Micheal Zeuner offers his thoughts on one of the wealth management industry's hottest topics: the fiduciary debate.

Michael Zeuner is a managing partner and co-founder of WE Family Offices, which serves ultra high net worth families in the US and Latin America. Zeuner also serves as a board member of the Institute For The Fiduciary Standard.

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In recent months there has been an increased amount of attention being paid to the fiduciary standard – a regulation that’s been on the books for 75 years and requires registered investment advisors (RIAs) to put their clients’ interests ahead of their own, avoid conflicts of interest, and have a duty of loyalty and care to their clients at all times.  

Currently, brokers – who are affiliated with broker-dealer firms, not RIAs - are not subject to the fiduciary standard, but instead are subject to a lower suitability standard which does not require them to put their clients’ interests ahead of their own, and which relies heavily on disclosure of conflicts, versus avoidance.  

Despite these differences in regulatory regimes, representatives of both types of firms (RIAs and broker-dealers) can legally hold themselves out as “advisors” – which needless to say leaves investors confused:  is my advisor required to put my interests ahead of their own, or are they able to serve two masters – me and the firms’ whose products they are selling?   

What’s changed in recent months has been efforts by the White House and the US Department of Labor to both highlight the problem, and address the issue by requiring that anyone who advises an investor around their retirement assets, do so under the requirement of the fiduciary standard, irrespective of the platform (RIA or broker-dealer) on which they operate. Additionally, the SEC has been mandated since the publication of the Dodd Frank bill in 2010, to address the differing regulatory regimes, but little progress has been made.  Only time will tell whether regulators will clarify the environment, and ensure that a fiduciary standard be applied by anyone providing investment advice.  

In the meantime, the Institute for The Fiduciary Standard has been working to take matters into their own hands, rise above the regulatory quagmire, and create a tool that can be used by investors and advisors to assess whether they are receiving or delivering true fiduciary advice, today.  

Last week, the Institute released “best practices for financial advisors” that are business model neutral and aim to educate both investors and advisors about what it means to serve as a fiduciary advisor.  The best practices can be used by financial advisors to assess whether their business practices can be deemed to be fiduciary or not, and by investors to assess whether their advisor is acting as a fiduciary in both words and deeds – irrespective of the type of firm the advisor works for.  Armed with the best practices, the investor can make an informed decision about the advisor they work with, and advisors can make informed decisions about the business practices they adopt.

The best practices address issues such as: establishing a clear and reasonable basis as to why the advice being provided is solely in the client’s best interest; requiring clear and truthful communication; providing written statements of total fees and underlying investment expenses; avoiding conflicts and potential conflicts and acknowledgement that material conflicts of interest are incompatible with objective investment advice; avoiding compensation in association with client transactions; avoiding gifts or entertainment that are not minimal; and considering peer group rankings in ensuring underlying investment expenses are reasonable, among others.  

When announcing the launch of the best practices, the institute’s president, Knut Rostad, remarked “the reason why investors, the industry and the markets need best practices is straight-forward:  they are needed to fulfill a fiduciary promise to investors. That is the promise to be competent and ethical, to be professional. The promise to defend and protect and to serve investors, first.  Many investors believe this promise has been broken.”  

Michael Warszawski of Manchester Capital Management, commented that “education and tools that will help investors identify advisers which espouse a fiduciary standard of care and thereby offer the highest quality of advice are essential to reducing investor confusion and restoring trust in the financial advisory industry.”

For too long the prevalence of conflicts of interest and misalignment of interests has harmed investors and reduced the trust investors have in the financial advisory industry. The best practices announced by the institute are an attempt to restore that trust and provide clarity to investors and advisors around what true fiduciary advise looks like.