fi360 Blog

Fiduciary Links

• CEFEX yesterday released their new Investment Advisor Certification program, which includes a letter for a successfully certified firm from the law firm of Reish Luftman Reicher & Cohen stating that they have processes and procedures in place that meet or succeed the fiduciary standards of ERISA.  Fred Reish, of course, is one of the leading ERISA attorneys in the country, and recently spoke at our annual conference.  AIF and AIFA designees can download the updated CAFE and Reish letter by going to the fi360 Designee Portal.
• A Wall Street Journal article yesterday reported investor interest in fees was rising in response to lagging returns.  As a fiduciary, you should always be periodically evaluating fees for reasonableness, and be able to justify those fees.   You can try out the SEC Mutual Fund reader mentioned in the article and other interactive data viewers that are supposed to make it easier to search SEC filings.
• Speaking of SEC filings, the SEC sent a press release on Tuesday announcing a study being undertaken to reexamine both how they collect data and how they make it available to the public. Chairman Christopher Cox said it best, "What hasn't changed in 75 years [since the establishment of the SEC] is the importance of full disclosure — sunlight remains the best disinfectant for problems in our capital markets."  Anything utilizing modern technology to make information gathering and dissemination easier is progress in our book.
• TIAA-CREF announced today it was adding a new service to help their clients prepare plan documents to fulfill 403(b) requirements. The plan document service will help sponsors of all 403(b) plan types, including both annuity and custodial account-based plans.  A plan that uses funding vehicles from other vendors will need the help of their attorney to add the features of those options to the documents.
• An Insurance Business Review article today said that AIG was adding a new policy that protects individuals who manage public entity employee benefit plans from fiduciary liability exposures. This is in addition to several other fiduciary liability policy they offer.  AIG is not alone, as John Hancock and Mass Mutual are two other providers we know who offer similar coverage, and fi360 partner NAPLIA offers discounted coverage for our AIF designees. This type of protection has its benefits, but always make sure you understand what exactly is being protecting as it isn't always the full spectrum of fiduciary responsibilities.  Actually fulfilling your responsibilities is the ultimate insurance.  And, as noted above, getting CEFEX Certified provides proof that you are doing just that.  Check back next week when COO Rich Lynch will provide an example of the limitations of fiduciary warranties in his Fiduciary Q&A post.

For more links, visit the Fiduciary Links and Articles Database sections of fi360.com.

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Fiduciary Links

• Interesting article on ethics, leadership and fiduciary duty from Michael Tate Barkley of Critical Communications, LLC.
• Plan Adviser magazine has a report on increased concern on fiduciary issues from plan sponsors.
• The transcript of Under Secretary of the Department of Labor Robert K. Steel's keynote address to the Managed Funds Association, including comments on hedge fund investing best practices.  The report for hedge fund investors includes a guide for fiduciaries.  The fiduciary's guide to hedge fund investing reminds us a lot of an article in Pensions and Investments from last year.  Their conclusion is basically the same as ours: hedge fund investing should be reserved for highly sophisticated investors, and is probably not the best idea for fiduciaries.
• In her blog, Investment Writing, Susan Weiner quotes Peter Kinder, president of KLD Research and Analytics, predicting ten years from now SRI will be a required consideration of most fiduciaries.  There is no reason why fiduciaries can't begin to consider SRI and ESG factors now.
• Ric Edelman told Financial-Planning.com that the LaRue v. DeWolff decision means the end of mutual fund dominance in 401k plans.  While we agree with the conclusion that it means lower fees, it seems early to conclude there will be a mass movement towards ETFs, as they have their pros and cons as well.  We also wonder if this couldn't be an impetus for a movement back to traditional defined benefit plans.  In any case, Fred Reish doesn't believe the Larue decision will mean a huge rush to litigation, as some have predicted.

For more links, visit the Fiduciary Links and Articles Database sections of fi360.com

Does your manager's interests align with yours?

