fi360 Blog

Uniform Law Commission Website a great place for information

I recently received an email from an AIF designee with a question about under which laws do foundations and endowments fall in the state of Washington.  Now this is a fairly specific question that won't apply to almost everyone who would be reading this.  However, it is worth pointing out a very valuable resource for this type of question: the National Conference of Commissioners on Uniform State Laws (NCCUSL).

The NCCUSL is a 117-year-old organization that drafts laws for states to adopt in order to promote uniformity of law across state lines.  Using the Final Acts and Legislation link from their home site, you can search through all of the acts drafted by the NCCUSL (which is not limited to investment or financial-related legislation) or search your state to see which acts have been enacted by your state.  For the case of our audience, the most relevant searches would be the Prudent Investor Act (UPIA), the Prudent Management of Institutional Funds Act (UPMIFA), or the Management of Public Employee Retirement Systems Act (MPERS).  Each of these acts are used as substantiation for our Prudent Practices handbooks, with full legal substantiation derived from these acts found in our Legal Memoranda handbook.  And, on the respective page for each of these acts, you can find the full text of the act, a legislative fact sheet on an act (including a list of the states who have adopted it), a summary of the act, and other important information.

To use the original question above as an example, UPMIFA is the current legislation on the governance of foundations and endowments.  A quick search of UPMIFA on the NCCUSL site revealed that Washington has not enacted UPMIFA.  One possible explanation for this is that UPMIFA is relatively new, is replacing UMIFA, and maybe Washington just hasn't reached the point of enactment yet.  By checking the NCCUSL site's related sites page, we found that UPMIFA had its own page that included a comparison of UPMIFA with the laws governing each state.  After checking on Washington, it was confirmed that the state was still going by the predecessor, UMIFA.

Not every uniform act has its own page, and I wasn't able to confirm why Washington has not introduced UPMIFA for consideration yet.  Further research on the subject would need to be done by perhaps visiting the State of Washington legislature's Website. But, if you are looking for information on one of the uniform acts or the relevant legislation in your state, the NCCUSL page is an excellent starting point.

Fiduciary Links--The Blame Game

Now that the shock value of the financial rollercoaster is starting to wear off, much focus is now on who to blame.  After listing all of the usual suspects, InvestmentNews says that ultimately Americans need to look at themselves.  John Sullivan, editor, Boomer Market Advisor, wonders in his blog (a good blog by the way, John doesn't hold back, that's for sure) how many of those who were in a position to do something about the crisis before it got out of hand, are now in the position to assign blame (and, by extension, shield themselves).  You know the situation is serious if Anderson Cooper does a "Ten most wanted culprits of the collapse" feature.  And, if you try searching "crisis" and "blame" in any of the newspapers of record, you will find literally thousands of matches of articles and editorials with varying assignments of blame (the search yielded 10,000+ hits in the past thirty days alone in the New York Times).

While there is plenty of blame to go around and no shortage of politicians, reporters, bloggers, etc. who are willing and able to assign that blame, one thing doesn't change: where we are now.  And, we prefer to look forward. 

• We've already talked about the expectations we should have of our leaders as they implement the rescue package.  Well, it seems one provision still made it through the passed bill which gives the Tresury department broad power with little checks and balances.
• Regardless of how good the good times can be or how bad the bad times can be, we should all be prepared with the expectation that things can change, sometimes quickly.  Having a prudent investment process helps you navigate those ups and downs.  In your retirement planning, the end result should be the focus, not what happened in the markets this week.  CFP clients are apparently comfortable with this mindset.
• FINRA has a good informational page on the Treasury Department's new Money Market guarantee program. It calls to mind the hope that many employees close to retirement had been moving towards more conservatives asset allocations before the crisis occurred. 
• A DOL settlement with Agway's 401K included a requirement that plan officials take part in fiduciary training. The fiduciary environment is here, everyone should receive fiduciary training before they are told to. 
• The SEC has an Information for Individual Investors on Recent Market Events page that includes a number of good source.
• Reish says that the 408b2 regulations are coming.

