Every now and then, I see people use the word “fiduciary” when it comes to financial advice.
Although I 100% support what the term represents — an alignment between the interests of client and adviser — I’m not a fan of the word.
(Even though I think the nature of the service I provide, and the representations I make to my clients, make me a lot more like a “fiduciary” than many other financial planners.)
Let me spend the next several thousand words explaining why.
The term “fiduciary” confuses matters
“Fiduciary” is a fancy word. It looks and sounds like it has gravitas.
But do you know what it means? Does the person who proclaims that they’re a fiduciary really understand what it means?
I doubt it.
To be frank, a good portion of lawyers don’t know the ins and outs of fiduciary duties in specific detail.
Confusing words often indicates confused thoughts.
Even if you have a sense of what a fiduciary relationship is, and the types of duties that stem from this type of relationship, there’s another aspect that I think confuses matters.
This blog is made possible by Fairhaven Wealth, my independent, fixed-fee, advice-only financial planning business.
By suggesting that someone is either a “fiduciary” or they’re not a fiduciary, we are introducing something like a binary line in the sand.
As I explain later in this article, there are certain types of advisers who I don’t think can be called fiduciaries. But you should still engage them.
There are also cases where I would prefer the financial planner who isn’t a fiduciary compared to someone who is a fiduciary. (Spoiler: do you really need to enter into a relationship of such reliance and vulnerability that additional obligations need to be imposed by common law, or would a more simple relationship be more appropriate?)
What’s the alternative?
Instead of focusing on whether an adviser is a “fiduciary” or not, I think the focus should be on the degree to which the interests of an adviser and a client are aligned.
The degree of alignment is not a binary, yes/no, aligned-or-not characteristic. It sits along a spectrum. This is something that all clients (and advisers) should understand, and should influence their decision whether to engage an adviser, and their decision whether to follow their advice.
What is a “fiduciary”?
I had to do a deep-dive on the concept of fiduciary duties when I was a financial services lawyer in Australia and there was talk of a fiduciary-like duty being imposed on financial advisers over there. (That never quite happened, although a “best interests” duty was created and is now in force.)
Broadly speaking, a fiduciary relationship is a relationship of such deep trust and reliance that when it comes to managing conflicts of interest, the only appropriate way of managing the risk is to AVOID the conflict completely.
Is a fiduciary duty set out in any legislation, regulations, or codes? No.
It’s a creature of the common law — which means, it’s determined by the court.
The term “fiduciary” is a legal term, and what constitutes a fiduciary relationship and the responsibilities of a fiduciary can get technical. I’m talking, there-are-extremely-detailed-legal-textbooks-on-fiduciary-duties technical.
At its heart a fiduciary relationship relates to a situation where one person (the fiduciary) is in a position of inherent trust in relation to another person or person(s).
Examples of where fiduciary relationships can exist include:
- a young child and their guardian;
- the trustee of a trust and the beneficiaries of the trust;
- an attorney (acting under an enduring power of attorney) and the person for whom they’re acting;
- a director of a company, acting as a fiduciary on behalf of the shareholders of the company; or
- doctors or lawyers working with clients in very sensitive situations, where a fundamental part of the relationship is a relationship of profound trust and reliance between the professional and their patient/client.
Whether a fiduciary or fiduciary-like relationship exists between one person and another, and the duties and obligations that stem from this, is a decision for a court to make. It’s not something set out in legislation.
In some jurisdictions like the US there has been talk of introducing a “fiduciary rule” relating to financial advice — but that is a really a label for a certain standard that is set out in legislation, which may be similar to a proper fiduciary relationship, but is more narrowly defined and should be thought of as something different to a property “fiduciary” duty, even if it has the same label.
Some financial advice firms hold themselves out as fiduciaries. There are even organisations that “certify” firms as fiduciaries. But to my mind, this muddies the waters. They are defining “fiduciary” by their own terms, which may or may not differ from what a court thinks.
