fi360 Blog

Fiduciary Links

We haven't done a fiduciary links post in a while, so here we go:

• Breaking news from the Pension Governance blog: "PRUDENT PROCESS IS IMPORTANT"
• The new blog Brightscope wades through some of the public comments on 408(b)(2) disclosure rules
• Fi360 CEO Blaine Aikin is quoted in this Financial Planning magazine article on investment policy statements
• An NASAA press release today proposed a legislative agenda for the new Congress that includes a fiduciary standard of care due from all investment professionals
• The most recent issue of the Journal for Financial Planning includes an article that reminds to remember why we invest in the first place and how to use that mindset to avoid bubbles
• The Health Care Financials blog is new to our radar. Check back soon for the email interview I participated in with them, trying to clear some of the confusion on who is a fiduciary and what that means, primarily to their audience of medical professionals, but applicable universally.
• The Financial Planning Council released a Statement of Understanding on how they plan to work together regarding regulatory issues, including a fiduciary mandate for financial planning and making it easier for the public to identify "financial planners".  These are subjects touched on in my Health Care Financials blog interview.
• AIF designee David John Marotta wrote an article for his local paper about the importance of not allowing your advisor to act as their own custodian.  Also on the subject of custodians, Mike Patton's latest blog entry details how he chose his new custodian.
• Bloomberg takes a look at Madoff and the intensifying debate on who can offer investment advice and how it should be regulated
• Imprisoned NFL quarterback Michael Vick sues his former financial aide for breach of fiduciary duty

I had an ulterior motive for including the NFL-related post last.  With the Super Bowl upon us this weekend, we at fi360 want to make it clear how we feel about this year's matchup:

Go Steelers!

Update on the PPA investment advice rules

Just last week we hit twice on (see here and here) the investment advice rules of the PPA going forward despite some pretty heavy criticism (including from us) that the DOL was basically regulating that conflicted advice is permissible. 

Well, the new rules did hit the Federal Register on the 21st.  But, just a day before the inauguration, it was announced that all pending regulations were being halted for review by the new administration.

I was a little uncertain what this meant for the investment advice rule.  Does being on the Federal Register place it past the "pending" stage?  Or did the fact that it wasn't to be effective until March mean that it was eligible for for this freeze?

Well, an informative article from Pensions and Investments has explained it clearly. The rule is affected, is on hold indefinitely, and, in the opinions of most of those quoted for the piece, not likely to ever go into effect in its current form. 

This is the right move from the new administration and we hope to see a new version soon that does eliminate the possibility of individual advice coming directly from the mutual fund companies themselves. It never made sense to create even more confusion as to if the source of your investment advice is conflicted or not.

Stay tuned for more on this topic.

What fiduciaries can learn from Madoff

We've already touched some on the Madoff scandal here on the fi360 blog.  In my newest Fiduciary Corner column on InvestmentNews.com, I take a deeper look at six areas where a fiduciary, acting with proper skepticism, would have sought verification of key information. Before making an investment with Madoff, a proper, but relatively basic, due diligence review would have found the following reasons not to invest with the firm:

• Acting as his own custodian
• Lack of well-known accounting firm
• Unreliable performance reports
• Success levels that didn't reconcile with reasonable benchmarks
• Appearance of purposeful avoidance of regulatory oversight
• No recognized fiduciary standards

You can find plenty of extensive sources with red flags that existed with Madoff.  The Markopolos letter and our friend Susan Mangiero's blog being two good ones.  But it wouldn't have taken an expert to avoid getting caught in a scandal like this one, just an attention to fiduciary processes and a healthy dose of skepticism. 

Read my full article at InvestmentNews.com.  If you like it, make sure you click the "Recommend" button at the start of the article.

Some thoughts on fiduciary responsibility in light of the Obama inauguration

In his inauguration speech today, President Obama told us that, "Those of us who manage the public's dollars will be held to account -- to spend wisely, reform bad habits, and do our business in the light of day -- because only then can we restore the vital trust between a people and their government." 

What he was saying is that government officials have a fiduciary duty to their constituents. (If only he could have actually used the "f" word!)  The three items he calls for roughly could be equated to controlling fees, instituting a defined process, and giving full transparency, three of the primary tenets of fiduciary responsibility. It would be nice if every politician listening took this to heart and if the new leadership applied the pressure and accountability necessary to make it a reality.

We've already seen signs in the past week that we shouldn't expect a continuation of the status quo in terms of retirement regulation. 408(b)(2) is being pulled, presumably for even stricter disclosure requirements from new leadership, and the investment advice rules of the PPA are going forward, with George Miller already promising to see to it that they don't.  I'm hopeful that these moves signal a stronger imperative for disclosure.

The best part of an inauguration or any change in leadership is the potential that is there for change in the right direction, but potential is worth little if it becomes unfulfilled. So let's enjoy the honeymoon period but keep our own "watchful eye" on Obama and hope that a culture of fiduciary responsibility really does take hold in government and continues to grow in the investment industry. 

PPA final investment advice rules coming soon

Friday was a big day for some of the pieces of regulations we've been waiting on. 

As we posted on the blog Friday afternoon, 408(b)(2) rules are apparently being pulled altogether.  You can stay tuned for the fall out from that development sometime after the new administration takes office.

Also on Friday, the DOL announced that final rules for investment advice for 401k plans and IRAs would be published this Wednesday.  The rules will include the controversial "regulation that implements the new statutory exemption for investment advice added to the Employee Retirement Income Security Act (ERISA) by the Pension Protection Act (PPA) and a related class exemption."

