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Category: Fiduciary Responsibility (Page 1 of 2)

Fiduciary Law Is Trust Law

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On February 15, 2017

In Department of Labor, ERISA, Fiduciary, Fiduciary Responsibility, Regulatory

http://www.401khelpcenter.com/401k/shikes_fiduciary_law_trust_law_2017.html#.WKOx-zsrLIU

The words most associated with fiduciary responsibility are prudence, trust, duty, and loyalty. Fundamentally, these words describe acts wholly aligned with putting the client’s interests first.

There seems to be plenty of evidence that the Employee Retirement Income Security Act of 1974 (ERISA) and the U.S. Department of Labor’s (DOL) most recent fiduciary clarification are modeled after trust law. Indeed, with respect to the fiduciary standard of care, trust law can go to a place where contract law cannot. Perhaps the two can be differentiated by one fundamental distinction: behavior vs outcome.

It is noted in ERISA: §1103. Establishment of Trust; (a) Benefit Plan Assets to Be Held in Trust; Authority of Trustees

In addition, the employer sponsor and its administrator admit the plan’s funding and benefit arrangement, at the very least, is that of a trust in the form 5500 which is necessary to satisfy annual reporting requirements (Section 9a & 9b).

Furthermore, it can be argued that there is a hint of “trust-like” obligation via the mandated surety bond which guarantees the faithful performance of duties.

Clarity will materialize if there is an admission that a trust relationship exists and yet this is rarely evidenced in class action filings, arguments by most of the financial services industry, and politicians. A trust relationship immediately becomes apparent by the duties owed to the beneficiary of the asset by the trustee or to parallel, the duties owed to the participant by the fiduciaries of the employer sponsor.

In a trust or fiduciary relationship, investment options and partnerships must be maintained and/or chosen with transparency and be free of conflicts of interests. For simplification purposes, there must be visibility in both content and oversight.
◦Content may be defined as investment options and its associated performance, costs, commissions, and fees.
◦Oversight may be defined as the fiduciary’s obligation to monitor the performance and behavior of all partnerships, including administrator, recordkeeper, auditor, attorney, investment advisor, money manager, and all parties where there has been a noted fiduciary transfer of duties.

Confusion between the two is often seen in legal filings. For example, did the breach occur because the investment options performed poorly or because no one was monitoring who chose them? Were the recordkeeper’s fees unreasonable or was there a lack of oversight in choosing and monitoring the chosen recordkeeper? Was there guidance and consistency in the Summary Plan Description?

A visible methodology is required for content and oversight, and yet, how can such a methodology be evidenced other than with the proper use of the interdependent components of various financial technologies (this is yet another article)?

As I read numerous articles and pour through many class actions lawsuits, I wonder if the legal community is too focused on contractual and common law and the financial services industry focused on a transaction-based business model. It can be argued that long-term professional cultural bias can inhibit the development of the necessary skill sets required for subject matter mastery. Fiduciary law is trust law. Accept it.

Neal Shikes has been a Registered Financial Services Industry professional for over 20 years and a Chartered Retirement Planning Counselor, CRPC®. He is also the “Willing Fiduciary” (http://willingfiduciary.com/) associated with Counsel Fiduciary LLC (http://counselfiduciary.com/) and a principal associate for Thornapple Associates a provider of Expert Witness Services (http://thornapple.net/).

Class Action: The Case Against JPMorgan Chase

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On February 7, 2017

In Current Events, ERISA, Fiduciary, Fiduciary Awareness, Fiduciary Oversight, Fiduciary Responsibility, Litigation

A Class Action suit has been filed against the fiduciaries of JPMorgan Chase’s 21 billion dollar Retirement Plan on 1/25/2017.

Typical to most of these cases, it is “a class action brought pursuant to §§ 409 and 502 of the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §§ 1109.” This is a lengthy complaint that describes a lot of investment content that includes the following allegations described in two counts:
. “failing to adequately review the investment portfolio..”
. “retaining proprietary funds…. despite the availability of nearly identical lower cost and better performing investment options.”
. “failing to affect a reduction in fees..”
. “failing to offer commingled accounts…. despite their far lower fees…”
. “the Defendants breached their fiduciary duties by failing to adequately monitor other persons..”

Causation, as described in the complaint, was “because substantial assets of the Plan were imprudently invested.”

