fi360 Blog

Who needs an IPS?

A recent graduate of our AIF Web-based program came to us with a two-fold question.  He is an investment advisor and, in the AIF curriculum, we emphasize how important the Investment Policy Statement is to the successful carrying out of an investment program.  For various reasons and from previous advice, his firm has not been using IPSs as a standard procedure, and he wanted our take on if every client should or must have an IPS.  Secondly, as he was deciding if he was going to proceed to obtain the AIF designation, he wanted to know if we required him to use an IPS and what liability he would be inviting if he used the AIF and continued to not use an IPS for all clients. 

The question: Do most or all of the client relationships need to have a written signed Investment Policy Statement if using the AIF designation? – is an interesting one. It essentially has three parts that I will address separately:

• Should most clients have an IPS? Definitely yes. We view the preparation and execution of an effective IPS as the most important function a fiduciary performs. While you can’t force clients to adopt an IPS, all should be made aware of how critical it is to guide the investment process. A note should be made to the client file for any advisory client who declines/refuses to discuss/adopt an IPS. In working with retirement plans you will find that in the event of a DOL audit the very first document they will expect to see is the IPS.
• Should the IPS be signed, and by whom? All fiduciaries should acknowledge their fiduciary responsibility in writing but this does not have to be accomplished in the IPS. If you are an RIA, you probably acknowledge your fiduciary responsibility in your client agreements or ADV (for those clients for whom you do accept fiduciary responsibility). The IPS should be kept current; consequently, we recommend that you have some process in place to demonstrate that you and your advisory clients have conducted regular reviews (best practice is for annual reviews). This process may involve entering signatures on the IPS but that is not mandatory. Signatures are a useful way for the client and service providers to demonstrate that they are all aware of, and intend to operate in conformity to, the IPS but that too is a good practice, not a requirement.
• Is the need for a signed IPS related to the use of the AIF designation? No, use of the AIF designation does not require the specific application of every Practice. The designation does not represent a “guarantee” by either the designee or fi360 that all practices are being applied across all clients. That said, please be aware that we strongly believe those who earn and use the AIF and apply the practices will mitigate some level of fiduciary risk – not increase it. This view is supported by the fact that several E&O firms are offering reduced premiums for designees.

It is also worth noting that if you would ultimately like to have your firm certified by CEFEX you will need to address the IPS Practice as I have indicated in my first bullet point in order to demonstrate conformity with Practice 2.6. This is, however, a separate matter from the specific question asked. Unlike use of the AIF designation, CEFEX Certification of an organization does signify that the certified firm applies all applicable Practices. Even is this case, (especially in this case) we view this as a means of reducing liability.

The right intentions elevates the profession

In my most recent Fiduciary Corner column, I wrote about how the financial services industry has an unfortunate history of information being withheld for the benefit of someone other than the investor. The recent example I cited was a July 31 complaint against Merrill Lynch by the Massachusetts Securities Division, alleging that Merrill Lynch intentionally pushed the sales of products it knew to be especially prone to failure at the time in an effort to minimize their losses, and Merrill Lynch's subsequent statement that their advisors were acting with good intentions in selling this investment product.  However, if the allegations are true, it would seem to be a case not of whether or not the advisors were acting with the best of their intentions, but of the parent company using the trust their advisors have built up from their clients against them. So investors are not only left trying to find an advisor they can trust, but wondering if the advisors are even being armed with the best information available on their investment options.

With a seemingly endless parade of scandals with the common thread being that people in positions of trust suppressed vital information in an effort to benefit themselves, no one should be surprised by any less than increased scrutiny from regulators and legislators and decreased trust from investors. Unfortunately this creates a long, winding, and bumpy road to change. If the financial services industry wants to avoid being dragged down that road it should lead a change in course by committing to fiduciary principles and implementing fiduciary processes in the way investment products are structured and distributed.

Read my most recent Fiduciary Corner column in InvestmentNews for more.

Fiduciary Links--Olympics Edition

In honor of the Olympics, I did a Yahoo! search of "Olympics + fiduciary".  One good result came from Fiduciary Trust Company, which looked at the growth in China demonstrated by the $40 billion spent on construction and infrastructure since being awarded the Olympics.  The article then explains how they use diversified asset allocation across multiple countries when trying to take advantage of a fast-growing yet highly-volatile market like China. 

Another interesting article came from Calvert in the area of socially-responsible investing, specifically addressing what corporate sponsors of the Olympics can do to address human rights concerns in China and still take advantage of the global marketing opportunity.

