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Be careful what you wish for

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If planners are fiduciaries, what sort of fiduciaries are they and what rules apply to them? Further, what is a fiduciary anyway?
There's a debate raging in the United States about whether and under what circumstances planners should be what they call fiduciaries. I say 'what they call' because the definition of a fiduciary in the US and under Australian/English equity law may differ. The issue is being discussed in Australia but perhaps without the profile or fervour the Yanks are adopting.

I understand the FPA is considering the issue. In its 2005 paper on managing conflicts of interest, the FPA referred to every financial planner's fiduciary duty. For the association, the argument over whether planners are fiduciaries appears over. But in fact is it? And if planners are fiduciaries, what sort of fiduciaries are they and what rules apply to them? Further, what is a fiduciary anyway, what are the issues that are bedevilling our American cousins and does our law of equity make the debate different here to that in the States?

In his book, Fiduciary Obligations, then Australian National University legal academic PD Finn writes: "The term 'fiduciary' is itself one of the most ill-defined, if not altogether misleading terms in our law." Finn concludes there is no single all-encompassing definition of the term. A fiduciary is a person who has a special relationship with another person - a relationship that imposes very high standards of behaviour on the fiduciary. The sort of relationships described at various times as being fiduciaries include company directors, agents, trustees and solicitors (damn). The problem Finn points out is that different relationships described as fiduciary give rise to different rules and behaviour standards. It is therefore not possible to define one single set of rules that apply to all fiduciaries. You have to establish what relationship it is and what are the equitable rules that pertain to that type of relationship.

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Having said that, there are a number of characteristics of the fiduciary that apply pretty much across the board. For a person to be a fiduciary, they must first and foremost have bound themselves in some way to protect and/or advance the interests of another. You can be a fiduciary simply by accepting a certain role or office, for example, trustee. Alternatively, and as would apply to most financial planners, you could specifically agree to be a fiduciary in your dealings with the client.

If you are a fiduciary, there are a number of duties that apply to you and you must adhere to. The most basic duty of a fiduciary is a duty not to act for your own benefit or for the benefit of any third party, but rather to act only in the interests of the beneficiaries for whom you act. Put simply: the client comes first - totally and completely. The fiduciary is, however, the final arbiter of what the interests of their beneficiary are and how best to act for them. This extensive power to decide those interests gives rise to the second important general duty of a fiduciary under the equitable principles: the duty to not act capriciously or unreasonably.

If these are the two fundamental rules regulating the behaviour of fiduciaries, there is a still larger group of duties that may apply to different types of fiduciaries. These are generally called the duties of good faith and relevantly include the duty not to exert undue influence, the duty not to misuse property, the duty not to misuse confidential information, the duty to avoid conflicts of duty and interest, and the duty to avoid conflicting duties.

So what are the Yanks debating? The National Association of Personal Financial Advisors in the US adopts its own definition of fiduciary specific to financial advisers and then requires its members to swear an oath to comply with the definition as part of their membership eligibility. Their definition is: "A financial adviser held to a fiduciary standard occupies a position of special trust and confidence when working with the client. As a fiduciary the financial adviser is required to act with undivided loyalty to the client. This includes disclosure of how the adviser is to be compensated and any corresponding conflicts of interest."

'Not much new there', I can hear you say. In Australia we're required to do that by legislation, regulation and ASIC and FPA pronouncement anyway. And therein lies the distinction with the American situation, and why great care should be taken when simply importing the US debate into Australia. With the US market being 15 times bigger than ours, there are so many more specialist financial advisers who operate in very narrow niches. They may describe themselves as brokers, representatives, salesmen, agents, advisers and, of course, planners. Most of the members of this group are what we call product sellers or distributors or are providing planning advice of only a very narrow nature and would not accept the kind of limitations imposed on them if they were designated to be fiduciaries.

So the issue for us here in Australia is this: if we already have plenty of rules applying to make planners virtually fiduciaries in the most general sense anyway, would the use of the term simply better describe what already exists or would it bring with it yet more duties of an equitable nature that could further add to planners' liabilities to clients? Should planners therefore avoid using the descriptor fiduciary in order to limit their duties just to the black letter list we're all familiar with?

Returning to Finn's views that different fiduciaries have different duties, if the financial planning profession is to adopt and promote the description in Australia it must be made very clear what set of rules will apply to the planner's behaviour and what won't. It will be crucial to do that in a way that can prevent an equity court from applying a set of unwanted duties to the planner.

 

Be careful what you wish for
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