Fiduciary Capacity Isn't A Term That Only Applies To You; It May Also Apply To Your Clients

Tuesday, March 27, 2012 08:24
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Fiduciary Capacity Isn't A Term That Only Applies To You; It May Also Apply To Your Clients

Tags: compliance | Dodd-Frank | fiduciaries | FINRA | regulation

Many of your clients are acting in a fiduciary manner and may not even know it, says Don Trone, who created the Global Fiduciary Strategist (GFS) standard. Trone offers practical advice as your clients look to you to support them in fulfilling their own fiduciary roles.

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Any client who is a trustee on a family trust, a board member for a university endowment, an investment committee member for a foundation (public or private), or in charge of the retirement plan for their business is acting in a fiduciary capacity. Whether or not clients realize the nature of their position, fewer still are documenting their behavior. Part of your fiduciary responsibility as an advisor is to support them in fulfilling that duty.  
 
In supporting your clients, it’s also your job to keep up with regulatory developments and changes in litigation relative to fiduciary fulfillment. You may wish to partner with an attorney who specializes in these areas.
 
Even then, there’s the issue of having no formal standard against which to measure and no across-the-board delineation of the specifics of fiduciary care.
 
This is where the safe harbor discussion comes in. Trone says that having the right frame of mind is important to fulfilling a fiduciary role. It’s a mindset that is critical to offering the support your clients need from you. Safe harbor is the easiest way to get this frame of mind.
 
First, Trone says that acknowledgment of safe harbor processes is germane and not limited to the financial industry. In 2009, the Department of Labor (DoL) simplified the safe harbor process as proposed in 2007 and officially proclaimed it was sufficient as an option for measuring fiduciary activity relative to Employee Retirement Income Security Act (ERISA) accounts.
 
Following safe harbor procedures simply means that you can document that you have followed accepted regulatory procedures combined with recognized industry best practices. It is widely acknowledged that if you have followed the prescribed procedures, you will not be liable. Trone outlines and comments on five existing safe harbor procedures which can be applied to the financial industry:
 
Procedure 1: The firm must define minimum qualifications (in terms of experience, licensing and training) for advisors who wish to serve in a fiduciary capacity;

Comment: Safe harbor can be implemented quickly from a regulatory standpoint. It requires no additional budget. It also allows the industry to define the details of what a fiduciary standard of care should look like.
 
Most of the broker-dealers and wirehouses will actually define higher criteria than the SEC and DOL would define on their own. Safe harbor would put us back to the starting point of providing a higher level of care.
 
Procedure 2: The advisor must accept and acknowledge their fiduciary status in writing;
 
Comment: This is nothing new. These are traditional safe harbor procedures as defined by DoL.
 
Procedure 3: When serving in a fiduciary capacity, the advisor must agree to only utilize investment products, data bases, software and technology approved by the firm.
Comment: Trone cites the 2006 pension act which stipulates an audited computer advice model.
 
Procedure 4: The advisor must agree to maintain records which demonstrate the advisor's procedural prudence (the details of the advisor's decision-making process);

Comment: Maintaining records has always been a legal requirement of fiduciaries.
 
Procedure 5: The activities of the advisor must be monitored by the firm.

Comment: Again, this is another standard safe harbor procedure as defined by the DOL.
 
Next week, we’ll use examples to help you more specifically provide support to your clients who are fiduciaries.

 

Comments (4)

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brentb843
I think the story with Trone is that advisors with the GFS aren't required to act in a fiduciary capacity. Trone is selling memberships.

Procedure 1 really is to support his business model. Sad really, he has such vast knowledge.
brentb843 , March 27, 2012
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lisagray
My goal is to present a variety of viewpoints on the fiduciary issue, including different types of fiduciary functions as well as views on what it means to be a fiduciary. This is not the first time I've heard this kind of business model comment about Trone and I have to admit I've felt this about him myself to some degree. But he has had impact in the fiduciary space so he's a legitimate part of the conversation. And I have not gotten the sense that advisors with the GFS designation do not have to act in a fiduciary capacity.

The real point of this post is that clients also serve in a fiduciary capacity and need their advisors to support them in fulfilling that duty. Trone makes some good points about the safe harbor type of solution. Nothing in our conversation was really geared toward people getting the designation he created.
lisagray , March 28, 2012
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brentb843
I think it is a fair assessment, but I believe since Trone is now 'selling' his legitimacy is questioned. Before the GFS, he was a part of the folks with the AIF (accredited investment fiduciary) designation. It is comical the amount of brokers who have AIF behind their name. How can one be an Accredited Investment Fiduciary, but not a fiduciary?

I understand the perspective of the point that clients acting in a fiduciary capacity need assistance, but the need lies in an advisor who will be that fiduciary. Simply put, I am not looking for a pharmacist to take a GMD (Global Medical Doctor)certification to walk me through removing my own brain tumor. The odds are just too high.

The fiduciary standard comes in form of process, either it is followed or not, regardless of the designation.
brentb843 , March 28, 2012
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lisagray
Good points, Brent, and this is exactly what I was hoping would happen - that some discussion would get started. The need for client support is because they are often thrown into fiduciary situations with family money that they are not aware of. Having an advisor who makes sure they cover all the bases in that role is an asset protection bonus.

It is a legitimate need and, like it or not, families place members in these positions even though we know they should be utilizing educated fiduciaries. So they need us! And isn't that a great thing!
lisagray , March 28, 2012

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