Some firms may be fiduciaries
There may be some financial advice that a court would find are “fiduciaries”. Whether or not this is the case would relate to the nature of the relationship they have with clients, and the representations they’ve made to their clients.
My personal opinion is that a fiduciary duty is unlikely to be found unless the client was quite vulnerable or for some other reason had put a disproportionate level of trust or reliance on the adviser.
A fiduciary duty might be more likely with an adviser with a Discretionary Investment Management Service (DIMS) licence, because the adviser is given greater discretion over how to act in relation to client monies. DIMS providers are subject to even more regulations, perhaps in recognition of this (and perhaps replacing any fiduciary duties a court might otherwise impose).
Personally, I’m not a DIMS adviser. In large part this is because I’m advice-only and don’t implement advice on behalf of clients, which makes the service irrelevant to my offering. I’m also personally ambivalent about the benefit a DIMS service provides to clients: if I were the type of adviser who implemented on behalf of clients, I would prefer to have an arrangement where I ran every transaction past a client before implementing it, rather than having discretion to implement decisions (within certain constraints) without letting them know ahead of time.
To my mind, this is a situation where a fiduciary relationship might apply, but it might not be necessary for a client to enter into such a relationship of trust in the first place. For a lot of clients, it might be more appropriate to have a more limited relationship with an adviser that doesn’t necessitate fiduciary duties in the first place.
(For what it’s worth, I’m fairly certain that a court would find a fiduciary duty applied to the platforms/wraps/custodial providers that actually hold client monies. This stems from the fact that these entities are acting as trustees on behalf of these clients.)
It’s one thing to be a fiduciary, it’s another to act as one
It’s also one thing to be a fiduciary (or hold yourself out to be fiduciary), and another to actually act in accordance with fiduciary duties!
In fact, most of fiduciary-related law relates to situations where fiduciaries haven’t acted in an appropriate manner (otherwise, why would it have gone to a court?).
Even without “fiduciary”-related protections, a number of independent consumer protections exist
If you’re dealing with a salesperson in a retail store or car lot, they have a legal obligation not to “mislead and deceive” (under the Fair Trading Act). Arguably, they also have to make sure that whatever you purchase is “fit for purpose” (Consumer Guarantees Act) — but there may be some wiggle room depending on how they can direct the conversation with you (for example, by steering you towards a purchase without getting you to reveal too much about what you’re wanting to use the item for).
If you’re dealing with an RFA (as the law currently stands), the above obligations (not to mislead and deceive, to provide a service and recommend products that are fit for purpose) apply. RFAs also have a duty of care and can be found guilty for negligence in relation to their advice, although this is rarely litigated. There is also a statutory requirement in the Financial Advisers Act that they must “exercise the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances” (s 33).
On top of this, RFAs need to be members of a dispute resolution scheme. These schemes have unique terms of reference, and in many cases they have the authority to adjudicate disputes based on what they believe is fair based on the circumstances, taking into consideration (but not being limited to) relevant laws, industry standards, etc.
This puts consumers of advice in a better position compared to, say, dealing with a salesperson.
If you’re dealing with an AFA, the above standards apply, and there is also the Code of Professional Conduct that applies to AFAs but not RFAs. The first code standard is that an AFA “must place the interests of the client first”. Which is above and beyond what most service providers need to provide. So we’re moving further down the spectrum and closer to fiduciary-like obligations.
(An aside: under the upcoming laws, the new Code of Professional Conduct which will apply to all financial advice service providers has a watered down version of this standard. When this comes into place, the obligation will be to “treat clients fairly”. (There are other duties, for example, the advice must be “suitable for the client, having regard to the nature and scope of the financial advice”.))
These are all consumer protections, but they are not fiduciary standards.
Instead of “are you a fiduciary”?, ask this
In my view (and I’m still working through my thoughts on the matter), a more appropriate question to ask than “are you a fiduciary” is:
WHAT ARE YOUR CONFLICTS OF INTERESTS AND TO WHAT DEGREE ARE YOUR INTERESTS ARE ALIGNED WITH MINE?
