Willing Fiduciary

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Month: June 2016

Fiduciary Avoidance Through Mixed Messages

The public at large has been inundated with marketing messages that herald individualized advice that is highly personalized and based on the client’s interest. However, when this message is substantiated in a mutual agreement it is completely disclaimed in the form of a footnote so that it doesn’t serve as the primary basis for investment decisions.

Other times advisors clearly receive compensation for recommending specific products though that guidance is considered “general education.” Confused by mixed messages and the regulatory structures that govern retirement assets?

Internal Revenue Code provisions state that any person paid to provide advice on the investment of IRA assets is a Fiduciary. The rulemaking authority is the Department of Labor and the enforcement authority is the IRS.

ERISA pertains to Retirement Plans and states that any person paid
directly or indirectly to provide plan officials or participants with
advice on the investment plan assets is a fiduciary. Both the
rulemaking and enforcement authority is the Department of Labor.

Are these messages mixed?

Retirement Plan Fiduciaries: A Storm On the Horizon

It seems Retirement Plan Sponsors should be taking their Fiduciary Duties more seriously or the legal community will.

The decision, in itself, to select an Investment Advisor, Record-keeper, Administrator, etc. is a fiduciary action. While the Financial Service Industry is focused on fees, commissions, exemptions, and conflicts of interest, the Fiduciary Responsibility of oversight seems to be lost in the equation.

Sometimes, the evidence of history can be seen in our courts. As of now the fear focus seems to be on allegations of excessive fees, commissions, and conflicts of interests. However, Retirement Plan Sponsors should be focusing their concerns on allegations of oversight and/or lack of prudence. Litigation storm clouds are gathering over the documented plan Fiduciaries for not monitoring either the investment options via analytic evidence or for not monitoring the performance of those parties assisting the Fiduciary for monitoring the investment options. If the correct facts and allegations supporting propositions directed at the proper defendent trend, expect a “cloud burst” of legal activity against Retirement Plan Sponsors.

Fiduciary Responsibility and Constitutionality: Identical in Spirit

The Founding Fathers were consciously aware of human nature and how it manifested itself in behaviors evidenced throughout history. They believed that an enumerated guideline curbing the self destructive behavior of human nature while unleashing its incredible potential was required to achieve and maintain a sustainable Republic. The point of regulation is to do the same: to inspire an environment of opportunity leading to prosperity, not one of fear and arbitrary constraint.

A Fiduciary Duty is one that in action and intent places someone else’s interest before yours and it is an oath that requires diligence and oversight. It is either safeguarded and bound by statute via visible regulation that heightens awareness or it is reduced by human nature and behaviors that masks its true purpose. It should be coveted and upheld instead of blurred by interpretation with intent to usurp.

In spirit, Fiduciary Responsibility and Constitutionality come from the same hallowed ground. This is a qualified preference that seems to be more consistent with the rights of the enumerated sovereign.

Fiduciary Simplicity

“Under ERISA and the Code, a person is a fiduciary to a plan or IRA to the extent that the person engages in specified plan activities, including rendering ‘‘investment advice for a fee or other compensation, direct or in direct, with respect to any moneys or other property of such plan.”

“In particular, under this standards-based approach, the Adviser and Financial Institution must give prudent advice that is in the customer’s best interest, avoid misleading statements, and receive no more than reasonable compensation.”

Is there any reason why a person seeking retirement guidance, from someone receiving compensation for providing that guidance, should have some other expectation?

Why The DOL Fiduciary Regulation Was Revised

The Employee Retirement Income Security Act of 1974 (ERISA) was established as a federal law. One of its intents was to provide a sense of Fiduciary Responsibility for those designated as Fiduciaries defined, in action, as those who have a role in managing and controlling Retirement/Pension Plan assets. It also defined a plan Fiduciary to include anyone who gives investment advice for a fee.

In 1975, the Department of Labor (DOL) looked to elaborate on “investment advice” and issued a 5-part regulatory test that provided some structure to the meaning. About 40 years later, the DOL started to recognize that it actually enabled Financial Advisors, Brokers, Consultants, and Valuation Firms to:

. Avoid Fiduciary Status
. Disregard Fiduciary Obligations
. Disregard prohibitions on “disloyal and conflicted transactions”.

