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What Does ‘Fiduciary’ Even Mean These Days?

By Thomas Coyle June 12, 2017

With the compliance phase-in finally here for the Department of Labor’s expanded definition of the term “investment advice fiduciary” under the Employee Retirement Income Security Act of 1974, some advisors say regulatory compromise by the DOL and factional spats linked to this wrangling have robbed the term “fiduciary” of its meaning.

Merriam-Webster says a fiduciary is “one who holds a fiduciary relation or acts in a fiduciary capacity.” The dictionary goes on to define “fiduciary relation” as “a relationship in which one party places special trust, confidence, and reliance in and is influenced by another who has a fiduciary duty to act for the benefit of the party.”

But some longstanding fiduciary advisors think the U.S. government has twisted those words out of shape.

“‘Fiduciary’ is getting harder to understand given the exceptions the DOL is allowing,” says David John Marotta of Marotta Wealth Management in Charlottesville, Va.

Marotta, whose firm manages more than $300 million, is particularly contemptuous of the DOL’s thumbs-up for so-called T-shares. These newfangled, DOL-inspired vehicles levy uniform sales charges of 2.5% instead of traditional loads of as much as 6.0%.

“Being a fiduciary means putting the client first, period, and working transparently to avoid, or at least reduce, conflicts,” Marotta tells FA-IQ. “It doesn’t just mean that how much you get to gouge people is somewhat limited.”

Robert Schmansky of Clear Financial Advisors in Livonia, Mich., also thinks the “simple concept” behind the word fiduciary — putting “a client’s interest above your own” — has been contorted nearly out of recognition.

But while Marotta puts the blame on the DOL and brokerage-paid lobbyists that pressured it to dilute its retirement-advice rule, Schmansky says the fault lies with “the media and academics.”

These forces “have made the word mean ‘low cost’ and ‘fee only,’ which is only going to create massive confusion among the public,” says Schmansky, who’s particularly upset “robo-advisors and mutual fund firms” — outfits that aren’t built to turn away unsuitable clients — “are fiduciaries” under the new rule.

In contrast, highlighting what he sees as an essential gatekeeping aspect of his role as a fiduciary, Schmansky says, “I turn away prospects who are not a fit very frequently. You can’t be a fiduciary if you aren’t able to turn away a client.”

David John Marotta

For Schmansky, the DOL-fueled definition of “fiduciary” also puts too much emphasis on protecting investors from “misinformation from advisors” and too little stress on advisors’ need to know their clients over time before they provide really good advice.

For this reason Schmansky lets his clients choose how they pay him. Practically the choice comes down to fees on assets under management, on an hourly basis or by project. It’s what “any fiduciary with a lack of information would do,” he says.

Allan Katz of Comprehensive Wealth Management Group in New York also thinks mode of compensation with choice built in is a core aspect of a fiduciary advisor’s responsibility – and that this principle has been obscured by compromises made to get the DOL rule on the books.

As an advisor working on a hybrid platform — an RIA and brokerage — Katz can “charge based on AUM or hourly” and “provide commission-based products.”

This, he says, lets him determine “what will be best for any particular client” from a fiduciary standpoint. “It can be either, or a combination. It all depends on what the client needs.”