fi360 Blog

Fiduciary Responsibility (and Liability) Depends on Facts and Circumstances

Fiduciary responsibility is determined by facts and circumstances on a case by case basis. In some cases it is very clear, such as when one is a "named fiduciary" to a retirement plan or trust or in the case of an investment advisor that has taken discretion of the assets. Often times it is not clear and in the event of litigation or arbitration, a judge or arbitration board would need to ask several questions before fiduciary status could be determined. In these cases, the questions are meant to determine the specific roles of the key players and judgment plays a big part in the decision regarding who has crossed the fiduciary line. If an investment policy committee (IPC) is involved and they are "purely advisory," they will have less influence over investment decisions that are made and one could assume that their fiduciary liability would be less. However, it is dependent on other factors. If the named fiduciary or trustee is a strong-willed independent thinker that typically makes up his or her own mind, the IPC bears less responsibility. If the named fiduciary or trustee has little investment experience and relies heavily on the IPC (in fact, he or she has never disagreed with their recommendations), they bear more responsibility even if they are only "advising" officially. Since the IPC has a role in any case, they could reduce but not completely eliminate their fiduciary responsibility by limiting their ability to exercise direct control (voting).

Paulson's Plan Falls Short

The recent release of the "Department of the Treasury Blueprint for a Modernized Financial Regulatory Structure" report reminded me of my senior thesis on the topic of sustainable management of New England fisheries and the commercial enterprises that harvest them. To capture a limited resource in a highly competitive market, whether fish or investors' dollars, each competitor is looking for an edge. If one country accepts low regulatory standards, others are pressured to do the same in order to help the companies operating under their flag maximize their take. Regulators' concern for the fate of the resource is only relevant in the context of being a necessary factor of production for the industry.

The problem with this regulatory paradigm for financial services is that people are not analogous to fish. The financial services industry exists to serve investors, not the other way around. When the Paulson Blueprint speaks in terms of consumer protection rather than of meeting fiduciary obligations, it is tantamount to the perils of overfishing – if you get too greedy you might wipe out your prey.

See Blaine's Fiduciary Corner column in InvestmentNews to learn more.