What Your Advisor Doesn’t Want You to Ask

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What Your Advisor Doesn't Want You to AskSimply put, the term “fiduciary” applies to the more than five million individuals who have the legal responsibility for managing someone else’s money. A fiduciary is required by law to always act in the best interests of their client, beneficiary, or retirement plan participant. Yet, many fiduciaries are not even aware of their legal responsibilities.

Last month Bob Arms and I completed a specialized program on investment fiduciary standards of care at the Center for Fiduciary Studies. The Center, in association with the University of Pittsburgh Joseph M. Katz Graduate School of Business, was established in 1999 to provide the investment industry with the first full-time training and research facility focused exclusively on investment fiduciary responsibility and portfolio management.

Our program was held in the former Masonic Temple which was purchased from the Masons by the University of Pittsburgh. Our courses were held in what is believed to be the former Masonic secret meeting chamber in the center of the building. Whether or not your investment advisor is a fiduciary shouldn’t be kept a secret from you.

Probably the most important question you can ask of anyone offering you financial advice is, “Do you have a legal obligation to act in my best interests?”

That question is at the heart of the Merrill Lynch exemption that allows stockbrokers to be able to offer the same services as Fee-Only financial planners without being accountable to the same fiduciary standards.

That question is at the heart of approaching Hedge fund investments very, very carefully because it is very difficult for the fiduciary to adhere to a prudent process when implementing with these types of funds.

That question is at the heart of the Social Security Reform debate. Privatized accounts would be protected by existing fiduciary legislation. Under the current program the government has no such fiduciary responsibility.

That question is at the heart of the criticisms of commissioned mutual fund and insurance sales structures whose compensation inherently creates conflicts of interest.

And that question is what many financial professionals fear the most.

It is the bright white line that separates those who sit on your side of the table and have a legal obligation to act in your best interests and those who sit on the other side of the table and have no such obligation.

The latest ruling by the SEC on the Merrill Lynch rule requires that your stockbroker disclose in writing: “Your account is a brokerage account and not an advisory account.” And “Our interests may not always be the same as yours.”

The National Association of Personal Financial Advisors (www.napfa.org) requires its members to sign and uphold the following fiduciary oath:

NAPFA Fiduciary Oath

“The advisor shall exercise his/her best efforts to act in good faith and in the best interests of the client. The advisor shall provide written disclosure to the client prior to the engagement of the advisor, and thereafter throughout the term of the engagement, of any conflicts of interest, which will or reasonably may compromise the impartiality or independence of the advisor.”

“The advisor, or any party in which the advisor has a financial interest, does not receive any compensation or other remuneration that is contingent on any client’s purchase or sale of a financial product. The advisor does not receive a fee or other compensation from another party based on the referral of a client or the client’s business.”

Similarly, the Center for Fiduciary Studies requires its designees that have completed Accredited Investment Fiduciary (registered trademark) (AIF (registered trademark)) training to sign a fiduciary oath that, among other things, requires their members to “act with honesty and integrity and avoid conflicts of interest, real or perceived.” If you want to be certain your financial advisor is on your side of the table, ask them if they have signed an oath to represent your best interests before their own, or better yet, visit the www.napfa.org to find a fee-only advisor in your area.

The NAPFA and Center for Fiduciary Studies oaths are not just hollow promises. They are legally binding standards of practice. Among other things, they require an advisor to avoid the conflicts of interest common in many financial dealings.

The Foundation for Fiduciary Studies has taken the existing legislation from the Employee Retirement Income Security Act (ERISA), Uniform Prudent Investor Act (UPIA), and the proposed Uniform Management of Public Employees Retirement Systems Act (MPERS) and created twenty-seven Practices representing the breadth and scope of a fiduciary’s investment duties and responsibilities. Each Practice is substantiated with a reference to one of these laws, and when applicable is supported by case law and/or regulatory opinion letters. Prudent Investment Practices, the published handbook that describes these Practices, was co-produced by the Center and the American Institute of Certified Public Accountants (AICPA). The legal review of this handbook was completed by the law firm of Reish Luftman Reicher and Cohen.

The Practices provide the foundation and framework for an investment process, and helps prevent making ad hoc investment decisions influenced by emotions, market noise, or conflicts of interest. The Practices also make good investment sense. Superior investment returns result from developing a prudent investment process and monitoring its adherence.

NAPFA changed the financial services industry by publicizing the idea of fee-only comprehensive financial planning in an industry rife with commission and fee-based conflicts of interest. The Center for Fiduciary Studies is seeking to promote the concept of fiduciary responsibility in an industry of brokerage firms whose “interests may not always be the same as yours.”

AIF Designees have passed a comprehensive examination on the 27 Prudent Investment Practices that formed the basis of their training. Designees are also required to strictly adhere to continuing professional education requirements which keep them abreast of recent events in the industry that are affecting every fiduciary.

Legal and accounting professionals, such as Estate Planning attorneys and CPAs, also have a responsibility to act in their client’s best interest. Therefore, when making referrals to other financial professionals, they have a legal responsibility to recommend only those fiduciaries that have made the commitment to act solely in your best interests.

When it comes to your money make certain all of the members on your team of advisors are on your side of the table.

*Portions of Fiduciary360 materials used with permission.

Photo used under Flickr Creative Commons license.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)