There seems to be a lot of content and outcome evidence in this Class Action and a reference to the assets being held in a trust (which is mandated by ERISA). To this author, there does not seem to be an obvious statutory definition to Trust Law in our Courts. Perhaps it was never codified. However, trustee duties regarding the assets entrusted to him/her are characterized through judicial creation by the courts and the ensuing regulations. In a Trust relationship, rights are created and the behaviors owed by the trustee to the beneficiary that adhere to those rights are characterized. It seems to me that if Fiduciary Duties are characterized by the behaviors that are owed by the Trustees the causation of the breaches should focus on a lack of or a misguidance of those behaviors instead of outcome. Where market outcomes cannot be controlled, fiduciary behavior can be.

“The Class Action Holiday Season.”

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On December 23, 2016

In Current Events, Fiduciary, Fiduciary Awareness, Fiduciary Oversight, Fiduciary Responsibility, Litigation, Retirement Plan Design

Class Actions I bring

To Fiduciaries of your plan

Glad tidings of litigation

And a happy New Year!

Fiduciary Litigation made its appearance during this holiday season as 4 new Class Actions were filed against the following institutions:

. Starwood Hotels & Resorts
. Delta Air Lines
. Fidelity Management Trust Co.
. Putnam Investments

In aggregate, the following claims were made:

. Failure to make sure that Plan fees were reasonable
. Failure to offer a Stable Value fund
. Revenue sharing whereby kickbacks were made for including particular funds in the menu of investment choices
. Incurring unnecessary management fees by offering passive index funds which held other passive index funds (double layer of fees)
. Lower cost investment options were available; incorrect share class
. Excessive record-keeping/administrative charges
. Redundant investment options
. Retained historically underperforming investment options
. Excessive indirect compensation through revenue sharing
. Poor performance in Stable Value Fund
. Self-dealing

These claims seem to focus on performance outcome, fees, and compensation. The Fiduciary Relationship between a Plan Fiduciary and its Participants can be defined by the behaviors and duties that the fiduciary has for the participants. Interesting enough, I did not sense any motivations to focus on breaches of Fiduciary Duty via a lack of visible oversight and methodology as the causation of outcome.

Fiduciary Culture Shock

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On December 19, 2016

In Department of Labor, ERISA, Fiduciary, Fiduciary Awareness, Fiduciary Responsibility, Regulatory

Some may argue that The Department Of Labor’s clarification on fiduciary responsibility is complex. It seems that this rationale is focused on the industry’s willingness and ability to adhere to it.

Some may argue that the regulation clarification is not complex at all. ERISA has existed for 42 years and Trust Law for far longer. Perhaps the fiduciary behaviors that are required to fulfill the intricacies of the required duties pose a challenge to the prevailing culture. Did the regulation suddenly become complex after 42 years?

Is the regulation complex or did the regulation expose a generation (or two) who grew complacent in not putting their clients’ interests first?

Wells Fargo: Another Class Action Filed

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On December 1, 2016

In Current Events, ERISA, Fiduciary Responsibility, Litigation

A new Class Action was filed against Wells Fargo on 11/22. The lawsuit accuses Wells Fargo of using their own Target Date Funds as the Qualified Default Investment Alternative (QDIA) even though they underperformed other Target Date Funds while having much higher expenses. The complaint also stated that this “generated substantial revenues for Wells Fargo” and provided “critical seed money that kept the funds afloat by boosting market share.”

It should be reiterated that ERISA requires that retirement assets are to be held in trust. To be consistent with Trust Law and a trust relationship, behaviors are dominated by the fiduciary duties owed to the participant. The fiduciary must remove all conflicts of interest and provide visible/transparent evidence that their behaviors were in the best interest of the participant.
It is not enough to only accuse, in proposition and allegation, that Wells Fargo breached their fiduciary duties. The plaintiff must do more than demonstrate higher fees. It must be proven that Wells Fargo failed in prudence, loyalty, and trust by not placing the interest of the participants above theirs.

Successful Class Actions will have to exhibit Subject Matter Expertise by proving that the defendant did not have a sound visible methodology to determine investment options and, thus, both the returns and likelihood that the participants will satisfy their retirement goals were reduced.

Fiduciary Ethics: Removing Conflicts of Interest

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On October 29, 2016

In Department of Labor, Fiduciary Awareness, Fiduciary Oversight, Fiduciary Responsibility

Removing conflicts of interest is a recognized and necessary ethical behavior. So much so that the U.S. Office of Government Ethics (OGE) is dedicated to overseeing the executive branch’s ethics programs, programs whose primary function is to prevent and resolve conflicts of interest. To give you an idea as to the size and scope of this endeavor, there are approximately 4,500 full-time and part-time ethics officials who work in the executive branch that try to provide employees assistance in identifying and resolving potential conflicts of interest.

