Ingraining Fiduciary Principles into Your Financial Plannin - PowerPoint Presentation

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Ingraining Fiduciary Principles into Your Financial Plannin - PPT Presentation

Duane R Thompson AIFA Senior Policy Analyst fi360 Session Overview The fiduciary standard exists for the benefit of society professionals and most importantly the individuals who rely upon fiduciaries ID: 282969

financial fiduciary fi360 investment fiduciary financial investment fi360 2013 rights reserved client professional standard planning interest care planners advice

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Slide1

Ingraining Fiduciary Principles into Your Financial Planning Practice

Duane R. Thompson, AIFA®Senior Policy Analyst, fi360Slide2

Session Overview

The fiduciary standard exists for the benefit of society, professionals, and, most importantly, the individuals who rely upon fiduciaries.

The core fiduciary duties of loyalty and care are the ethical foundation underlying laws, regulations, and professional standards governing planning practitioners.

egulatory developments in particular shape the fiduciary standard and affect your planning activities.This session is based upon FPA’s “Fiduciary Implications of Financial Planning” program.Slide3

Learning Objectives

Understand fiduciary roles, responsibilities, and regulations as applied to financial planners.Recognize the

benefits to client

and planner

that can be achieved by properly embedding fiduciary processes in a financial planning practice. Slide4

…[W]e cannot do everything ourselves; different people are more capable in different matters.

…[I]n cases where we ourselves cannot be present, the vicarious faith of friends is substituted; and he who impairs that confidence, attacks the common bulwark of all men, and as far as depends on him, disturbs the bonds of society…–Cicero, 106-43 BC, Oration for Sextus Roscius of Ameria

Historical Perspective Slide5

Professional Expectations of Fiduciaries Remain High Today

“A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor most sensitive, is then the standard of behavior [for fiduciaries].… Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the ‘disintegrating erosion’ of particular exceptions. … [The fiduciary standard] will not consciously be lowered by any judgment of this court.”

Judge Benjamin Cardozo

Meinhard v. Salmon

, 1928

5Slide6

Common Law and Statutes Define Fiduciary Obligation

Anglo-American common law

Common law of trusts

State trust laws

Congress

ERISA

Advisers Act Fiduciary StandardSlide7

The Fiduciary Standard Continues to Evolve

Century

CenturySlide8

Fundamental Fiduciary Duties – Loyalty and Care

Loyalty – Obligation to serve the client’s best interestsCare – Obligation to act with the skill, care, and good judgment of a

professionalSlide9

Duties Associated With the Fiduciary StandardSlide10

Duty of Loyalty – Financial Planning Applications

Focus on the client’s best interests when researching client’s situation and financial goals. Develop recommendations based solely on the client’s goals and objectives.Identify and disclose direct and indirect sources of compensation. Document how conflicts are resolved in favor of the client.

Duty of Care – Financial Planning Applications

Understand basic requirements of the law and regulations.Act consistently in accordance with fiduciary principles when laws or rules do not specifically address appropriate conduct.Apply a consistent data-gathering

process

to address all subject areas in the scope of engagement.

Employ a prudent due diligence process to select third-party service providers.

Suitability of investment advice -- focus upon a

prudent

investment due diligence process as opposed to chasing performance.

How Does Fiduciary Status Typically Arise?

“Named fiduciary” in trust or ERISA plan documentsProvide investment advice in a professional contextExercise discretion over client property

Have the authority to delegate duties to a co-fiduciary

Fiduciary RolesStewards

– manage the overall decision-making process Advisers – provide advice that is material to decision-making in a professional context (with compensation, based upon superior skill).Investment Managers

– make investment decisions and select the individual securities to implement a specific investment mandate

Functional FiduciariesIt’s not what you call yourself that’s decisive, it’s what you do.

If you exercise discretion or give personalized advice for compensation, you are a fiduciary.You are a fiduciary to the extent you perform fiduciary functions.

GAO Report on Financial Planning

Dodd-Frank Wall Street Reform Act called for GAO Study.* Conclusions of the GAO Report:No direct regulation of financial planners

exists

per se

and no additional layer of regulation over financial planners is warranted at this time.Financial planners are primarily regulated by federal and state investment adviser laws.Financial planners are subject to broker-dealer and insurance laws when

“acting

in those capacities

.”

*Government Accountability Office Report submitted to Congress in January 2011

SEC, State Definition of RIA includes Planners

Financial planners are RIAs – therefore you are an investment fiduciary.

SEC Interpretive Release 1092 (1987):

planners give investment advice; must register as IAs.

State “holding out” provisions capture planners for their investment advisory activities

Planners receive asset management fees

Most complaints focus on investment losses

Regulator inspections focus on investment activitySlide17

IN Definition of an Insurance Consultant

‘Consultant’ means a person who:

(A) holds himself or herself out to the public as being engaged in the business of offering; or

(B) for a fee, offers;

any advice, counsel, opinion, or service with respect to the benefits, advantages, or disadvantages promised under any policy of insurance that could be issued in Indiana.

