Understanding what it means to be a fiduciary financial advisor really helps when it comes to the important decision of who to trust for advice about your money.
This can be a very difficult choice.
Despite government regulation of financial services, some providers work to a higher standard than others. So how can you tell if your financial advisor is a fiduciary who makes sure your interests are paramount?
A fiduciary is a general legal term for someone in a position of particular trust, and who must therefore exercise a very high standard of care when acting on another’s behalf.
Essentially, fiduciaries have an ethical and legal duty to always place the other person’s interests above their own. This arises out of the nature of the relationship and goes beyond the care that’s required in general business, contractual or social relationships.
The concept of a fiduciary relationship is something that developed under the law of equity in the interest of fairness, protecting those in a vulnerable position who would otherwise be open to potential exploitation.
Examples of fiduciary relationships include:
These relationships are presumed be fiduciary in nature under the common law (i.e. the law developed by the decisions of courts).
Outside of such presumptions, there are other examples of fiduciary relationships that arise out of circumstance. For instance, where one person is vulnerable to the actions of another and there is also a reasonable expectation that this kind of special care will be exercised.
It is in this context that a financial advisor can be said to owe a fiduciary duty.
Where there is a fiduciary relationship between a financial advisor and their client, the advisor must exercise the highest standard of care under the law. This recognises the comparative vulnerable situation of the client and the special trust placed in the advisor.
Essentially, there are obligations on the advisor to:
Where a fiduciary relationship exists between financial advisor and client, the advisor must not profit from recommendations that are not clearly in the best interests of the client. A breach of this duty would occur, for example, if an advisor recommends a product in which they have commercial interest despite this not being the best fit for the client.
Unfortunately, the Financial Services Royal Commission uncovered numerous instances of such behaviour.
In Australia there are many obligations placed upon a financial advisor, with regulation increasing significantly in recent years. But whether this amounts to a genuine fiduciary duty remains unclear, despite current steps in that direction.
Prior to reforms in 2013, financial advisors had a statutory obligation to provide advice that was fit for purpose to the standard expected of a reasonable advisor. While falling short of a fiduciary duty, this obligation had replaced a simple consumer standard and saw a shift to a professional model for the financial planning sector.
Amendments to the Commonwealth Corporations Act (2001) in 2013 introduced a requirement for financial advisors to act in the best interests of their clients. While this was not a new concept, it was the first time the notion enjoyed the force of legislation behind it, creating tighter regulation of financial advice. Although not strictly speaking a fiduciary duty, the responsibility found in Section 961B of the Act signalled a movement towards this standard.
The Australian Securities and Investments Commission (ASIC) is now empowered to take civil action for breaches of this provision. In 2017, the Federal Court handed down the first penalty in ASIC v NSG Services Pty Ltd, with the defendant paying out a sum of $1 million.
However, this type of case only highlights the worst kind of breaches. The Royal Commission has also brought to light several instances where fiduciary standards were not met in the provision of financial advice. Clearly there is gap between the expectation of a fiduciary responsibility and the day-to-day reality of financial planning practices in some cases.
So how do you know that your financial advisor is consistently operating in accordance with the high level of trust that you expect? Unfortunately, the answer is not simply a matter knowing that an advisor is licensed.
ASIC administers Australian Financial Services (AFS) licences. However, this represents a one-time assessment of probity and does not necessarily ensure an advisor will maintain these standards on a continual basis.
The solution is to look for a genuine fiduciary financial advisor, who is held to an even higher standard than what is prescribed under the legislation.
For peace of mind that your financial advisor is an authentic fiduciary and will act with this kind of special care when dealing with your finances, examine whether they have taken their own actions in this regard. Are they independently certified beyond what is required by the law?
Advisors who take it upon themselves to be impartially audited and certified about their fiduciary responsibilities can be trusted to practice at a standard beyond what is enforceable through regulatory oversight.
An example of this is the certification offered by the Centre for Fiduciary Excellence (CEFEX), an independent international body that annually audits participating firms against industry best practice. An advisor who has gone down this kind of rigorous and continuing path is serious about upholding their fiduciary obligations and will always place their client’s interests before their own.
Globally, there are fewer than 100 fiduciary financial advisors with CEFEX certification and Fowler’s Group is one of only five firms in Australia with such accreditation.
At Fowler’s Group we needed to demonstrate strict adherence to the practices of a fiduciary financial advisor in order to gain this endorsement. It was a detailed and rigorous process, culminating in our certification in August 2016. And unlike domestic registration, the CEFEX process is on-going, with regular audits to ensure that participating firms continue to meet the criteria.
In short, we have been independently and thoroughly assessed as upholding the highest fiduciary standards and can be trusted to always provide advice that is in the client’s best interests.
Recent events in Australia have understandably created a cloud over the financial sector. In an environment that makes it difficult to know where to place your trust, it is important to understand how fiduciary responsibility operates for financial advisory firms and what to look for when making this choice.
Fiduciary certification removes this uncertainty, so you can decide on an advisor who will consistently act in your best interests, with a sole focus on building and protecting your wealth.
If this is what you are looking for, then get in touch us at Fowler’s Group today and find out how a certified fiduciary financial advisor can make a difference for you.
“Many years ago, I had a workplace injury which left me permanently incapacitated, and I soon faced the prospect of having a long time to live with just a little bit of money.
“I didn’t have income protection, and it didn’t look great for me and my family. Later, someone told me I should speak to Fowler’s Group, and within a week they had answers that my solicitors never had.
“Thanks to Fowler’s Group, I’m now paid to retirement age, and without them, I’d be in deep trouble.
“I was always dubious about financial advisers, but the difference with Fowler’s Group is that they genuinely care.
“It’s personal for them too, and they really do care about your personal interests.
“They did everything for me, and I’d recommend them to anyone seeking financial advice.”
~ Bruce, Cairns
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