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Client-adviser trust a paramount concern

By From page C1 | February 16, 2014

The financial industry has never been renowned for its transparency and candor. The financial crisis and ensuing recession have not only contributed but also raised awareness about this perception. Unfortunately there are presently additional furors boiling about such matters.

There are two current controversies running on parallel tracks and both have at their core the issues of transparency, responsibility and accountability.

The first controversy centers on the standard of responsibility which financial brokerage companies should have with their clients. For a long time brokers have been subject to the “suitability” standard, which essentially says that they must recommend investment products to their clients that are suitable for the client’s situation. The problem is that the term suitable is rather vague and open to interpretation.

The companion issue is that brokers have a legal duty to their employer that is superior to their duty to the client. Clearly there is a potential conflict of interest here and the broker must be clear with the client so no misunderstandings arise.

Some organizations in the financial industry, including the Board of Standards and Practices for Certified Financial Planners, have advocated that all financial advisers be held not to a suitability standard but to a fiduciary standard. A fiduciary, by law, must make recommendations in the best interest of the client, clearly a very different arrangement.

The brokerage industry argued that a fiduciary standard would limit their ability to design and present financial products. Further, they contended that consumers should have access to all products and should be able to make their own decisions. In essence, consumers should be allowed to make their own decisions about products and seek independent, objective advice separately as they felt necessary. So far, Congress has agreed and not acted to change any definitions of responsibility.

The entire situation could be just fine as long as all the members of the financial industry are clear with clients about their role and method of compensation. Too often roles and methods of compensation become fuzzy and from this lack of clarity springs the next controversy.

The Board of Standards and Practices for Certified Financial Planners is again at the center of the controversy because it has started to enforce clear definitions of compensation for those who hold the certified financial planners definition. The board has three definitions for compensation:

  • Fee only (the certified financial planner is paid only by the client and receives no commissions from product sales).
  • Commission only (the certified financial planner is paid by commissions from products sold).
  • Fee and commission (some combination of the two methods).

The board took strong action last year when it changed its website and forced all certified financial planners to review their profile and affirm which compensation category they properly belonged in. Also the board then limited those certified financial planners with any brokerage affiliation from claiming they were fee only. Not surprisingly, this action has created some complaints.

I find it interesting that many of the complaints focus on how difficult it is for the adviser. Indeed many comments state that clients do not understand or appreciate the difference among the compensation methods. Also, some advisers simply state that it does not matter and they will continue on without any changes to the practice.

My comment is that the client should be the center of the care and concern. Each adviser should have as their primary concern whether their clients understand the professional relationship, especially the compensation method. Advisers can offer their services in many ways, but they should be clear to the client. Anything less is likely to breed problems.

Clients must be able to trust their advisers. Any other relationship is likely to lead to ill will and problems.

Mark Sievers, president of Epsilon Financial Group, is a certified financial planner with a master’s in business administration from the University of California, Berkeley. Contact him at [email protected]

Mark Sievers


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