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What Will Replace “Fiduciary”?

What Will Replace “Fiduciary”?
July 23
00:03 2019

Well known industry commentator Michael Kitces recently suggested the SEC’s recently promulgated Regulation Best Interest “leaves little room for RIAs to market their fiduciary obligation to act ‘in the best interests of the client’ as a differentiator when broker-dealers will be able to use substantively identical words.”

Others echo this concern not merely from the point of view of a service providers marketing strategy, but from the point of view of the customer. What once represented a clear distinction of service (i.e., fiduciary standard vs. suitability standard) has now been muddied by the formal introduction (and redefinition) of the term “best interest.”

“Unfortunately, Reg BI is poorly named,” says Ric Edelman, Co-founder of Edelman Financial Engines in Washington D.C. “‘Fiduciary’ has always meant serving the client’s ‘best interests.’ Reg BI does not do this, but it uses the phrase ‘best interest’ anyway. As a result, an advisor who does not adhere to the fiduciary standard can now claim to be meeting the requirements of ‘Regulation Best Interest’ – creating confusion among consumers. It is a shame that the SEC chose this path.”

Edelman isn’t alone in this perception. Ted Halpern, President of Halpern Financial, Inc. in Ashburn, Virginia and Rockville, Maryland, says, “Unfortunately, after several attempts in recent years to create a uniform fiduciary standard at the federal and state level (Regulation BI is just the most recent), the legal meaning of the word ‘fiduciary’ has become quite confusing for consumers to parse.”

That this confusion has been introduced after the DOL’s now-vacated Fiduciary Rule managed to score a significant achievement by allowing the market to adopt “fiduciary” as a baseline only makes matters worse. “The word fiduciary does not come up often in plan sponsor or participant meetings,” says Derek S. Taddei, Client Services – 401k Plan Marketplace at Stellar Capital Management in Phoenix, Arizona. “It seems to be assumed by plan sponsors that all service providers act in the best interest of the plan and its participants. Non-fiduciaries vying for new business will typically not point out the difference, and will write contracts accordingly.”

If “fiduciary” is assumed and is therefore being used less, that means there’s a void that can be filled by a replacement term. What might replace “fiduciary”?

“I would like a more consumer friendly term,” says Marc Smith, Managing Partner at Marc Smith Investments in Dillsburg, Pennsylvania. “Fiduciary is odd to say and not immediately understood by people. A simpler term would help relay to consumers how important it is.”

Unfortunately, although as stated above it may cause more confusion, the SEC’s new terminology has the advantage of being more understandable than the more jargon-like legalese of “fiduciary.” “Best interest, this term is easy to grasp for consumers and retail investors,” says Timothy Hooker, Investment Manager at Dynamic Wealth Solutions LLC in Southfield, Michigan.

One possible way to fill this void is to switch the focus of the service model. Perhaps it’s not a term that will replace “fiduciary,” but a competing service model that will replace the fiduciary-oriented service model. Jairo Gomez, the Director of Retirement Plan Services at Allworth Financial, formally Hanson McClain Advisors, a California-based financial advising firm, says, “We are seeing more conversations on retirement readiness and financial wellness taking the place of fiduciary concerns.”

We’ve already seen the high level of interest in “financial wellness.” It represents a fresh change-of-pace to the nearly decade-old drumbeat of “fiduciary.” “The new catchphrase is ‘financial wellness,’ which corresponds with the push from greater participant savings,” says John C. Hughes, an ERISA/benefits attorney with Hawley Troxell in Boise, Idaho. “It is a shift toward a more universal holistic view of employees’ wellbeing. Consultants and recordkeepers seem to be the source of this refocus. There could be many reasons for this shift, one reason might be that it is a more appealing message to employer clients to hear about encouraging their workforce to be financially stable than it is for employers to hear about their own potential liabilities for missteps in operating a plan (that is, fiduciary breaches). It also could be that it was time for a new message and focus with employers becoming weary of hearing warnings about fiduciary process. It is not a bad thing for employers to focus on their employees’ financial wellbeing, but employers should not lose sight of other issues such as their fiduciary responsibilities. Fiduciary processes should continue to be developed, adhered to, and strengthened.”

And therein lies the danger of an alternative service-model head fake. Plan sponsors will continue to need to monitor and mitigate their own legal – or “fiduciary” – liability. And they’ll always need to turn to professional experts to help them with this task.





“Whether you call it ‘fiduciary’ or something else, advisors should be stepping up to provide this level of service,” says Halpern. “Perhaps ‘objective financial advice’ or ‘independent financial advisor’ are other terms that may become popular—but right now, I think ‘fiduciary’ is still the most common term. The problem is that consumers think it means one thing, and not all advisors live up to their expectations.”

Semantics, however, won’t change the nature and scope of the liability. “Fiduciary is still the name tag right now,” says Faith Keith, CEO of Leverage Retirement, Inc. in Allen, Texas.

Regulators (including the DOL) seem intent on splitting the baby in half by allowing two incompatible business models – one fiduciary with no self-dealing fees, the other non-fiduciary with conflict-of-interest fees – to coexist within the same market. Does this mean “fiduciary” has lost its inherent advantage? “I don’t see the term as getting replaced, but rather astute advisors doing a better job of explaining their obligations to their clients in plain language and being upfront about conflicts of interest, which was the right approach all along,” says Jeffrey Burg, Partner at DB Financial Partners in Phoenix, Arizona.

It’s clear the term “fiduciary” continues to have some cache within the marketplace. “We are now seeing robo-advisors in TV commercials stating they are fiduciaries. It still is a common word thrown around in the industry,” says Richard Reyes of The Financial Quarterback in Lake Mary, Florida.

The legacy of the DOL’s defunct Fiduciary Rule continues to reverberate throughout the retirement plan industry. It is doubtful the SEC’s Reg BI, which is geared primarily for the retail market, will change that legacy. “The assumption of widespread fiduciary level service amongst service providers was very prevalent and the Rule did elevate the topic,” says Taddei. “It became easier to engage in the fiduciary conversation, such as the why behind higher fee share classes and other undisclosed conflicts of interest with the plan and its participants. At this point, many RFPs we have seen specifically require potential advisers to sign on as fiduciaries.”

It may, therefore, be a simple case of “the more things change, the more they remain the same” with regard to the concept of fiduciary. “The end result clients want has not changed,” says Halpern. “Consumers still want an expert to analyze their financial situation and provide financial advice from a completely objective standpoint – finding the optimal solution for their needs. They want to pay a fee for advice (as opposed to a commission) because this structure eliminates a conflict-of-interest, and typically ends up being far less expensive over time. They want a strategy that has cost-effective investments, and minimizes taxes to the extent possible.”

Still, given the potential impact Reg BI may have, one can’t help but understand why David S. Thomas Jr., CEO at Equitas Capital Advisors, LLC in New Orleans, Louisiana, says, “Fiduciary is not being replaced. It’s just being watered down and diluted.”

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on TwitterFacebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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