Advisors Have Fiduciary Duty to Prospective Clients

unduhan-7During a discussion with a group of financial planners, mostly fee-only “solo-preneurs,” I suggested that many of us would be extremely challenged to serve all clients as their fiduciary and provide all their needed services.

One advisor shared that she had recommended outsourcing the ongoing management of a client’s portfolio to a highly regarded, low-cost money management firm. All things being equal, she said, she couldn’t provide the services for anything close to the price of the outsource firm.

This advisor recognized that her highest and greatest good for her clients was in her financial planning skills and in serving as a catalyst to help them do what was in their best interests. She felt that their portfolio needed ongoing oversight and recommended someone other than herself to provide that service. The advisor acted in her clients’ best interests — just as all fiduciaries are required to do.

The client appreciated the thoughtfulness of the recommendation but elected to keep everything with the planner. With full disclosure and informed consent, the advisor had fulfilled her fiduciary duty.

But what is our fiduciary obligation to prospective clients, as opposed to existing clients? Investment advisors are fiduciaries under the Investment Advisers Act of 1940, not only for our clients, but also in recommendations given to prospective clients, including the recommendation that they work with us and how that arrangement will be structured.

In other words, our fiduciary duty applies at the point where we propose how we enter into the equation. Are we the best choice of advisor to meet a prospective client’s needs? Could we be a great help in most areas and provide outsourcing options for everything else? Are there similar services available for less money?

Some states require disclosures of this type, and many professionals argue that it’s their ethical duty to provide them Most registered investment advisors have standard disclosure language regarding the fact that “like services may be obtained at a lower cost elsewhere,” but many may not be aware of our responsibilities at the point where we make a pitch to a prospective client.

Consider the common scenario of a holistic solo practitioner with multiple service offerings — for example, a retainer for long-term planning engagements, an assets-under-management fee structure for the portfolio, and hourly or project fees for everything else. We have to be equipped to offer these services as promised, yet I’ve found that most solo practitioners and small planning firms are better off if they focus on one, or possibly two, pricing or service-offering options.

Let’s consider an advisor who does primarily project work and charges an hourly or flat fee. The work is limited in scope, and the engagement is complete upon delivery of that work product. But the advisor may also work with a few clients on retainer, who are welcome and encouraged to contact the advisor anytime, day or night, if they have questions or concerns. On top of that, the advisor provides ongoing portfolio management, comprehensive planning and tax return preparation services for clients.