Financial planning businesses built on four key pillars stand a good chance of weathering whatever statutory fiduciary responsibility is thrown at them, according to Steve Helmich, director of financial planning for AMP.
Helmich told the 2011 SPAA National Conference in Brisbane that good financial planners already largely discharge a fiduciary obligation to clients, simply by virtue of always putting the client’s interests ahead of their own.
But the discussion around what fiduciary duty means, what it entails and how it will affect the business of financial planning has left many people confused or frightened about the potential implications.
Helmich said that we live in a word “where hurricanes are caused by man, and the credit crunch was an act of God”.
“And that sort of blurs the lines for fiduciaries, as well – just exactly where you are and what’s going to happen,” Helmich says.
“When you look around the world it seems that no one really knows what the question is, when it comes to fiduciary. They do not actually sit down and understand, well, why is it here? But they all seem to know an answer, and the answer is, of course you need to be a fiduciary; it makes sense.
“But the question gets to why? Why does that work, why will it be better, and who will benefit from the [change] – and does it already exist?
“I make the point that fiduciary-like duty exists already. And for planners who are doing the job as they should be doing, it is there and it is present already.”
Helmich provided an observation from a lawyer: “A person is not subject to fiduciary obligation because he or she is a fiduciary; it because they are subject to fiduciary obligations that they are a fiduciary.”
“So it’s more or less saying that it’s what we do that makes us a fiduciary,” Helmich said.
“We’re not a fiduciary and then have to do things; it’s what we do that actually makes us fiduciaries.
“So I’ve got my own definition. If you think about when you’re dealing with clients, if at all times you put your clients’ interests before your own, you are in essence fulfilling a fiduciary responsibility.
“If you haven’t put your clients’ interest first, I think there’s a basic flaw.
“[I think there are] four pillars of fiduciary [duty]. The first is principles.
“The [second is] process. Your process must show that you demonstrate that decisions are always made in the interests of the client.
“The next one is about prudence.
“And the last one is consistency…whether it’s someone with scoped advice, holistic [advice] – whatever the situation, it can be applied.
“So to me the principles, they are the things that, if you focus on those in your practice and your processes, will help you meet the fiduciary standard.”
The four pillars of fiduciary duty
1.Principles
Fiduciary standards are defined in terms of Principles as opposed to rules which impose on the fiduciary the requirement to act in the best interest of client (very little black letter law).
2.Process
The process a planner must follow to demonstrate that decisions are made in the best interest of client.
3.Prudence
To build upon process and define the dimension or the details of a procedurally prudent strategy and investment process. Must demonstrate that decisions are being made with the interest of the client first and foremost.
4.Consistency
That the process can be effectively and efficiently applied across all client situations. Planners can insulate their practice from liability by demonstrating they have a procedurally prudent process that is consistently applied.
Source: Don Trone, Strategic Ethos.
Steve’s comments are right on the money. It is the first time I have actually seen someone articulate this whole issue of fiduciary duty. It provides someone with a framework to work with. Well done