The OGE’s mission is to create public confidence in the impartiality of government decision making by improving transparency, increasing accountability, and making sure that senior leaders are making decisions based on the interests of the public rather than their own personal financial interests.

The Department of Labor’s clarification attempts to define and enforce the required ethics that bind human behavior in governance where Fiduciary Duty and Responsibility is mandated. It is no different than the OSE’s mission, 18 U.S.C. § 208, or, ultimately, the Constitution.

Fiduciary Dilemma: Is your Clearing Firm transferring their risk to you?

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On September 26, 2016

In Fiduciary, Fiduciary Oversight, Fiduciary Responsibility

In the Financial Services Industry, it is not enough to fulfill Fiduciary obligations in isolation. Business partners must be committed to this standard as well. Clearing Firms and associated technology must enable a Fiduciary to meet client obligations.

Like Employer Sponsors of Retirement Plans, Registered Investment Advisors (RIAs) are responsible for monitoring investment “content” and provider oversight. Each provider agreement must be reviewed carefully as it has a tendency to morph in heightened regulatory environments.

Predictably, attempts to transfer various types of risk become visible during contract renewals or amendments. Without warning, terms like “custody,” “technology integration,” and “client data” become legal ambiguities and justifications to shift risk to the Independent Broker Dealer or RIA. These risks are inherent to their business. Are Clearing Providers no longer responsible for custody, settlement, payments, wire transfers, and their own business partners that facilitate these functions?

The Fiduciary has a legal and ethical duty to oversee the integrity of their business partners to protect the interest of their clients. According to Black’s Law Dictionary a Fiduciary is a person holding the character of a trustee, or a character analogous to that of a trustee, in respect to the trust and confidence involved in it and the scrupulous good faith and candor which it requires. Is your Clearing Firm enabling you to do so for your clients?

Fiduciary Herein Granted

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On September 9, 2016

In Current Events, Fiduciary, Fiduciary Awareness, Fiduciary Responsibility

Is there any doubt what the Founding Fathers intended in the very first Article and Section of our Constitution?

“All legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives.”

HEREIN GRANTED which indicates possessing only specified or enumerated powers whereby the stated body CAN NOT claim an unlimited, inherit, or elastic authority to legislate. Our government wields only such power as the people ENTRUST to it.

As to entrust and to accept, a specified office or Fiduciary Duty involving trust. In matters of right, sovereignty, legality, and crucial advice should anyone accept anything less than Fiduciary Herein Granted? Could accountable Fiduciary Relationships be the brick and mortar to the sustainability of a relationship? Company? Nation? Herein Granted!

Fiduciary Oversight

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On July 27, 2016

In Department of Labor, ERISA, Fiduciary, Fiduciary Awareness, Fiduciary Oversight, Fiduciary Responsibility, Retirement Plan Design

Establishing a Retirement Plan, in itself, is not a fiduciary action but a business decision. However, by implementing a plan one is acting on behalf of the plan and in these actions one may be a fiduciary. For example, hiring a service provider in and of itself is a fiduciary function.

Acting prudently with regards to oversight is a critical responsibility under ERISA but not engrained in the culture of Employer Sponsored Retirement Plans and the Investment/Brokerage business. The culture has been compensation and product spread driven for decades. In fact, it doesn’t seem as if fiduciaries are aware of others who serve as fiduciaries which can leave them vulnerable to participate in another fiduciary’s breach of responsibility.

Oversight can be demonstrated by following and documenting a formal review process visible through technology. This is what the regulatory authorities are asking for.

Fiduciary Virtuosity

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On July 19, 2016

In Fiduciary, Fiduciary Awareness, Fiduciary Responsibility, Financial Planning

Fulfilling a Fiduciary Obligation is not a solitary achievement but one that is habitually executed. It can only be defined as a virtuous act of both trust and accountability made visible when someone has placed their client’s goals before their own. But is it also a virtuous expectation?

Many professions have to be practiced with standards of excellence that originate through evidence based evaluation of judgment. It is reasonable to conclude that a client of someone calling themselves a Financial Advisor would expect that these moral and virtuous standards are executed by putting their interests in the forefront. Who else’s goal is to be actualized?!

Is there really any other way to help people reach their goals and/or another expectation that a client should have?

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