If you have any other good links, let us know or submit them to the comments section below.  If you are on LinkedIn.com and are an AIF/AIFA designee and/or Tools subscriber, sign up to join the Fiduciary360 group.

New book from AIF designee and fi360 LinkedIn page

We mentioned this in a post about a month ago that AIF designee Joshua P. Itzoe of Greenspring Wealth Management has written a book, titled Fixing the 401(k).  The book is written for 401(k) fiduciaries to diagnose problems in their plans and bring them up to snuff.  Dr. Susan Mangiero has a review of the book available on her Pension Risk Matters blog. 

Well, the book is now available in our Fiduciary Store.  It retails for $15.95, and AIF and AIFA designees can receive a 15% discount of this and other titles in the "Industry Text" area of our store by entering in the discount code at checkout (codes are available at the front page of the store). 

Don't forget that designees also receive 50% off of our Prudent Practices handbooks and there is also a free Legal Memorandum giveaway, also available in the Fiduciary Store.  Handing out handbooks or SAFEs to clients and potential clients is a great way to demonstrate that you are following a prudent investment process that reduces risk and helps investors weather the inevitable ups and downs associated with investing.

Finally, if you are on LinkedIn, the professional networking site (kind of like Facebook for professionals), make sure you sign up for the Fiduciary360 group and get in touch with other designees around the country.  If you are not already on LinkedIn, I'd recommend signing up, it is very interesting to find and see profiles from people who have some connection to you.  Who knows, you might even pick up a new client or find the perfect consultant to fill your needs.

Fiduciary Links

The Employee Benefits Security Administration (EBSA) released an interpretive bulletin reasserting the duty of a fiduciary to consider the investment return to an employee benefit plan above all other factors, including SRI, when considering other "economically targeted investments." 

While we completely agree with the sentiment, it seems odd for such a strongly worded bulletin that does not significantly change the DOL's view and could scare trustees from considering SRI at a time when evidence is mounting that SRI and ESG funds are performing competitively with non-SRI funds.  Earlier this year, CEO Blaine Aikin wrote two articles on the subject for Boomer Market Advisor magazine, "The SRI fiduciary cop out" parts one and two, which explain why consideration of these factors represent a more thorough due diligence process, not conflicting interests.  Some other good sources on the subject are the Social Investment Forum, the United Nation's Principles for Responsible Investment, and CALPERs.

On to the rest of this week's links:

• The SEC, NASAA, and FINRA released a joint report outlining practices that financial services firms can use to strengthen their policies and procedures for serving older investors as they approach and enter retirement.
• The state of West Virginia is comtemplating lawsuits against firms whose failures resulted in losses to the state's portfolio.
• InvestmentAdvisor.com has a new look and a number of good blogs.  We always follow this publication and they have been good to fi360; we recommend you take a look.
• There are only hours left in Financial Planning magazine's software survey, make sure you go and write-in fi360 Tools as your favorite software.

If you have any other good links, let us know or submit them to the comments section below.  If you are on LinkedIn.com and are an AIF/AIFA designee and/or Tools subscriber, sign up to join the Fiduciary360 group.

Does Fiduciary Responsibility apply?

The sudden collapse of several financial institutions over the past few weeks reminds me of a quote found on our website.

One of the tests of leadership is the ability to recognize a problem before it becomes an emergency.  - Arnold Glasgow

Where was the leadership of these companies, and why did they not recognize the perilous situation that they were putting their shareholders in? As a fiduciary, trustees of a pension plan or 401k have a legal responsibility to act in the best interest of their “shareholders.”  Should the board of directors for public companies also have that same responsibility to their shareholders? 

I believe that they should be held to that same standard.  A shareholder of a company is expecting the board of directors to act in their best interest.  Let’s look at some of the Prudent Practices to identify shortfalls.

