Posted by  Joe Bert, CFP®, AIF®

At Certified Financial Group, we don’t see it as the firm’s goal to be the knight-errant of the fiduciary standard for all financial advisors. Nor do we propose to wag our fingers at those with conflicts. Rather, we simply hope to intimate our firm’s pride at our Investment Advisor, Certified Advisory Corp (CAC), having recently received the Centre for Fiduciary Excellence’s CEFEX designation and to discuss our perspective on the meaning of fiduciary duty.

In this piece, we’ll briefly explain what the CEFEX means and why it was so important for CAC to go through this lengthy process. We also hope to share what it means to be a true fiduciary—not just in our view, but in the Department of Labor’s (DOL) view as well.

What the CEFEX Signals

To begin, it’s important to note that there are only 75 investment advisors in the U.S. currently CEFEX certified. The process to certification requires a 120-page questionnaire and an on-site examination. The Centre for Fiduciary Excellence is independent, and its CEFEX designation is described as serving investors “who require assurance that their investments are being managed according to commonly accepted best practices.” At the same time it assists these investors in identifying and determining “the trustworthiness of investment fiduciaries.”

Despite the certification’s cost of time and treasure, we felt that assuring investors of our fidelity to the CEFEX governing principles, and our core belief in fiduciary reliability, were worthy goals.

You can learn more about the specifics of the CEFEX process here, but we believe this designation underscores our commitment to both the sprit and the letter of being a fiduciary.

What It Means to Be a Fiduciary

In the world of financial planning, “fiduciary” has become co-opted and rather commoditized. From our perspective, being a fiduciary at its most basic means placing your client’s interests before your own. But further unpacked, this simple definition can become a viper’s den of complications and caveats in certain hands.

At CAC, we put our client’s interests first by being fee-only, assuming no relationship (financial or otherwise) with any broker/dealer or third-party investment vendor, and maintaining closely held private ownership. These long-standing principles allow us to sit on the same side of the table as our clients as we approach any investment scenario, vendor selection or allocation decision.

Advisors v. Broker/Dealers: Why Fiduciary Is Now The Thunderclap, Not the Nuance

CAC believes that now is the ideal time to discuss the distinctions of a true fiduciary and those who may simply use the term.

The largest distinction lies in the difference between investment advisors, acting as a fiduciary by strict definition, and a broker/dealer, whose actions may not be in a fiduciary capacity at all. CAC is the former, and provides investment advice to its clients, the only fee we derive from this relationship is the agreed-upon fee for this investment advice.

In contrast, a broker/dealer cannot legally provide substantive advice. The advice they do provide typically comes attached to a product. This product may be the brokerage platform itself, and/or, more insidiously, a proprietary investment product.

Imagine a scenario in which your broker/dealer charges you 50 basis points (.50%) for investment advice on your $100 million of investable plan assets. They also charge you a fee for trades executed through their brokerage platform – clear incentive to ensure your broker/dealer affiliated advisor uses only that platform and does not search for equal, more cost-effective alternatives. At the same time, your broker/dealer affiliated advisor may also push a branded proprietary product. If selected the revenue of this product flows back to the broker/dealer parent and your advisor likely receives a commission or soft dollar incentive for this additionally derived revenue.

This proprietary investment product, now added to your portfolio or investment lineup, may be a fine product, and truly “suitable.” However, did your advisor act in your “best interest” and search for alternatives that perhaps had a better share class or other lower fees? In a worst-case scenario, are you certain they properly evaluated investment alternatives that may not only have been cheaper, but may have also outperformed their proprietary offering? The commission-based incentive to sell you this product ensures that they likely have not taken these actions. If you are a sponsor of an employee retirement plan this lack of fiduciary due diligence on your end now opens you up to a litany of breach of fiduciary duty claims that settle on your shoulders—not, by definition, your broker/dealer who never truly accepted the role of a fiduciary that ERISA mandates.

The Department of Labor’s Fiduciary Rule

There are several other compounding factors and conflicts which we will address in subsequent conversations, but these few initial issues should be enough to bring one question to the fore: “How much money is my broker/dealer or broker-dealer rep. deriving from their relationship with me?” The answer is likely much more than the fee you believe you’re paying.

The next question you should ask point blankly to your broker/dealer himself or herself is: “Are You a Fiduciary?” And, if so, what kind of fiduciary?

Helping to clarify these questions is the DOL’s “Fiduciary Rule,” which will be instituted in full in the coming months. And while complicated, totaling more than 1000 pages, it does lay out one very clear thesis: Broker/dealers cannot provide advice nor exist as fiduciaries in any capacity if they are also providing investment product. Given this, it does beg the question if broker/dealers can ever act as fiduciaries, and if, in fact, they have ever truly acted in this capacity historically.

This is an important inquiry, but only scratches the surface of what becomes a byzantine journey into the rules and regulations under ERISA that govern the true meaning of “fiduciary.”

At Certified Advisory Corp, it is our wish to help you discern the complicated answers to the questions above, and, in turn, help reduce your risk and fiduciary liability. As a CEFEX Certified firm, you can rest assured that you are working with a true fiduciary, providing you the latest insight to achieve distinctive results.

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