In 2004, the SEC began requiring fund companies to disclose the names of their fund managers and how much they have invested in their own fund.  Morningstar this week released a study on the percentage of fund managers who invest in their own funds.  If you take comfort in knowing your fund managers have the same confidence in themselves as you have in them, then the study will leave you in considerable discomfort.  According to Morningstar, "In U.S.-stock funds, 47% report no manager ownership." 

While managers are not required to invest in their own fund (and can occasionally be a bad idea or even prohibited), it is obvious why this, generally, is so important.  Even the SEC in the final rule on the matter explained their motivation, "a portfolio manager's ownership in a fund provides a direct indication of his or her alignment with the interests of shareholders in that fund."  We at fi360 feel the same.  So much so, that we made this Criteria 2.6.2 in the Prudent Practices for Investment Managers handbook.  In addition to looking bad if a manager does not invest in his or her own fund, you can be sure the manager will be paying attention to the amount and use of fees if he or she is sharing in the cost. 

In our training programs, we offer nine due diligence screens for the selection and monitoring of investment managers. A good secondary screen would be to check if and how much a manager is investing in their own product.  This information can typically be found in the Statement of Additional Information (SAI), which must be provided upon request by the fund company.

Are you suprised by Morningstar's results?  Do you typically check to see if your manager is invested in his or her own fund?  Let us know what you think.

Seven precepts for investment fiduciaries

If you were to read ERISA, UPIA, UPMIFA, and MPERS, you would find that a number of common elements emerge as they relate to fiduciary responsibility.  These common elements also can be found in most countries that have fiduciary legislation.  For this reason, we call them the "Global Fiduciary Precepts."  The seven precepts are the most basic level for understanding the responsibilities of an investment fiduciary:

1. Know standards, laws, and trust provisions.
2. Diversify assets
3. Prepare investment policy statement
4. Use "prudent experts"
5. Account for investment expenses
6. Monitor the activities of "prudent experts"
7. Avoid conflicts of interest

The common theme of these precepts is that having sound processes, along with an unwavering focus on the best interests of investors, limits your risk as a fiduciary.  They are the most basic level of understanding the responsibilities of an investment fiduciary.  By expanding them across the investment process, we created the more detailed "Practices", which are a guide for knowledgeable investors to implement better investment processes.

Read Blaine's most recent InvestmentNews Fiduciary Corner column detailing how the precepts limit your fiduciary risk.

Also, you can download a free card for referencing the fiduciary precepts, as well as the fiduciary handbooks, and other helpful documents from the download documents section of fi360.com.

Designee makes the switch from BD to RIA

We would like to extend a congratulations to David Bromelkamp and his firm, Allodium Investment Consultants.  They were recently nominated by a client for the Minnesota Business Ethics Award for their commitment to investors' interests.  Three years ago David left his job at a broker-dealer to start an independent RIA with fi360's Practices at its core.  You can read a full case study on David's experiences in the articles section of our website.

David's move was largely in response to the BD's refusal to allow him to share the Practices with his clients. This has been a roadblock that we have frequently encountered here at fi360.  Many BDs do not permit their employees to use the AIF or AIFA designations because they are afraid of the "f" word, fiduciary.  Their stance seems largely to be if they avoid the word, and by extension, the issue, they are avoiding the responsibility and liability.  However, this is simply not true.  The overturning of the broker-dealer exemption meant that there would be no more exceptions to registration and disclosure requirements for those providing investment advice.  Fiduciary status is determined by facts and circumstances, and regulators and the investment community are taking a greater interest in ensuring investors' interests are always the primary concern. BDs who are not proactive in embracing this change in culture are at risk of losing the faith of the community, of increased scrutiny from regulators, and of defections from advisers who want to do the right thing by their customers, like David Bromelkamp did.

Additional sources of information:

• Don Trone's article on how the overturning of the broker-dealer exemption signaled a new era of investment advice.
• A recent report from the lawfirm of Reish Luftman Reicher & Cohen on how the impact new 408(b)(2) disclosure regulations most dramatically affects broker-dealers.
• An article on the partnership between fi360 and LPL, a broker-dealer who is proactively addressing their fiduciary responsibilities.

Have you made or are you contemplating a similar move?  If you have any experiences or questions you want to share, leave them here in the comments section.