What NO ONE is talking about regarding Fiduciary Duty
David H. Kinder, RFC?, ChFC?, CLU?
I help individuals and business owners leverage the tax code to retire at their desired standard of living, pay less taxes, and use as little as a third of the capital traditional advisors recommend. Curious? DM me!
First disclaimer: I am not a compliance professional or attorney. This is not compliance or legal advice. However, ignore this to your own professional peril.
No one is talking about the reality of fiduciary duty and I believe that the narratives being shared does NOT serve the insurance or financial services community, regardless of insurance-only licensing, broker/dealer licensing, or RIA-only. Regardless of CFP, Fee-only CFP, or Fee-based.
Fiduciary duty is NOT about "best interest"!
Everyone is talking about best interest standard. And this is where the misunderstandings come from.
Here's the reality: everyone who is serving clients should have their client's best interest at heart.
Often it is misunderstood that "best interest" means that I put the client in a far better position regardless of compensation method or amount. That's what it SHOULD mean.
If everyone CAN have their client's best interest at heart, what's the difference between "best interest" and fiduciary standards?
Duty of loyalty.
This became explicitly clear when I was doing some posts in my Facebook group regarding the Unauthorized Practice of Law. I posted a PDF of the 1993 Florida Supreme Court decision regarding trust work being done by non-attorneys. If you're curious, it's 613 So. 2d 426.
Here's what it says with some slight emphasis added by me:
The question posed by petitioner also presents a potential conflict of interest for a lawyer employed by a corporation or other entity involved in the sale of living trusts.
Loyalty is an essential element in the lawyer's relationship to a client. In advising a client about the disposition of property after death, the lawyer must first determine whether a living trust is appropriate for that client.
If so, the lawyer must then ensure that the living trust meets the client's needs.
If the lawyer is employed by the corporation selling the living trust rather than by the client, then the lawyer's duty of loyalty to the client could be compromised. See Rules Regulating The Florida Bar 4-1.7(b) (lawyer shall not represent a client if the lawyer's exercise of independent professional judgment in the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person)
and 4-1.8(f) (lawyer shall not accept compensation for representing a client from one other than the client unless: client consents; there is no interference with lawyer's independence of professional judgment or client-lawyer relationship; and information relating to representation is protected).
In light of this duty of loyalty to the client, a lawyer who assembles, reviews, executes, and funds a living trust document should be an independent counsel paid by the client and representing the client's interests alone.
Duty of loyalty is defined by the source of compensation. Period. End of story.
Compensation that is received that is from any source ASIDE from the client... is automatically considered a conflict of interest.
You'll notice that this is NOT about preferred outcomes for the client. This is about full compensation disclosure.
Annuities and life insurance can create superior retirement income outcomes, but if they pay a commission to the agent, that compensation is considered a conflict of interest.
Now, look at the wording of the forms that the Department of Labor would have the agent complete. What is it called? A PTE or Prohibited Transaction Exception form.
Why is it called a Prohibited Transaction Exception form? It's called that because in a fiduciary relationship, the one providing advice is not allowed BY FIDUCIARY LAWS to receive any outside compensation, unless the client consents and it is disclosed.
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One thing that truly concerns me about the PTE form is the fact that the companies don't want it returned back to them. They're for the agent's record retention keeping. Why is that a bad thing? Because it won't become applicable until a complaint arises.
Who is a fiduciary?
Michael Kitces wrote his blog article some time ago regarding the 4 levels of fiduciary.
Self-proclaimed is the most ignorant and dangerous because there usually isn’t any counseling with attorneys as to what it really means to hold yourself out as a fiduciary.
Some time ago, Steve Savant - Radio Talk Show Host interviewed prosecuting attorney Ilya Lerma on several occasions. I have a playlist on YouTube of all these interviews. The biggest one that caught my attention was the episode titled “Calling yourself an expert may expose you to damages.” The main message of that video was in the event of a complaint, attorneys will use your image and reputation you used to solicit the public and hold you accountable to that standard.
Insurance agents promoting themselves as a fiduciary:
While the insurance agent may have made a very suitable, or even professional product recommendation and feels that they can back up that recommendation as being “in the client’s best interests”, that doesn’t necessarily mean that they upheld a fiduciary duty of loyalty defined by the source of compensation.
The difference here is the representation of the agent and not knowing what it truly means to hold yourself out as a fiduciary to the public.
Here's what I DON'T know:
If you are dually licensed as an insurance agent and with an RIA with a Series 65, your insurance agent activities should be disclosed as an OBA or Outside Business Activity on your ADV Part 2.
Does your status as an IAR (Investment Advisor Representative) of the RIA (Registered Investment Adviser firm) mean that you should be following fiduciary rules and standards for everything you do - including your activities as an insurance agent as described in your OBA?
I can see this being a HUGE issue for dually-licensed insurance agents and IARs. Check with your compliance departments to ensure that you are truly following the fiduciary standard of care and how it applies to your disclosed Outside Business Activities.
This isn't just about ethical conduct.
We are all (should be) about making sure the client is better off having worked with us than before they met us. That's being a decent human being in our business.
This is understanding the fiduciary legal standards and duties and how it applies to our profession.
I am concerned about everyone who says they are a fiduciary... and doesn't know all the nuances and requirements involved. You may be opening yourself up to a legal complaint based on the standard you promoted yourself.
Here's my recent podcast episode on this topic:
Founder @ Tax-Free Tutors | CPA, CFP, CLU, PFS I Futuristic! Tax Planning Expert
1 个月Well said Ed Kelly and David H. Kinder, RFC?, ChFC?, CLU?! Proper financial planning spans many different areas — and all of their separate rules and requirements. It’s virtually impossible to deliver the best result without “bending” someone’s standard. Each time I found myself there I did what I thought was best for the client and hoped if it were ever challenged that a reasonable judge or jury would see that I was acting with the intent of a fiduciary.
Tax Alpha Consultant
1 个月Why is it more righteous to not offer clients the full range of products and services? When a client desperately needs life insurance, but your “principled” fiduciary stubbornness keeps you from properly analyzing and recommending the best way to meet that need. I’ve heard the rationalization… “I refer it out.” I’m not buying it. Zero integration with the other 6 areas of financial planning. Zero accountability to ensure the insurance was placed. Zero ongoing servicing. What about protecting longevity risk with annuities? Oh no… I’m too pure and too much of a “fiduciary” to even explore that idea. What about high income clients whose group disability maxes out at 60% of income up to $10,000. Your client makes $400,000, but you don’t bother to advise and implement additional personal DI… because YOU are a fiduciary! It’s bad, and you know it. Try defending yourself in an arbitration when the attorney points out your failures to advise despite your CFP. Hooray for the dually licensed. Hooray for the few financial advisors who truly do comprehensive planning and provide deep analysis, strategies, & implementation across the entire 7 areas of planning. We are supposed to be professionals here. It is not supposed to be easy for us.
Investment and tax planning for individuals 55+
1 个月Good write up, David. Your part about the dually licensed IAR with insurance (or maybe BD affiliation as well) strikes at the heart of a really awkward conversation for the dually licensed. When the client asked me (when I worked at a big firm) if I was a fiduciary the company line was that we were fiduciaries on the account level where a client agreed to an advisory relationship on a specific account, but that we were not fiduciaries to the clients in all areas of advice. Good bad or indifferent it felt icky to say. (No offense to the dually registered at all)