Tag Archives: agency law

Fiduciary Minefields: The Agency Mess

Relationships and terminology may define what you do for clients, but do your clients fully understand your legal, moral, and ethical context for delivering extreme service excellence and protecting their interests and goals?

How clear are you and your communication, in all formats and platforms, about related fiduciary responsibilities?

A recent report addresses these issues for the real estate industry, so it offers an excellent example of misconceptions and missed opportunities which may exist in your industry and your communication as well. The bonus is we’re all real estate buyers, sellers, and investors, or wanna-bes, so this is a valuable read on many levels.

The Consumer Federation of America (CFA — www.consumerfed.org) started the year off by releasing the report authored by former-executive-director and Senior Fellow Steve Brobeck and entitled “The Agency Mess:Home Buyer and Seller Confusion and Costs Related To Diverse and Poorly Enforced State Laws about the Role and Responsibility of Real Estate Agents. The title tells the miscommunication story. The report incorporates CFA’s research of the literature on real estate agency, CFA’s mystery shopper survey of agents, and a national consumer survey.

I asked Brobeck my questions during a media conference to clarify the communication confusion which can lead to compromised fiduciary relationships, financial loss to buyers and sellers and, therefore, potential loss for real estate brokerages and professionals.

PJ Wade: Could you give us a very exact definition of agency law and what the fiduciary duties are to the client (…the client’s interests above all else but the law) and to the customer who is the third party. Also, in that answer, give us a clear definition of what the word “agent” means and to whom it can be applied. Is it the brokerage, is it the salesperson…?

CFA Steve Brobeck: “[CFA] is considering, in this report, every real estate professional that works directly with the home buyer or seller to be an agent. Some of those agents are just agents and some of them are brokers. But we do not really view a material difference, from the view of the consumer, between having an agent-agent or a broker-agent. So again, when you look at this report, you will not see the term “broker” used very often.

Define fiduciaryThe fiduciary is obligated to procure (and I’m quoting from another source here) the greatest advantage for his client. The occasion of that being if you are the seller agent and you are working with a seller, you have an obligation to get the highest price, sale price for the house. If you are a buyer broker, you are obligated to get the lowest price for that house.”

PJ Wade: Do the real estate practitioners, brokers, salespeople, the agents really understand these [agency and fiduciary] distinctions as clearly as they must?

CFA Steve Brobeck: “I think that’s part of the problem. There are several issues related here: the complexity of the law, the variation of the laws, and even the definition of the terms from state to state are not just very, very difficult for consumers to understand. They’re difficult for many agents to understand. Keep in mind, too, that there are 1.2 million, 1.3 million, 1.4 million practicing agents. Some of them have only been practicing for a year or two. In some states, the training is not very rigorous; in other states, it is. They may not fully understand all of these terms and the law in their particular state. The problem is there just hasn’t been any effective monitoring, so even if they are ignorant of the law and they don’t make required disclosures, no on ever calls them on it.”

PJ Wade: So would it be a fair summary to say that fiduciary duties of the agent to the client are to keep the client’s interests above all else but the law? And for the customer—the third party—would responsibilities be fairness and not to misrepresent and care of answering?

CFA Steve Brobeck: “Yes, I think that is a good summary.”

PJ Wade: What should a consumer do if they feel something going wrong? Should they complain to CFA or…?

CFA Steve Brobeck: “I think the first thing—we’re trying to keep this as simple as possible. We’re hoping that the nonprofit groups with whom we work—as you probably know CFA is an association of 240 members [ https://consumerfed.org/history/ ]—and we’re going to be putting this information out for them to communicate to the people with whom they work. We hope the media will communicate this.
We are also going to be communicating with the State Real Estate Commissions and, I hope, [encouraging them] to take a more active role in informing the consumers in their state about agency relationships.
But the key thing is ‘Don’t make it too complicated!’ As I indicated in my prepared statement, people just need to know whether the agent they are working with is a fiduciary. If they are not a fiduciary, what is their role? Their role, if [working with] a buyer, could be a subagent, could be a transactional broker, but [buyers] need to know that.
I don’t think the industry is going to oppose us. They certainly took leadership in the 1990s in terms of passing state laws that actually did some good, but now we need to review those laws. We need to review them, simplify them, and, just as importantly, ensure they are enforced. Ensure that there’s not just heavy-handed enforcement, but that each Realtor, each real estate agent feels that they are obligated, morally and ethically obligated to disclose their relationship to their customers.”

PJ Wade: So, ethically, morally, and legally…

CFA Steve Brobeck: “Well, they are, in most states, legally obligated to provide disclosure. But you know, given the situation, we are not really going to solve the problem unless all real estate agents feel that they not only must comply with the law, but that they have an ethical obligation too, at the earliest substantial contact, to clarify their role as an agent to their customer.”

Did parallel examples of miscommunication and misunderstood services and client relationships come to mind as you read this interview?

The 14-page report, The Agency Mess, provides more detail on the range of fiduciary relationships that exist, most of them beyond what consumers may expect. Without understanding each type of relationship and related fiduciary duties, consumers don’t understand when to confide financial information and when not to reveal their true feelings about a property.

  • Are your clients right about what they are getting for their money when they work with you?
  • Do you survey and interview clients to be sure you understand exactly what they don’t?
  • How do your efforts stand up against relationship definition efforts by competitors?

As a real estate consumer or owner, what is your reaction to The Agency Mess?