In effect, Employer Sponsored Retirement Plans became a platform for Financial Advisors, Brokers, Consultants, and Valuation Firms, to steer Retirement Plan Participants to investments based on their own self-interest. This type of intent is prohibited by ERISA.

These advisors represent a whole generation of people who have no idea as to what the spirit of these laws are, no Fiduciary awareness, and no fear of accountability under ERISA. This is what the Department of Labor is trying to remedy.

Fiduciary Modeling

Somewhere along the line, our society became more impressed with mathematical rigor and modeling than actually accomplishing goals. Most people would rather spend time choosing and maintaining a comfortable lifestyle during their goal journey than deciphering a methodology.

Are the assumptions true or were they necessary to get a solution? Whose solution? Did those 20 pages of disclaimers materialize for the benefit of the client or the firm that produced it?

Fiduciary Modeling includes giving the client the ability to learn how to apply more subjectivity with regards to what they want to accomplish in their life. The path is personal and must be visible not trapped in someone else’s algorithm.

The FinTech Fiduciary

Many participants in the financial services industry utilize FinTech for financial planning, analytics, client reporting, portfolio management, etc. All technology, however, leaves a footprint of evidence as to how it’s being applied. If one is in the business of giving impartial and transparent advice, then there is no better median of making the evidence visible than FinTech.

Being committed to providing advice in a client’s best interest is one facet of having the legal responsibility of a Fiduciary. Often overlooked is the matter of oversight of service providers. The supervision of partners in the Fiduciary process can be evident if financial technology is properly applied to the process. Insofar as applying technology to satisfy the DOL’s Fiduciary Duty Rule, that may mean identifying the roles, actions, and strategies of Record-keepers, Administrators, Auditors, Investment Advisors, and Attorneys by ledgering all interactions.

A FinTech Fiduciary with optimized FinTech has an elevated cognizance of oversight.

An Introduction – Understanding Fiduciary Obligations

Although there should be no confusion about it, the role and accountability of a Financial Advisor/Consultant has always been rather fuzzy. This lack of clarity is especially purposeful to Independent Broker Dealers, Wire-houses, and Insurance Companies because it allows them to limit their potential legal liabilities behind the interpretation and accountability of “suitability”.  The regulatory interests that define and monitor this are FINRA and ERISA.  The relationship between the firms that benefit from presenting products via suitability and the regulatory interests can become quite strained and adversarial at times and that has materialized recently in the Department of Labor’s recent Fiduciary Duty ruling.

Acting in the best interest of the client, proper security selection and portfolio construction supported by meaningful insights and analytics to make the best solutions visible to a client, has always been a fundamental obligation. In fact, I’m not really clear as to how anyone can provide investment advice in the client’s best interest any other way.  It does require, however, a unique set of skillsets that must be learned in theory and honed through experience.  Clients should expect you to act in their best interest and fiduciaries need to honor this expectation.  This obligation, which should be rather intuitive, is no different for the legal Employer Plan Sponsor of a Retirement Plan and those designated with discretion in administering and managing it.  Both FINRA and the DOL make it very clear that it is in one’s actions and responsibilities that manifests the role as a Fiduciary.

After reviewing and reverse engineering the 5500 tax filings of many large sponsors (and having many conversations with HR benefit representatives, some on the sponsor’s administrative committee) it is clear to me that they do not understand their fiduciary responsibilities. It also seems as if many Plan Sponsors justify their actions via ERISA’s definitions and not the DOL’s.  In fact, I don’t believe that most are even capable of acting in the participant’s best interest because they are not trained money managers, product specialists, and cannot apply the proper techniques and analytics to do so.  This, in itself, is a breach of fiduciary responsibility because there is no way to supervise the Administrator, Record-keeper, Investment Advisor, Auditor, and all other partners being compensated to implement and execute the Retirement Plan. This, to me, inhibits oversight which is the primary causation of  fiduciary breeches.

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