A Reader Asks... #1

Dimes asked, "Are you a fiduciary? What is a fiduciary?" and those are both excellent questions.

In fact, this is a hornets nest that was metaphorically kicked by the Pension Protection Act of 2006 (PPA). Signed into law last year, the PPA defines who has fiduciary responsibility (and liability) but the PPA never defines the term fiduciary!

Wikopedia defines fiduciary this way:

A fiduciary duty is the highest standard of care imposed at either equity or law. A fiduciary is expected to be extremely loyal to the person to whom they owe the duty (the "principal"): they must not put their personal interests before the duty, and must not profit from their position as a fiduciary, unless the principal consents. The fiduciary relationship is highlighted by good faith, loyalty and trust, and the word itself originally comes from the Latin fides, meaning faith, and fiducia.

In 2005 the The Certified Financial Planner Board of Standard Inc. started the process to update the Standards of Professional Conduct. A key issue in this update is the standard for duty of care. The proposal is to replace the current “reasonable and prudent professional judgment” standard to a requirement that a CFP® professional “shall at all times place the interest of the client ahead of his or her own.” For CFP® professionals providing financial planning services, the duty of care would be raised from the current duty to “act in the interest of the client” to the “duty of care of a fiduciary." The proposal defines fiduciary as "one who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client."  The CFP Board of Standards Board of Directors is scheduled to meet this month and review the last round of comments regarding the proposed revisions. If approved, the new Standards of Professional Conduct are anticipated to be effective January 1, 2008.

To further complicate matters, the Securities and Exchange Commission (SEC) Rule 202 already states that Registered Investment Advisor's (RIA) and their representatives (Investment Advisor Representatives or IAR) have a fiduciary responsibility to clients.

I am not an attorney and feel very unqualified to comment on this battle of legal details. But I do like the CFP Board of Standards definition. I have held myself to that standard since I started in this business over 17 years ago.

Am I a fiduciary? I suppose that depends on the context to which you are using the fiduciary standard. I am an IAR and always provide my advise in line with clients interests and relative to their goals.

Dimes, if that does not answer your question please let me know. I fear I may have raised more questions than I answered. Such is the nature of gray issues.

Photo on Flickr by johnxlovessheep