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“Fiduciary”

By Rick Kahler MS CFP® ChFC CCIM http://www.KahlerFinancial.com

Okay, I did it again in a recent column. And, I got into trouble again. That’s what I get for using the F-word.

Mea Culpa

My most recent transgression was to point out the simple fact that insurance agents are compensated by commissions on the products they sell. They have no fiduciary duty to legally act in the best interests of their customers.

Every time I remind readers that sellers of financial products do not have a fiduciary duty to their customers, I get indignant responses from financial salespeople who seem to think I have accused them of being unethical.

Ethics

Not so. Someone who sells financial products may well operate with integrity. In fact, their licenses typically require that they be “fair” and “honest.” These salespeople may care about their customers and be committed to selling only products that they believe will meet their customers’ needs.

But being a fair, honest, and ethical salesperson is not the same thing as having a legal fiduciary duty to the consumer. The word “fiduciary” has a specific meaning in our legal system. It describes those in positions of trust or authority who are required by law to act in the best interests of those they represent. A fiduciary is an advocate for the consumer, who is legally termed a “client.”

Of Doctors and Attorneys

Doctors and attorneys have fiduciary relationships with their patients and clients. The executor of an estate is a fiduciary. So is a trustee, someone acting under a power of attorney, or an agent hired to represent you. Real estate agents can be fiduciaries if they are engaged to represent either buyers or sellers.

Financial planners can also be fiduciaries. Yet those who offer financial advice and services in conjunction with the sale of a financial product are not fiduciaries.

Follow the Money

How can you generally tell whether a financial professional is required by law to act in your best interests? Simple. You follow the money. Wherever the professional’s compensation comes from is most likely where the fiduciary responsibility goes.

If you hire a fee-only financial planner, you are directly paying that person for professional advice and services. The planner receives his or her income from you and others like you. You are clients, not customers, and the planner is legally obligated to act on your behalf.

This is not the case if you buy financial investment products or receive financial advice from someone who is compensated by commissions. It doesn’t matter whether this person’s business card says “financial consultant,” “financial planner,” “investment advisor,” or “broker.” Anyone can use those terms.

Commission Sales

But, if someone is paid by commissions from financial companies, he or she is a sales representative whose fiduciary responsibility is to those companies. They may call you their “client,” but in the legal sense, you are not. You are a customer who buys products from a salesperson. Just like those who sell cars, groceries, or shoes, these salespeople owe their primary loyalty to their employers. They are obliged to operate in the best interests of themselves and their companies.

This relationship has a built-in conflict of interest. Because financial salespeople make most of their money from commissions, their recommendations to customers are usually biased toward investments that will be the most profitable for themselves. Their legal responsibilities are to act fairly and honestly. Most either don’t or won’t disclose the amounts and sources of their commissions

More:

• An Interview with Bennett Aikin AIF®
• Calling for CFP® Fiduciary Status, Real Education and Higher Duty
• The Uniform Prudent Investor Act versus Fiduciary Accountability
• Fiduciary Burden of Participant-Directed Investment Plans
• About Fiduciary Benchmarks, Inc

Assessment

A financial salesperson who is not a fiduciary certainly can act with integrity. I know many who do. That means they are honest people who want to thrive in business by selling legitimate products in a responsible and ethical way. It does not, however, make them fiduciaries.

Conclusion

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Filed under: Ethics, Financial Planning | Tagged: financial fiduciary, rick kahler | 8 Comments »