Unfortunately, most hits had more to do with an Olympics advertisement on the page instead of a real tie between a fiduciary topic and the Olympics.  Anyways, here are the rest of the good links for the week:

• The Investment Fiduciary Leadership Council, a group of CEFEX-Certified organizations, has formed a plan sponsor task force to "evaluate the implications of pending changes in the Department of Labor's fee disclosure and conflicts of interest rules." 
• The SEC CCOutreach Program released a Compliance Alert regarding issues that had been coming up recently during their reviews of fund and adviser companies, including personal trading by advisory staff, proxy voting, valuation and liquidity issues, soft dollars, "free lunch" seminars, broker-dealer relationships with insurance companies, and more.  The program is a useful tool for compliance departments and offers a number of links to resources for compliance officers.  They also offer compliance seminars that are good for CPA continuing education credit.  We also would accept attendance at one of these seminars as part of your AIF or AIFA designation continuing education requirements.
• The Government Accountability Office released a report about the challenges 401(k) sponsors have fulfilling their fiduciary duties.  The electronic version is not yet available, but you can actually have the report sent to you just by requesting it.  Plansponsor.com has a good article summarizing the findings.  Most important of the findings was that many sponsors do not fully understand their duties or are not fully aware of which duties actually have been delegated to service providers.  Our advice would be to go through our online SAFE and make sure you are either personally fulfilling the duties in each question, or know exactly who is.  Any "no" or "I don't know" answer to the questions in the self-assessment basically represent a failure to fulfill all of your fiduciary duties (with the exception of possible non-applicable situations).

New Article Competition Entry and other updates

We have just posted a new entry to the article competition.  Scott Pritchard of Capital Directions, LLC in Asheville, NC, writes about how 401(k) plans have given investors more control over their retirement plans, and how that hasn't meant increased success.  Once you have read it, make sure you send us your feedback.  If you are an AIF or AIFA designee and are interested in entering the article competition ($1000 first prize), visit the designee portal for more details.

We also have added a new book to the Fiduciary Store, Foundation & Endowment Investing brings insights from 12 of the most accomplished Chief Investment Officers in the foundation and endowment community.

Our articles database also has some new additions, including a Financial-Planning.com article that includes quotes on green investing from a 2008 fi360 Conference speaker and an AIF designee.

Finally, check out our updated events page.  Here you will find some of the best events in the industry where fi360 will be present either as a speaker, exhibitor or attendee.  You will see on the events page a 50% discount to the Center for Due Diligence's 2008 Advisor Conference in Scottsdale, Arizona for AIF and AIFA designees.  Check out the designee portal for more information on the discount.  Make sure you let us know if you will be attending any of these events so we can have the chance to meet you there.

Investment Due Diligence--Search, Selection and Monitoring

The requirement for a well-defined and consistently applied due diligence process for selecting and monitoring investment options is without question. It is a common thread throughout the four-step investment management process detailed in the Prudent Practices for Investment Advisors handbook

• Practice A-2.6 states “There is an Investment Policy Statement which contains the detail to define, implement, and monitor the client’s investment strategy.”
• Practice A- 3.1 states “Each client’s investment strategy is implemented in compliance with the required level of prudence.”
• Practice A-4.1 states “Periodic reports compare investment performance against an appropriate index, peer group, and IPS objectives.
• Practice A-4.2 states “The periodic reviews are made of qualitative and/or organizational changes of investment decision-makers.”

The “Custom Due Diligence Criteria” feature of the fi360 Platinum Toolkit facilitates the satisfaction of the aforementioned Practices. Subscribers now have the ability to define a unique due diligence criteria made up of as many as 15 sets of “factors” and “thresholds.” [An example of a factor and threshold set is 5-Year Performance (factor) and Top Quartile (threshold).] Numerous factors are available, including the fi360 Fiduciary Score™ which has become an industry standard, independent, rating of the minimum due diligence criteria any fiduciary should be using. In addition, each factor and threshold set can be assigned a level of importance: "Required" or "Optional".

Go to the "Managing your Watch List" heading and select "Creating your own Due Diligence" on our Tutorial page to learn more.

SEC-DOL to share resources to protect investors

The SEC and DOL released a Memorandum of Understanding, highlighting how they can create a "framework for consultation and exchange of information". 

Blogger Daniel Schwartz of the Connecticut Employment Law Blog was left wondering "what the fuss is about".  It should be expected that these agencies, like fiduciaries, should always be doing what is necessary to benefit the individual.  Drafting an MOU and holding a press conference leaves the impression that this relationship wasn't in place previously. It reminds me of finding out how little information was going on between law enforcement agencies in the aftermath of 9/11.  This MOU came less than a month since the SEC signed a MOU with the Federal Reserve.  One would have thought it wouldn't have taken nearly 100 years for the DOL, the Fed and the SEC to formalize information sharing. Of course, just perusing the press releases of either the DOL or the SEC brings up a number of examples of the agencies working together, including this page of tips for fiduciary plan sponsors in choosing investment consultants.

Workforce.com does the best job of explaining what the fuss is about. The shift to DC retirement plans has made this more necessary than before and cites shared efforts between the two agencies in creating an alert to investors about 401k debit cards.  The article also includes a quote about the "breaking down of silos" around government agencies.  It is encouraging to see those silos being broken down while also being slightly maddening that those silos exist in the first place.