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

 

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.