Focus on Fiduciary

Since the truth about the activities of money manager Bernard Madoff came to light last December, we have seen a proliferation of stories about fraud or other deceptive practices perpetrated by financial advisors that have hurt their clients.  In addition to uncovering a number of Ponzi schemes like Mr. Madoff’s, the SEC’s recent enforcement actions have highlighted cases involving kickbacks, excessive trading, and misappropriation of funds.  It is not a coincidence the apparent increase in the number of these cases has accompanied the market downturn.  These illegal behaviors become much easier to detect when account values are falling than when investors are being rewarded by good returns.  Had large investors in Mr. Madoff’s funds not requested to redeem their shares in response to the market, he might have been able to continue his fraud indefinitely. 
 
These stories are truly discouraging, both for the investing public and professional advisors who act as fiduciaries for their clients.  A fiduciary is required by law to act in his or her client’s best interest at all times.  Most consumers of financial advice, however, are not aware that the vast majority of those who call themselves “financial advisors” or “financial planners” today are not actually subject to a fiduciary obligation to their clients.  Under current rules, advisors who are compensated by third parties on the sale of financial products are subject to a lesser standard known as the “suitability rule.”  This regulatory hurdle requires only that the product sold be appropriate for the client (in other words, not too risky) at the time of sale.  Moreover, this obligation ends once the transaction is completed.  The advisor is not required to perform a periodic review to determine if the product purchased is still appropriate.

At Three Bearings Fiduciary Advisors, we firmly embrace our role as a fiduciary for you.  It is part of our culture, not just a regulatory requirement imposed by law.  We operate as a fee-only firm in order to fulfill this role, eliminating the conflicts of interest that may arise when advice is delivered through commissioned product sales.

To help educate consumers about the importance of the fiduciary relationship between advisor and client, the National Association of Personal Financial Advisors (NAPFA) hosts a website, providing information about the need for a fiduciary standard in the financial services industry as well as a checklist consumers should use in evaluating their own advisor.  The NAPFA checklist asks directly whether the advisor is willing to adhere to a fiduciary oath, placing client interests above his or her own and those of his or her employer.  This oath, which must be adopted by all NAPFA members, requires that the advisor
 

• always act in good faith and in the best interests of the client,
• be proactive in disclosing conflicts of interest with the client, and
• not accept any fees or compensation that is contingent upon the purchase or sale of a financial product, or referrals to other professionals.

If your friends and family are not working with a fiduciary advisor, please share this information with them.