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Confusion abounds, even among advisers, regarding fiduciary duty

Even J.R. didn't get it. Larry Hagman, who played that greedy oil baron J.R. Ewing Jr. on the TV drama Dallas, recently won an arbitration case based in part on a breach of fiduciary duty. If multimillionaire stars can be hoodwinked, that's got to make other investors feel less culpable, right?

Probably not. Every investor would benefit by brushing up on what a fiduciary's role is and work only with those who have a Prudent Man Rule mindset.

A fiduciary relationship begins with two: you and another. It's a relationship based upon trust and confidence, and involves your assets and the prudent management of them by someone other than you.

Palm Beachers don't have to think back very far to recall an ugly breach in confidence by one of the island's own. But when it comes to money, the line between understanding what fiduciary duty involves can be as blurred as knowing what precise roll they are to play within one's own financial world.

"In any client and broker or agent relationship, you have a fiduciary relationship," says Randy Hopkins, owner of Randolph A. Hopkins, Insurance Agents and Consultants in Palm Beach. "We've built our business here based upon [a fiduciary duty] along with the honesty and integrity we share with our clients."

Louis Vilardo, senior vice president of investments with Well Fargo Advisors in West Palm Beach, agrees: "It's in everyone's best interest when advisers act at the highest level of integrity and with prudence."

Nothing new

For decades, those needing a license to sell securities have been taught about the importance of creating fiduciary relationships with their clients, and to follow the Prudent Man Rule or the Prudent Investor Rule. Doing so requires that the individual selling financial products puts his clients' interests ahead of his own ... and to suggest only appropriate investments to them.

A good fiduciary relationship promotes both positive business practices and forms the basis for developing long-lasting relationships. Without either, one's book of business -- or reputation -- isn't likely to flourish.

Although there are no specific laws outlining what a fiduciary is, that's likely to change next year because of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Signed into law in July, its Section 913 requires the Securities and Exchange Commission to create a "suitability standard" for brokers, dealers and all selling securities.

That noted, when it comes to registered investment advisers, the Supreme Court has already recognized the Investment Advisers Act of 1940 as establishing the "federal fiduciary standards to govern the conduct of investment advisers..."

During a speech in Washington, D.C., earlier this year, Securities and Exchange Commissioner Luis A. Aguilar said the 1940 Act identified the duty of advisers to use "utmost good faith, and full and fair disclosure of all material facts," as well as "an affirmative obligation to employ reasonable care to avoid misleading [their] clients..."

But it's been more than 60 years since that act was put into play, and times have changed.

According to Aguilar, as of January of this year, there were nearly 11,500 registered advisers in the country managing about $33 trillion. In 1999, there were only 6,650 registered investment advisers managing a fraction of that amount: $18 trillion. (Unregistered individuals and the dollar amount from their securities sales are not included in these figures.)

Add the growth in the numbers of registered investment advisers with the growing number of other securities sales individuals to the volatility of the financial markets and it's now more important than ever for investors to understand who those with a fiduciary duty are. Unfortunately, many don't.

In August, ORC/Infogroup for the Consumer Federation of America, AARP and other national financial organizations polled 1,319 U.S. investors and asked them questions related to fiduciary duty. Results found:

*Two out of three investors were incorrect in thinking that stockbrokers are held to a fiduciary duty.

*Three out of five investors mistakenly thought that insurance agents have a fiduciary duty to their clients.

*Seventy-six percent of the investors thought that brokers with the title of financial adviser are held to a fiduciary duty.

Going forward, nearly all those polled agreed that when receiving investment advice from a financial professional, that that person should put "your interests ahead of theirs, tell you up front about any fees or commission they earn and any conflicts of interest that potentially could influence that advice."

Subtle distinction

But adding that kind of heavy dose of disclosure doesn't sit well with all who sell securities within the financial arena. Some in the insurance industry, for instance, aren't keen on the thought of having to explain how they are compensated on some of the products they sell because clarification can be complicated.

"Our fees are built into the cost of the product," Hopkins said. Brokers, who basically act as their clients' order takers, worry about the chance of fiduciary confusion.

"I think one could argue there is a distinction between an account that is a fully managed account versus one in which the broker is simply executing trades at the client's direction," explains Vilardo, whose business is almost entirely managed. "But does the broker have a responsibility to advise the client even in that latter instance? I think so. Do I think it rises to the same level as in the former instance? Perhaps not, because that broker's client is really self-directing all the trades in their account."

There won't be any final word on fiduciary duty by the SEC until 2011. Until then, those selling any kind of securities would be wise to remember these words from Aguilar: "While the scope of service may vary between clients, you simply cannot be three-quarters of a fiduciary."

As for those seeking investment advice or direction, knowing the fiduciary duty of those you're working with is as important as understanding what you're investing in.

To read more articles, please visit the column archive.

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