Begin by looking at Practice 2.2 in the Investment Stewards handbook.  Practice 2.2 calls for a risk level to be identified, and more specifically criteria 2.2.2 calls for a “worst case” scenario to be identified. I wonder how risks were evaluated by the board of directors for Wachovia.  Wachovia hailed their acquisition of Golden West Financial Corp. as a success only two years ago, but it ultimately led to their downfall and subsequent merger with Wells Fargo.

Moving on to Practice 2.5, we see that the Steward (board of directors) should also be able to identify risks with investments that they are implementing in a portfolio and monitoring them on an ongoing basis.  Do the advisors have the capacity to identify and monitor the risks of these investments?  According to a blog post in the Deal Journal of the Wall Street Journal, Lehman’s board had only one member with banking experience and he joined the board in 2008.

It’s easy to look in the rearview mirror, but I think that the boards of the financial companies were acting imprudently with respect to their “fiduciary” duties to the shareholders of these failed companies.

Designee makes the switch from RIA to B/D

In our first case study, we profiled a designee who made the switch from a B/D to establishing themselves as an independent.  This time we've taken a look at an advisor who went the opposite direction.

AIFA designee David Strother, chief investment officer and financial services director for DSF Wealth Management, LLC, started Wealth Care Group Asset Management as an RIA in partnership with a CPA firm.  When they later merged with DS&F Financial Services, LLC (an affiliate of Darnall, Sikes, Gardes & Frederick, a Corp. of CPAs), who are affiliated with B/D First Global, he had to choose between remaining an independent RIA at the CPA firm's financial services affiliate, or terminate his independent RIA and move under the umbrella and supervision of 1st Global's RIA.

What made this move possible for David was 1st Global's culture of independence that already existed.  While some B/Ds run from the "f" word, fiduciary, they allowed David to use his AIFA designation, use and show fi360 Tools reports, and share the Prudent Practices with clients. 

"Working under 1st Global's RIA allowed us to outsource most of the compliance function, while providing us more flexibility, which we believe benefits our clients,” said Strother. "It allows us to operate in the best of both worlds. We don't sell any proprietary products and we'll never make a recommendation based on compensation. We may make selections that pay us a commission – such as limited partnerships, structured products and insurance products, because we feel it's best for the client, but we always communicate what our compensation is."

David's B/D experience is not typical to what we usually see, and we think it makes a lot of sense to go the route of independence if you want to give your clients a level of service that is less conflicted.  But his story is a good example of how a scenario like this can work under the right circumstances.  Just remember, fiduciary status is determined by facts and circumstances, and going the B/D route will not shield you from liability if your actions dictate that you were acting as a fiduciary.

Go to our articles section to read the whole story.  Here are some other sources relating to the subject:

• Investment Advisor gives a guide to deciding "B/D or RIA?", even though it doesn't mention the fiduciary issue.
• Blogger/2008 fi360 National Conference speaker/RIA Mike Patton blogs on his "Road to Independence" for Investment Advisor.
• The SEC has guides to registering both as a broker-dealer and as an investment advisor.

If you or someone you know would be a good subject for a case study on fi360 or the adoption of a fiduciary culture has benefitted them, send us an email at resources@fi360 and tell us the story.

Fiduciary Links--Rescue Package Edition

The only thing on most people's minds this week is the financial crisis, the wild fluctuations in the market and the rescue package.  If you have not done so already, make sure you check out Blaine's Fiduciary Corner column on the subject in this week's InvestmentNews. Seems like someone has been listening, as the Treasury Department specifically included a fiduciary duty requirement (see page 5) to the United States for "financial institutions interested in providing securities asset management services for a portfolio of troubled mortgage-related assets."

