Being A Fiduciary Is Important, But Competence Matters, Too

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Executive Summary

Notwithstanding some of the successes of the Financial Planning Coalition in pushing forward the fiduciary battle in Washington, requiring all advisors to act in the best interests of their clients is still an uphill fight.

Nonetheless, the fiduciary movement seems to be gaining momentum, from coming regulations from the Department of Labor to reforms in 401(k) plans to the scrutiny of regulators in the aftermath of debacles from Stanford to Madoff. But what happens if the fiduciary fight is won over the next few years? Does that mean the public is now protected? Perhaps not.

After all, it doesn't really help to ensure that advisors act in the interest of their clients, if there's no assurance that advisors have the actual knowledge, skills, and expertise to craft appropriate recommendations and deliver the right solutions to clients in the first place. In other words, protecting the public is not just about fiduciary. To restore the public's trust in advisors, the fight must be about competence, too.

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

The inspiration for today's blog post comes from a recent conversation I had with Knut Rostad, President of the Institute for the Fiduciary Standard, about what's next for the financial planning profession, and the financial services industry at large, when a fiduciary standard is eventually implemented. True, the fight for fiduciary is not over yet, and it may take several more years, but ultimately I believe the delivery of advice will be regulated according to a fiduciary standard. Which raises the question: so then what? As I told Knut, I believe the next great frontier will be... competence.

After all, the reality is that it doesn't really help the public for all advisors to be subject to a fiduciary standard where they must act in their client's best interests and minimize or prudently manage conflicts of interest, if there is no assurance that the planner has the competence to craft the right recommendations and deliver the right solutions in the first place! It simply means that when the public gets bad advice that leads to bad results, it will be due to the advisor's ignorance or incompetence instead of his/her greed or self-interest.

In turn, this means that if we ultimately wish to establish consumer confidence in financial planning, we need a standard that applies not only fiduciary principles pertaining to acting in good faith in the interests of clients, but one that also substantiates the competency of the individual to actually deliver quality financial advice.

Notably, some suggest that a true fiduciary standard should actually incorporate the concerns of competence into the standard itself. For instance, the Institute for the Fiduciary Standard includes "Act prudently - with the care, skill, and judgment of a professional" where "skill... of a professional" would certainly imply a competence requirement.

Yet in practice, this is applied unevenly in the profession. For instance, the stated primary [fiduciary] focus of the Financial Planning Coalition is "protecting consumers by ensuring financial planning services are delivered to the public with fiduciary accountability and transparency" (emphasis mine) without specifically articulating competence. Similarly, the FPA's Standard of Care requires that services must be delivered with the client's best interests first and in good faith with full and fair disclosure of material facts and management of all conflicts of interest... yet competence is not stated as a requirement to meet the standard of care. On the other hand, NAPFA's Code of Ethics does explicitly stipulate competence as a fundamental requirement with which members must comply, and the CFP Board's Code of Ethics includes competence as one of its core principles (and of course, the CFP Board seeks to fulfill this by providing a designation that establishes such competency).

Ultimately, I believe that the financial planning profession must and will evolve to a standard similar to that of NAPFA and the CFP Board - where competency is explicitly acknowledged as a requirement to be a professional and deliver advice to the public. In turn, this means the next frontier in protecting the public is to determine what the appropriate minimum standard for competence should be. Is the CFP certification the appropriate standard, as is implied by the requirements of both NAPFA and the FPA to be a certificant in order to be classified as a "practitioner" member?

On the other hand, it's also worth noting that in a world where all planners are subject to a fiduciary standard - at least as it pertains to acting in clients' best interests and minimizing or prudently managing conflicts of interest - planners themselves may push competence to the forefront as a way for the best to differentiate themselves from the rest, since "being a fiduciary" itself would no longer be a differentiator. In other words, winning the fiduciary fight could actually be bad for the current marketing plan of many advisors; in a future where building trust with clients is no longer simply about demonstrating more integrity than the competition (because everyone is subject to the same fiduciary standard), marketing that demonstrates more knowledge, expertise, and credibility will be necessary to earn a prospective client's business.

The bottom line is that the profession's efforts to protect the public will shift in the coming years. Eventually, the fiduciary fight will be won; but the end result will not protect the public, but simply shift the fight from ensuring that advisors act in the interests of their clients, to trying to ensure that advisors have the competence necessary to deliver the right advice to their clients in the first place. The final frontier will be to establish a unified standard that incorporates both the client-centric focus of fiduciary and the requirement for professional competency.

So what do you think? Is competence the next frontier after fiduciary? Should competence be incorporated more directly into the fiduciary standard? What is the appropriate standard for competence? Is it the CFP marks? Should it be a lower standard that is more inclusive? Or a higher standard that is more exclusive?

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