fi360 Blog

The Pilgrim example for fiduciaries

As most of us head into a long weekend to spend with our families during Thanksgiving, I’d like to take a look at the Mayflower Compact. This succinct document established that upon landfall, government would be established in a democratic fashion for the good of the community. The success of the Pilgrims serves as a great lesson on placing the interests of others above self-interests.

The entire text of the Compact is as follows:

Having undertaken, for the glory of God and advancement of the Christian faith and honor of our King and country, a voyage to plant the first colony in the northern parts of Virginia, do these present solemnly and mutually in the presence of God and one of another, covenant and combine ourselves together into a civil body politic, for our better ordering and preservation, and furtherance of the ends aforesaid; and by virtue hereof to enact, constitute and frame such just and equal laws, ordinances, acts, constitutions and offices, from time to time, as shall be thought most meet and convenient for the general good of the colony unto which we promise all due submission and obedience.

Fiduciary Links

• InvestmentNews has an editorial about the potential harm to investors from an SEC interpretation that posting disclosures on a company Website may be enough to satisfy disclosure requirements.  You can find the interpretive release here and the submitted comments here.
• Securian is now offering a Web-based encyclopedia to help employers whose retirement plans are administered by Securian address their fiduciary duties.
• The Blog on Wealth says that now is the time to re-negotiate investment management fees.  Check out the commenting section, there is some good discussion going on there.
• An article in Morningstar Advisor gives the advice on how to reach out to investors in times of turmoil.  What makes this article particularly good is the advice that client objectives ultimately determine whether change is needed.  This ties in particularly well with Blaine's most recent Fiduciary Corner column on asset allocation being the means to accomplish a goal, not an end unto itself.
• Financial Adviser magazine says, "More regulation and fewer players will be the outcome of the financial crisis."
• Both the AIF and AIFA designation's listings in the FINRA designation database have been updated.
• We have a new entry in the fi360 Article Competition: Roger Levy's Getting a fiduciary checkup.

What defines your character?

As I drove into work yesterday, I listened to my favorite national sports radio show: ESPN’s Mike & Mike in the Morning.  If you’re a sports fan and can tune it in, I highly recommend the show. Mike Greenberg and Mike Golic are excellent and the show provides a nice blend of sports-related humor and serious discussion. One of the day’s topics provided a great analogy for what fiduciaries are currently facing.

The topic was “Honesty in Sports,” with a tie-in to the story of professional golfer J.P. Hayes, who was playing in a second-stage event for the PGA Tour Qualifying Tournament. If you’re not familiar with the sport, pro golfers must compete to qualify for a “tour card” that enables them to play fulltime on the PGA Tour next year. Essentially, they’re competing for an opportunity to earn a living. Anyway, during the first round of play, Hayes unintentionally used a different ball than the one with which he started the round—a violation of the “one-ball rule.”

Note that there are no referees, umpires, or instant replay in golf. It is very much an individual and self-policing sport. The U.S. Golf Association has established Rules of Golf. They provide the “laws” of the sport, if you will. The players are expected to know, understand, and follow them. The following them part is oftentimes left in the hands of the individual golfer.

In this situation, Hayes knew and understood the rules; he would be penalized two shots. Would he follow the rules? Remember, he is attempting to qualify for a 2009 tour card. This is his livelihood. Hayes didn’t hesitate in making the right decision. He found a Tour official and owned up to the error.

Fiduciaries are faced with similar tough decisions and temptations. Conflicts of interest, prohibited transactions, and other challenges abound within the industry; each of which presents a crossroad for a fiduciary as they perform their duties. The industry, like the U.S.G.A., has provide “rules” that are expected to be known, understood, and followed. Fi360 has built upon this base to provide Fiduciary Practices to further guide fiduciaries and the investment professionals who serve them. But, like in golf, much of the onus to adhere to the rules is still left to the individual.