Exemptions:

Attorneys

Insurance producers

Trust officers

Actuaries and CPAsSlide18

Fiduciary Duties Defined in Case LawInvestment advisers are fiduciaries

SEC v. Capital Gains Research Bureau (1963, U.S. Supreme Court) – Investment advisers are fiduciaries to their clients. Unlawful for adviser to engage in fraudulent, deceptive, or misleading conduct.Disclosure of conflicts/best execution

In the Matter of Arleen Hughes

(1948, D.C. App. Ct.). Acting as fiduciary, dually registered adviser failed to disclose adverse interests, including securities sold out of inventory, and best price execution.

Fiduciary Obligations of CFP Certificants

“A certificant shall at all times place the interest of the client ahead of his or her own. When the certificant provides financial planning or material elements of financial planning, the certificant owes to the client the duty of care of a fiduciary as defined

CFP Board

.”-- CFP Board Standards of Professional Conduct,

Rule 1.4

OK, so I’m a fiduciary. Now what?

Responsibilities can come from contractual obligation, statutes , regulations or common law court decisions. Determining that you are a fiduciary leads to other key questions:*To whom am I a fiduciary?What are my guiding principles (duties) and responsibilities (scope of engagement)?

What are the consequences of failure to exercise fiduciary obligations?

* SEC v. Chenery

, 318 U.S. 80, 85-86 (1943)

Fiduciary Standard Varies by Law and Regulation

Federal

ERISA Fiduciaries

Advisers

Brokers

Federal

State

Organizational

Individual

State

Organizational

Individual

* Source: Mercer Bullard, fi360 2010 Annual Conference PresentationSlide22

Fiduciary Responsibility under ERISA and the Advisers Act

Factor

ERISA

Fiduciary

Investment Adviser

Conflicts of interest

Prohibition and disclosure

Disclosure and client consent

Self-dealing

Generally prohibited

Disclosure and client consent

Private

right of action

Participants

may sue fiduciaries for violating ERISA; tax and financial loss penalties

No private right of action for violation of the Act; restitution of

advisory fees

Duty

to diversify

Plan must generally offer diversified investment options

Broad discretion

Compensation

Must be reasonable

Negotiable

Fidelity bond

Required

Not required

Registered Representatives – Beefed-up Suitability Rule

Revised FINRA suitability rule (July 2012) adds fiduciary elements:Time horizon, liquidity added as factors

nhanced due diligence on customer profile

ageinvestment experience risk toleranceR

ecommendation to

hold

a security (not just buy or sell)

Includes investment strategies in addition to individual securities

Recommendations consistent with ‘customer’s best interests’Slide24

Financial Planner OversightSlide25

FPA Standard of Care

Put

client’s best interests

first

Act

with due care and utmost good faith

not mislead clients

Provide

full and fair

disclosure of all material facts

Disclose and fairly

manage

all material conflicts of interest

Loyalty

Care

Core Fiduciary Duties Slide26

CFP Board Definition of a Fiduciary

“One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.”

-- Standards

of Professional Conduct,

Terminology section

CFP Board Definition of a Conflict of Interest

“A conflict of interest exists when a [CFP®] certificant’s financial, business, property and/or personal interests, relationships or circumstances reasonably may impair his/her ability to offer objective advice, recommendations or services.”

Standards

of Professional Conduct, Terminology SectionSlide28

CFP® Rules of Conduct Related to Conflicts

Rule 1.4 – At all times place the

interest of the client ahead of his or her

own (baseline standard of care). When providing

financial planning services, act in a manner the planner reasonably believes is in the best interest of the client (CFP Board’s fiduciary definition).

Rule 2.2

– Requires timely disclosure of all conflicts having potential to materially affect a relationship when CFP®

professional

knows,

or should have

known,

of a conflict

Rule 4.1

–

Requires the CFP® professional to

treat clients

fairly and services with integrity and objectivity

Best Practices*

acknowledgement

and consent from a client should be

obtainedconflicts

may not all be handled through disclosure*Source CFP Webinar on Managing Conflicts of Interest , February 2013Slide29

Benefits of Achieving Fiduciary ExcellenceConsumer expectations

all financial services agents act in best interest of clientsClient benefitssuperior knowledge, skill, and/or management of a professionalProfessional benefitsclient satisfaction

competitive advantage over non-fiduciaries

personal satisfaction as a true professionalSlide30

Benefits of Integrating Fiduciary Principles into Your Practice

Enhance client satisfaction: Clients seek trustworthy and competent advice above all else.

Mitigate

risk

: Reduce regulatory, litigation, business, and PR risks.Increase practice efficiency:

Well-defined

fiduciary processes aligned to generally accepted investment theories are efficient and

effective

.Slide31

Questions?