Willing Fiduciary

With whom do you work?

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Fiduciary Focus #2 of 3: Fiduciary Drift: Content

Black’s Law Dictionary defines prudence as the following:
“Carefulness, precaution, attentiveness, and good judgment as applied to action or conduct. That degree of care required by the exigencies or circumstances under which it is to be exercised.”

A Fiduciary will drift in judgement when the focus is returns. Perhaps this occurs due to a lack of understanding in Wealth Management, Financial Planning, and fiduciary cognizance. For someone untrained, returns can be disguised as beta without consideration to volatility.

Investment options should be chosen and be consistent with the stated and visible goals of the plan while increasing the likelihood that the participants achieve their goals. For most asset classes and capitalizations, it becomes difficult to justify the expenses of active investment managers because few consistently outperform passive indexed investments. If active money management is chosen, there has to be a visible methodology that proves why. There have been Class Actions where this has been the basis.

The fundamental duty of the fiduciaries of a Retirement Plan is to adhere to the terms of the plan, to take reasonable care of the assets, and to act in the best interests of the participants. If this sounds vaguely familiar to the Fiduciary Duties of a trustee for a Trust, it should. ERISA modeled it that way. I wonder if the success rates of Class Action Suits and DOL Actions would improve if Employer Sponsored Retirement Plans were defined as trusts in the complaint and then characterizations are made about Fiduciary Duty and breaches.

Fiduciary Ethics: Removing Conflicts of Interest

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 Focus #1 of 3: Conduct not Outcome

The most successful Class Actions under the Employee Retirement Income Security Act of 1974 (ERISA) against Employer Sponsored Plan Fiduciaries will uncover behaviors that are detrimental to the participants of the plan. Behaviors, not products or product outcomes.

If, under ERISA or Trust Law, Fiduciaries must act solely in the interest of participants then there must be visible evidence of loyalty and prudence. Only by examining the conduct and methodology of the Fiduciaries can it be determined whose interests were paramount and if a breach of duty has occurred. Once a behavior is suspect it, perhaps, is better to investigate possible causation based on the visible evidence or lack thereof. Walking through “the valley” of causation, is not a journey that a CPA or Attorney should be embarking on alone. They have little experience in the proper conduct and methodologies required to complete the journey.

Outcome may foster presumptions of prudence. Conduct and allegations supporting propositions MUST appear in the complaint.

Next two blogs:

Fiduciary Drift: Content

Fiduciary Drift: Oversight

University of Litigation

Since August 1st, twelve Class Action lawsuits were filed against universities for breaches of ERISA Fiduciary Duties:
Yale: $3.6 Billion Assets under management (AUM), 37,939 participants
NYU: $4.2 Billion AUM, 24,164 participants
Columbia: $4.6 Billion AUM, 27,000 participants (there are two separate lawsuits)
Cornell: $3.1 Billion AUM, 29,452 participants
U of Penn: $3.88 Billion AUM, 26,904 participants
Duke: $4.7 Billion AUM, 37,939 participants
Johns Hopkins: $4.3 Billion AUM, 24,561 participants
Vanderbilt: $3.4 Billion AUM, 41,863 participants
Northwestern: $2.87 Billion AUM, 33,015 participants
USC: $2.19 Billion AUM, 28,423 participants
Emory: $3.66 Billion AUM, 51,797 participants

Here are some allegations:
. No competitive bidding process
. Excessive fees
. Underperforming mutual funds
. Duplicative mutual funds
. Incorrect, more expensive (sometimes Retail), Share Class

Class Action is in session!

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

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?

Litigation Failure: White vs. Chevron Corp

Even though the allegations may be sound, the conclusions may not be supported with the sufficient facts “to infer that the fiduciaries had breached their fiduciary duties.”

Though the plaintiffs have until September 30th to amend the complaint, such is the recent case, White Vs. Chevron Corp.

The plaintiffs argued:
. the wrong types of investments were offered rather than “others” (they offered investments with higher expenses/expense rations while similar investments were available with lower expense/expense ratios)
. there were revenue sharing relationships based on AUM (as the plan grows, the charges increase) instead of a per participant basis
. failure of oversight (a poor performing investment option should have been removed earlier)

These are all sound reasons that cause “suspicions or inferences of fiduciary breaches” but none are demonstrative that one has occurred. Conclusive evidence must be provided as to how these allegations prove that the participant’s interest didn’t come first in content and oversight.

This story exemplifies the reasons why Attorneys need someone with experience in Portfolio Construction, Financial Technology/Analytics, and Legal Application expertise to support their allegations.

Fiduciary Herein Granted

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

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

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?

A Robo-advisor is not a Fiduciary

A robo-advisor cannot put “its client’s interests before their own” because it has no interests.

Goals are determined by a series of questions and responses are driven by algorithms. It is algorithmic suitability.

There is no subject master expertise, insights or wisdom, and there is certainly nothing proactively propulsive with regards to future market activities and/or change preemption.  There is no behavioral coaching.

Trust is a perception based on rational reflections about the future. Can a Robo-advisor have rational reflections about the future or just statistic generalities?

There is nothing wrong with a Robo-advisor.  However, before getting what you pay for you have to know what to pay for.

 

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