By Brenden P. Melrose, CFP®CIMA®, AIF®, Compliance Manager at Halbert Hargrove

The investment industry is rife with jargon and can sound like a foreign language. One word that gets thrown around too casually? Fiduciary. This is troublesome: This type of commitment is not one to be taken lightly.

There are many different types of fiduciary relationships; This blog will focus on the world of investment advice. An advisor or organization who serves in a fiduciary capacity is legally required to put clients’ interests ahead of their own. Placing clients’ interests first may sound like common sense to you, but it is not always common practice. Some non-fiduciary advisors only need to meet a suitability standard – meaning that an investment recommendation only needs to be suitable for the client’s objectives, risk profile, etc.

If two products may both be suitable, but one of which involves a steep commission paid to the ‘advisor,’ which will get recommended?

If they’re going to talk the talk ….

It’s easy to say one serves in a ‘fiduciary capacity.’ However, it’s an entirely different story to follow through and fulfill that obligation.

There’s a time and place for a verbal agreement with a handshake – and there’s a time and place for pen and paper. An advisor serving in a fiduciary capacity should put this in writing, by making it part of their client agreement. As an example, the first sentence of Section 1 of our standard client agreement acknowledges and accepts appointment as a fiduciary investment advisor. If a firm or advisor says they will serve in a fiduciary capacity but doesn’t commit to it in writing – say thank you, and calmly, but quickly move toward the exit…or at least ask why.

Trust, but verify

Even before you have that commitment in writing, you should be asking about processes and procedures. Can the advisor provide any verification regarding how they fulfill their fiduciary duty? Do their employees undergo any additional training or certification? Does the firm adhere to a set of best practices to provide a fiduciary standard? This should be articulated in a straightforward manner.

One way to verify is to seek independent third-party review and certification. This is the route our firm has chosen to pursue. Since 2010 we have worked with the Centre for Fiduciary Excellence (CEFEX) in an effort to demonstrate and fulfill our commitment to our clients. The process involves voluntarily submitting to an annual audit conducted by independent analysts.

The purpose is to review a firm’s procedures and processes to verify they are adhering to the fiduciary standard described in the handbook, Prudent Practices for Investment Advisors, published by fi360, an industry leader in fiduciary excellence. We believe this standard represents a set of best practices based on regulations applicable to our industry.

But who’s watching the watchers? CEFEX recently requested a review of their own certification process from a well-respected industry attorney, C. Frederick Reish. (You can read about his bona fides by clicking on his name.)

The result

One of Reish’s conclusions was, “An investment advisor providing advice to retirement plans subject to the Employee Retirement Income Security Act of 1974, as amended (‘ERISA’), who receives a CEFEX Certificate of Registration from Fi360 following the conclusion of the assessment process will have demonstrated that, as of the date of the assessment, it has procedures and practices in place that equal or exceed the fiduciary standard of care in ERISA (the ‘prudent man rule’).”

You may be thinking, that’s great, but I’m an individual, not a retirement plan! To explain why this applies to you, here’s Mr. Reish again: “we address ERISA because it is the single body of law in the United States for which there are well-developed regulatory and judicial interpretations regarding fiduciary duties generally.” As you can see, ERISA serves as an appropriate benchmark (and I promised myself no investment puns!) for fiduciary standards.

The opinion goes on to state, “In our view, the practices identified in the Handbook [Prudent Practices for Investment Advisors] address these requirements and, when followed by an investment advisor, would indicate that the advisor is following a prudent fiduciary process and, therefore, fulfilling its fiduciary obligations to its clients.”

Land it

My wife tells me I have a tendency to be verbose, exhorting me to “land it” when it’s time to conclude my thoughts. My hope is this blog gave you more insight into a word I believe has been haphazardly used in our industry and provided illustrations of how a firm can demonstrate their fiduciary commitment.

When searching for, or working with, an advisor, it’s prudent to decide if working with a fiduciary is right for you. If it is, remember that it’s not just a word – it’s a commitment. You should be confident you are working with a capable fiduciary who can point to how they are fulfilling the commitment they’re making – in writing – to you!

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