On to the rest of the rescue package links:

• U.S. Treasury Department's page on the bailout includes the full text of the Act and all press releases related to the subject.
• The White House's Economy and Jobs page is mostly bailout-related.  Make sure to check out the fact sheet.
• The SEC has a full page on the mark-to-market study they are required to undertake related to the rescue package.
• If you go to the Library of Congress's THOMAS database, click on "Congressional Record" in the left-hand menu of options, you can search the official records of proceedings for the House and Senate by both subject or date for information on Congress's proceedings getting the bill passed.
• Both presidential candidates, Obama and McCain, give their statements.  Don't worry, we are not getting political, both say it is an "outrage" that we are even in this situation.

And, finally, if you are a Tools subscriber, make sure you write us in to Financial Planning magazine's annual technology survey. Let the rest of the industry know that you think fi360 Tools are among the best priced and most effective analytics in the industry.

If you have any other good links, let us know or submit them to the comments section below.

New article competition submission: fiduciary duties in settlement planning

A new entry has been posted to the Article Competition page.  AIF designee Henry Strong of JMW Settlements, Inc in Washington, D.C., co-authored the article "Fiduciary focus: the prudent integration of structured settlements and post-settlement trusts" about the need for more training for settlement fiduciaries and the opportunities available for better settlement planning.

The article has been published in the Spring 2008 issue of the American Bar Association's The Brief.

Make sure you submit your feedback on the article, either to resources@fi360.com or in the comments section below.

Also, please note that previous submission "The Tyranny of Choice" by Scott Pritchard has been accepted to be published in the fourth quarter edition of the Journal of Pension Benefits.  Congrats Scott!

Fiduciary Duty of Public Officials during a Crisis

In today's edition of Investment News, my Fiduciary Corner column takes aim at Congress and the Treasury Department's failure to put the interests of taxpayers first in the initial proposed bailout bill.  Since I wrote the article, the updated bailout was passed that does include improvements to the oversight.  However, it still does not address the conflicted loyalties of Paulson's first draft and has been riddled with add-ons that are not to the exclusive benefit of tax-paying citizens. A rescue package for our nation's financial systems was and is essential, but only in the context of how those financial systems are essential to the fiscal health of the public. It is unfortunate that our leaders are failing to put our interests first and foremost, and it does not end with the passing of the bill. Going forward, the public should continue to expect a fiduciary duty in the implementation of the bill and should hold their public officials accountable if and when they fail to do so.

* * * * * * * 

Also in today's issue of IN, Blaine is quoted saying the embracing of the fiduciary role is becoming a critical component to being a successful fiduciary for 401(k) plans in today's environment and going forward. Along with that comes the importance of defined procedures, documentation and strict adherence to the investment policy statement. 

If you like these articles on InvestmentNews.com, make sure you click on the "Recommend" link near the top to signal to others how important these fiduciary-related topics are.  IN and the fi360 Blog both have comments sections also, so let us and other readers know what you think. 

To read more Fiduciary Corner columns and other articles addressing fiduciary responsibility, visit the Articles section of fi360.com.

Fiduciary Links

• The Connecticutt Post gives a fair warning to Investment Stewards. The release from the DOL regarding their lawsuit against a Fairfield, CT dentist that is referenced in the article can be found in their EBSA newsroom.  Many of the releases here are about their legal actions for some breach of fiduciary duty.  Stewards and Advisors alike could learn a lot just browsing through these.
• While we have been critical of the DOL lately, we should point out an excellent page of resources about fiduciary responsibilities they have available.  We have also heard good things about their fiduciary responsibility compliance seminars.  I'll be attending the Pittsburgh one in October and will pass on my notes then.
• Some new items from fi360: The updated Web-based AIF Training program was released this week, fi360 is working with the Council on Foundations, and make sure to stop by and visit Steve, Heather and Dave in Boston this weekend if you are planning on going to the FPA conference.
• Pension Risk Matters, Dr. Susan Mangiero's blog, informs us of her upcoming speaking engagement with National Association of Corporate Directors about board oversight responsibilities.
• A designee inquiry led me to find a link of good information on 403(b) from TIAA CREF.