Fiduciary Links

In case you need to hear another voice telling you that the future of the financial planning and investment industry is heading towards a fiduciary environment, read some of Bob Veres' recent columns at Financial-Planning.com. In addition to two recent articles taking a look at recent controversy surrounding the CFP Board (here and here), Mr. Veres has also recently looked at the question of "Are planners professionals?" and why the wirehouses are not long for this world.  We couldn't agree more.  In fact, take a look at these slides from our AIF Training program for our take on what makes a professional.

And, some more of the best fiduciary links this week:

• PLANADVISER magazine's latest issue is all about their recent national conference. Among the topics: Getting comfortable with the "F" word.
• MarketWatch shows how SRI funds are holding up comparatively well during the market meltdown.
• CFS co-founder Roger Gibson book "Asset Allocation: Balancing Financial Risk" recently went into its fourth edition.
• AIFA designee Scott Simon just wrapped up a three-part series on proposed ERISA rule §2550.404a-5, the "anti-participant rule."

And, finally, we at fi360 have a two new opportunities available.  First, our 2009 National Conference in Scottsdale, AZ is open for regestration, early bird pricing is available through the end of the year. Also for the rest of the year, we are offering for the first time a package of both our Web-based AIF training program and a subscription to our Platinum Toolkit.  Purchasing the two together gets you savings of over $800.  There are also discounts available on the Tools and Training individually as part of this promotion, so check it out.

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.

Foundation conflicts of interest

A question we have received a number of times here at fi360 is: is it alright for a foundation board member to also be serving as an adviser to the board? While not prohibited, is it is a conflict of interest that should be avoided or carefully managed.

Recently, we did some training programs at the Council on Foundations, a non-profit member organization of grantmaking foundations and corporations.  As part of the training sessions, we went over sample conflict of interest policies that were provided by the CoF and provided our comments on how they are structured, one that calls for the careful management of conflicts of interest and one that calls for their avoidance or elimination. In the comments of these two pieces you will see why the foundation would want the type of policy outlined and what shortfalls the sample policies have.  The bottom line, as you will see, is that conflicts of interest are always a tricky issue that can cause serious problems to emerge if not handled correctly.  The best approach for this type of policy is to be as meticulous as possible in defining what is and what is not permissible and to be as transparent as possible so as not to create any questions as to loyalties. And, in general, it is best to avoid conflicts of interest if possible and, where they are permitted, to do so only for the best interests of the foundation itself, not for the benefit of the board member/advisor.

Both the Council on Foundations and Board Source have produced good pieces on defining what constitutes a conflict of interest, how to avoid them and/or manage them carefully, and contain sample policies. Another good resource is the IRS tax code section 4941, which includes self-dealing prohibitions for foundations with non-profit status.

Never forget what you are investing for

In my latest Fiduciary Corner column for InvestmentNews, I discuss asset allocation and how diversification only makes sense in the context of the time horizon.  It is sometimes easy to forget the reasons we are doing this in the first place.  If you (or your client) are close to retirement and already have the necessary cash, it is time to declare victory and lock that success in, regardless of other opportunities that may have presented themselves. While diversification is still the best means of accumulating wealth, always remember the end prize and be prepared to grab it when it is in reach. In the end, you invest so that you have the cash when you need it, which is why determination of time horizon is the most important decision in our hierarchy of decisions:

Once you have determined the time horizon, you are prepared to move on to selecting asset classes and eventually to individual funds, and then adjusting accordingly as retirement approaches. Much of this is discussed in greater detail in the Formalize section of our Prudent Practices for Investment Advisors handbook.  The following links also give valuable insights into asset allocation:

• The SEC has a beginner's guide to asset allocation, diversification and rebalancing.
• An MSN Money column has similar advice with some specific examples.
• CNNMoney.com has a free asset allocation calculator.
• And, of course, our own web-based Tools include an Asset Allocation Optimizer utilizing New Frontier Advisors' Resampled Efficiency technique.

Click here to read the full article and if you like it, 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.