Fiduciary—a buzzword you see plastered on advisor websites, blogs, and internet searches. A title coveted yet cloaked in mystery. Working with a fiduciary seems to be on any check-list for people in search of a new advisor, but what does being a fiduciary really mean and why does this designation affect you, the client?
Today, our team is going to bring you a two-part series that delves into the new fiduciary standards that the CFP Board issued in June 2020. These 15 standards impact the way that advisors operate and provide additional assurance that you are working with someone who only has your best interests at heart.
Without further ado, let’s dive into the world of fiduciaries.
What is a fiduciary?
Let’s start with a basic definition of a fiduciary. A fiduciary is a person or company that has a legal and ethical relationship of trust with another person. In the financial industry, a fiduciary is someone who always (remember this word) acts in the client’s best interest.
While this may seem like a basic requirement for financial advisors, the fiduciary rule is far from universally adopted. Many professionals who market themselves as financial advisors are really brokers whose job is to sell products and services. While brokers play an important role in the financial space, their jobs are different than that of a fiduciary financial advisor.
The CFP Board’s new Standards of Conduct
The CFP Board took major steps to help its advisors clearly define and execute fiduciary duties. The fiduciary rule has undergone a lot of change over the years but the CFP Board implemented a new Standard of Conduct that makes the rules crystal clear.
Before these new requirements, a CFP® professional had to act as a fiduciary only when providing financial planning services to clients. The new rule implements a “fiduciary at all times” rule which means that your CFP® professional always needs to act in a fiduciary capacity with their clients.
This revised Standard of Conduct includes 15 duties that fiduciary advisors owe to their clients. By implementing this rule, clients can rest assured that they are working with a professional who always keeps their best interests at heart and only makes recommendations that are good for the client.
Here at Step by Step, we are passionate about being a CFP® professional and want to ensure that we provide you with the best service possible. For us, that means bringing these fiduciary duties to life in each and every interaction we have with our clients. Let’s take a look at the 15 fiduciary duties and how they impact you.
Fiduciary duty to clients
This first rule is an embodiment of the “fiduciary at all times” standard. It means that whether the advisor is providing direct financial planning services or not, they are obligated to act in a fiduciary capacity. As a fiduciary, advisors need to uphold three basic tenets:
Duty of loyalty. This means that the advisor needs to work in your best interest and disclose any conflicts of interest.
Duty of care. This duty means advisors need to take a comprehensive view of your needs and make recommendations that support your vision. For example, when planning your investment strategy our team would look at your risk tolerance, risk capacity, asset allocation, asset location, as well as short and long term goals to build a plan that works for your unique needs.
Duty to follow client instructions. As your advisor, we work for you and will enact the plans that you select.
These three duties are at the heart of the fiduciary at all times rule. This really means that being a fiduciary is a full-time job, one that we take seriously.
Reign in conflicts of interest
Conflicts of interest are going to pop up—after all, we are only human. But a fiduciary designation requires advisors to clearly disclose what those are before any advice is given. This also includes implementing preventative measures to lessen conflicts of interest and properly manage them if they arise.
Fiduciary advisors tend to have fewer conflicts of interest from the get-go because their fees aren’t relying on the sale of a product, service, affiliation, or commission. But this rule asks that all fiduciary advisors take a proactive approach to conflicts of interest and always uphold the client’s wishes. This fosters an environment of openness, honesty, and trust.
Provide the full scope of information to both clients and prospects
This section gets a little in the weeds, but ultimately this means that an advisor needs to provide clients and prospects with the full scope of any engagement they have with them. For example, this would include the service offerings themselves, fees, payments, referrals, and other elements associated with the plan. Essentially, the clients (and prospects) need to have adequate and comprehensive knowledge of the process before starting services.
This idea upholds that transparency aspect of what we do. The CFP Board wants to ensure that advisors are providing all of the information necessary for clients and prospects to understand the situation.
Clear client communication
Communication is at the heart of most successful relationships. Think about it, by effectively communicating with your spouse, parents, kids, and friends you are able to have more open and fulfilling relationships. This same idea can be applied to your professional relationship with an advisor.
In terms of the CFP Board, this section really means active engagement with clients and upfront, transparent communication tactics. This section is intimately tied with the one above, as a properly structured plan will lead to better communication.
Being a fiduciary has always been a full-time job for our team at Step by Step and for many qualified advisors out there. The CFP Board wanted to solidify that promise and work to further enhance the client experience.
We are excited to dive into the other 11 duties with you all next time. How will a fiduciary advisor benefit you? Schedule a call with us today to find out.