduciary. However, for a good financial planner, the mission is far more visceral: “Do the right thing because it’s the right thing to do.” This is one of the lessons that have been ingrained in me since I was a child. Frankly, that’s what being a fiduciary means to me. You always put the interests of the client first because it’s the right thing to do. When you do the right thing, everybody wins.