Everyone has conflicts of interest
If someone says “I don’t have any conflicts of interest”, then that’s revealing. The person replying is either lying or doesn’t understand conflicts of interest. Because EVERYONE has conflicts of interest.
For example — I’ve tried to build the cleanest business model I can imagine, and I won’t hesitate to say that I have conflicts of interest. I charge fixed fees. Arguably, this creates an incentive for me to spend less time for the same fee rather than more time, which could create a conflict because it might mean I’m less inclined to spend the necessary amount of time to provide high quality advice. (If I charged based on hourly rates, my incentive would arguably be the opposite: to spend more time rather than less, to increase my fees.) I manage this conflict by being upfront about it, and also by invoicing clients at the end of the engagement — by doing this, I’m only going to get paid if the client is happy with the process, and it creates an incentive for me to provide the highest quality advice I can provide within the scope of our agreement.
In this broad sense, even traditional fiduciaries have conflicts of interest compared to the people they’re acting for. A doctor or a lawyer has to earn a living. A director of a company usually wants to make money. Professional trustees can’t do it for free (and in fact, I personally think it’s an alarm bell if a “professional” trustee acts for free).
But there’s something worth pointing out here. The conflicts of interest don’t relate to the advice being provided, or the conduct being engaged in by the fiduciary.
Conflicts of interest can impact advice to varying degrees
I’ve been upfront: I have conflicts of interest.
But in my view, that’s at a completely different end of the spectrum compared to, say, an financial planner/investment adviser who is affiliated with the product provider and receives an incentive/commission for recommending the product they’re associated with (or whose job is vulnerable if they can’t direct enough funds into one or more of their employer’s products). Arguably, the advice being provided could be flavoured with some sales incentives.
Some types of advisers receive commission, and maybe that’s okay
The other thing I’ll add to this is that there are some types of advice where a commission-based model is the only model that seems to work. Examples include mortgage broking and insurance advice.
In this case, I don’t think any reasonable person can say there’s a fiduciary relationship in the context of these types of advice. But that doesn’t mean you shouldn’t engage an adviser of this nature!! If you need personal insurance, or you need a mortgage, I think you should engage a professional to work for you, even if they can’t say they’re a “fiduciary”. (I used an insurance product adviser to sort out my personal insurances, and use them to review my policies. I also used a mortgage broker when my wife and I arranged our mortgage.)
You just need to investigate further. Sure, someone may receive commission. That creates conflicts of interest, but the key is how this conflict of interest is managed AND how other conflicts of interest feed into this.
For example: is the mortgage broker or insurance adviser affiliated with just one lender or insurer? If this is the case, the conflict is extremely high.
Or are they affiliated with a number of lenders and insurers, and do they recommend different lenders and insurers to different clients based on unique characteristics of the clients’ circumstances, needs, and objectives? If so, the consumer is likely to be dealing with someone whose interests are more aligned with theirs than someone who is arguably a salesperson for just one provider’s products.
Forget this fiduciary foolishness, focus on fair-mindedness
(Forgive the sub-heading. That creation is an abomination of an alliteration.)
The term “fiduciary” sounds fancy. But I think it confuses matters in a number of different ways.
- Even if a fiduciary is available, it may not be suitable to engage in a fiduciary relationship in the first place!
- Even if someone says they’re a “fiduciary”, do they actually understand what their duties are, and do they act according to these standards?
- Focusing on whether someone is a fiduciary or not implies that a binary line in the sand exists between an adviser who will provide good advice and an adviser who won’t. Instead of thinking in yes/no terms, you should think in terms of a spectrum of alignment between the interests of a client and an adviser.
- There are various types of advice where a fiduciary standard is unrealistic and basically rules out any form of adviser who might be suitable for you.
If you’ve made it this far, congratulations on reading 2,000+ words on an esoteric term derived from Latin. If you want some bonus reading, I wrote another article a couple of years ago: “Fiduciary relationships, fiduciary duties, and sticky ethical and moral dilemmas”.