Physician-Investors and the “F” Word

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By Rick Kahler MS CFP® ChFC CCIM

Rick Kahler CFPOkay, 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.


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



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.


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7 Responses

  1. Main Street or Wall Street
    [Fiduciary Standards or Suitability Standards]

    Main Street has been at odds with Wall Street for several years. We hear our politicians discuss how Wall Street has to do a better job understanding and working with Main Street and how Wall Street’s greed is out of control.

    We all know that politicians will not get Wall Street under control. However, the truth is Main Street has the power to control Wall Street; they just need to understand how.

    In recent times, we read and heard about Goldman Sachs employee, Greg Smith, who publicly resigned and denounced Goldman Sachs. Greg was the Executive Director and head of the firm’s United States derivatives business in Europe, the Middle East and Africa. He said “[I can] honestly say that the environment now is as toxic and destructive as I have ever seen it”. Mr. Smith continued in his letter that Goldman Sachs has continued to act in a manner that was only conducive for themselves with little or no regard for their clients.

    Goldman Sachs has been questioned regarding their practice of the mortgage derivative and its betting against their own clients on products that they have recommended. In my opinion, they are one of the main reasons the mortgage markets are in trouble; but that’s a discussion for another post.

    What should Main Street do? Simple, understand the difference of how your advisor is governed when working with you. Wall Street firms like Goldman Sachs, Merrill Lynch, Morgan Stanley, Bank of America, and Wells Fargo, to name a few, are only required to work using a Suitability Standard. According to the Suitability Standard, clients receive recommendations that are suitable, or appropriate, to their circumstances. This is less stringent than the Fiduciary Standard. Under the Suitability Standard, financial firms and professionals are not required to put the client’s interests first. They also are not obligated to disclose conflicts of interest.

    Registered Investment Advisors, like me and BlueKey Wealth Management, work using a Fiduciary Standard. Under the Fiduciary Standard, financial firms and professionals are required to act in the best interests of their clients. They are supposed to disclose conflicts of interest. The Fiduciary Standard also requires that financial professionals and financial firms do not put maximizing their own compensation and earnings ahead of their clients’ interests.

    The Fiduciary Standard, however, applies by law only to a subset of key players in the financial services industry. Many are, instead, subject to the lower Suitability Standard. Under federal legislation dating to 1940, the definition of money managers and investment advisors subject to the Fiduciary Standard is relatively narrow and highly technical. There are increasing calls for securities sales people such as financial advisors and insurance agents to be made subject to the Fiduciary Standard.

    Why wouldn’t those firms make the change to the Fiduciary Standard? Well we can all probably guess; can anybody say “firm profit”? Wall Street firms have been opposed to passing ruling being pushed by Certified Financial Planner Board of Standards and others to require all advisors to work as Fiduciary. However, that tune might change soon. Wall Street firm’s assets dropped to $4.8 trillion in 2010 from $5.5 trillion in 2007, according to Cerulli data, with a prediction that it will continue to dip from 43 percent to 35 percent by 2013.

    Main Street is slowly waking up and realizing that Registered Investment Advisors, although smaller than their rival Wall Street firms, offer a better set platform to serve individual clients. BlueKey Wealth Management is a boutique firm that works as a fiduciary with all its clients and by associating ourselves with a custodian that has over 1.2 trillion in assets we are able to deliver very competitive services to our clients without compromising our integrity.

    Amaury Cifuentes CFP® CMP®


  2. Fiduciary – Go Slow!

    The House Financial Services Committee just approved a slew of bills that would slow the pace of regulatory proceedings to expand advisors’ fiduciary responsibilities and relax registration requirements, among other measures.

    What a joke?

    Dr. David Edward Marcinko MBA CMP®


  3. Have We Done Enough To Improve Financial Industry Ethics?

    As examples of financial services firms failing to live up to expectations continue to arise every few weeks, it has become clear that more needs to be done to restore the industry’s ethical foundation, says author and advisor John G. Taft.

    This is a worthwhile 2 part article.

    Dr. David Edward Marcinko MBA CMP®


  4. Fiduciaries-NOT

    The CFP-BOD standards for fiduciaries is ASPIRATIONAL.

    I aspire to be tall, dark and handsome too; but alas, I am not.



  5. Is The Fiduciary Battle Shifting With FINRA’s “Report On Conflicts Of Interest”?

    The past several years have been a bit of a rollercoaster for potential changes to the regulatory landscape for financial advisors.

    In the aftermath of the financial crisis, there was discussion of imposing a fiduciary duty on financial advisors as a part of the Dodd-Frank legislation, though it was ultimately scaled back to just a study on the issue under Section 913. Given that the study confirmed there was widespread confusion on the issue of standards for advisors, the Dodd-Frank legislation also authorized the SEC to promulgate new rules to lift the standard for advisors to one “no less stringent” than the Investment Advisers Act, though at this point it remains to be seen whether such a “uniform fiduciary standard” will ultimately be issued, the terms of its standards, and what organization will be responsible for it, especially given the Registered Investment Adviser industry’s opposition to FINRA as a potential regulator.

    Any thoughts on this article by colleague Mike Kitces?

    Dr. David Edward Marcinko MBA CMP®


  6. Maintaining Ethics in the Move From Regulator to Regulated

    Life is fraught for financial watchdogs who switch to the private sector, especially if they try to have standards.

    Ann Miller RN MHA


  7. “Profession Concerned About Wrong F-Word” – CFP Board Chairman Says

    Re-posting an article by Ann Marsh of Financial Planning originally published on Friday, July 18, 2014.

    During a routine webinar this week discussing its operations, CFP Board CEO Kevin Keller read aloud a question from a CFP, who asked, “Has the CFP board put the fee-only controversy behind it?”


    The article references frequent ME-P contributor Rick Kahler. So, your thoughts are appreciated.

    Hope Hetico RN MHA


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