The exemption has caused a fairly vocal opposition.  Soon after the regulations were proposed, our CEO, Blaine Aikin, wrote in his Fiduciary Corner column that the exemption allows commission-based brokers to function as fiduciaries and not give up their conflicted positions. Rep. George Miller (D-CA) has been the most vocal opponent within government. And, the majority of the dissapproving comments in the public commenting period on these rules focused on the allowance of conflicted advice. 

If you go to the DOL's EBSA proposed rules section of their website and navigate around, you can find the most of the available information on the rules thusfar.  Otherwise, we'll see on Wednesday if any changes have been put into place since the proposed rules were first published and public hearings were held. 

We will leave you with this advice from Blaine's original column on the subject, "Advisers who fully em-brace a fiduciary standard of care and consistently apply fiduciary practices don't need exemptions from prohibited transactions, be-cause their business model is designed to avoid them."

DOL Pulling 408(b)(2)

We at fi360 wanted to pass on that we received word earlier today that the DOL is expected to withdraw the 408(b)(2) regulation from consideration. In addition, the regulation on disclosures to participants is expected to be withdrawn.

According to Fred Reish's report to us late this afternoon, it appears that the consequence, in both cases, will be that the regulations will be re-worked by the DOL after the new Assistant Secretary has been appointed. However, at this time, the specifics are unpredictable.  In addition, this opens the door for legislation sponsored by Congressman George Miller, which could be more burdensome than the regulations would have been. 

Check out this bulletin from Fred Reish and Bruce Ashton earlier this month anticipating that the regulation might be withdrawn and what that would mean going forward.

Please check back here to the blog for more information as it becomes available.

 

The Satyam scandal and the risk of emerging markets

Last week, we looked at the Madoff scandal and how following a fiduciary process would help you avoid getting caught in it or a similar scheme.  Also during last week, the Satyam scandal broke in India, where the chairman of the outsourcing company admitted he had been cooking the books to overstate their performance.  Much of the attention stemming from the scandal here has been focused, obviously, on confidence in India's corporate governance culture, or lack thereof, and lack of confidence in emerging markets in general. 

Now the question for you, as a fiduciary, is what to do regarding emerging markets?  Well, I think that what this latest scandal highlights is just why emerging markets are considered the higher risk proposition to begin with. 

Practices 2.1-2.3 of our Prudent Practices for Investment Advisors handbook outline how to identify risk, return and time horizon in establishing proper portfolio diversification. Practice 2.4 then states, "Selected asset classes are consistent with the risk, return and time horizon." The basic premise is that asset classes should be selected in the context of how they advance a client's investment goals.  If emerging markets are to be used, it should be understood just how risky they are and the potential for the "worst-case" scenario to unfold is weighted appropriately.

In terms of practically applying those Practices, the two questions as it relates to emerging markets are how good are your capital market inputs and when does it make sense to add them as an asset class.  As references from fi360, our Asset Allocation Optimizer uses New Frontier Advisors' capital market inputs (which are due to be updated by the end of January, so you may want to check back to this link at that time) and our AIF Training program includes a slide on suggested sequence for adding asset classes, both of which demonstrate the high level of risk we associate with implementing emerging markets into a portfolio. When markets are particularly volatile or industry-affecting events occur, your may want to reevaluate your inputs and asset classes selected. 

What all this means is that while the Satyam scandal has given investors a lot to think about in regards to India and emerging markets in general, a well-diversified portfolio built using sound fiduciary processes is not going to overly depend on the use of emerging markets, if they are even used at all.  Emerging markets are, by definition, coming from areas with high levels of volatility and political, governance, and other risks, risks that can come to fruitiion in regards to investment return in scenarios such as this one. So, before attempting to implement emerging markets into a fiduciary portfolio, you should have an understanding of their context within the Formalize Step of the Fiduciary Quality Management System.

Press release: OppenheimerFunds Selects Fiduciary360 to Provide Tools for Evaluating Funds

PITTSBURGH – January 6, 2009 – Fiduciary360™ (fi360), an organization promoting a culture of fiduciary responsibility and improving the decision-making processes of investment fiduciaries, will provide on-going services to OppenheimerFunds, Inc. (OFI), a leading New York-based asset management company.

Fi360’s Platinum Toolkit will be used by retirement and retail wholesalers, individual asset managers, and analysts at OppenheimerFunds.  Under this agreement, participating professionals will have access to a wide array of research, analytical, and reporting tools and resources, including such insightful services as Web-based fund comparisons, customizable due diligence criteria, and performance measurement indexes.

OppenheimerFunds also will use the highly regarded fi360 Fiduciary Score™ to analyze performance.  This fi360 metric has become a valuable way to further transparency for investors and to comply with regulations, such as the Pension Protection Act.

Fi360 President/CEO Blaine Aikin says that his organization and OppenheimerFunds share a strong commitment to fiduciary responsibility.   “It is essential that today’s investment professionals understand the responsibilities of fiduciaries.  Our fi360 Toolkits provide OppenheimerFunds with powerful Web-based software to help them direct prudent investment processes.  By utilizing our tools, they are better able to evaluate many actions, from asset allocations to due diligence.  We at fi360 are proud to partner with OppenheimerFunds and to enhance their customer service and fiduciary obligations.”

A fiduciary look at the Madoff scandal

With all we are reading in the news about the Madoff scandal, the first questions that come to mind are just how did he get away with this for so long and what can be done to make sure you don't find yourself caught up in this type of fraud?

The short answer to the first question is that it is remarkable he got away with it for such an extended period of time. Anyone who took the time for proper due diligence was finding ample reason to avoid investing with Madoff (see this CNNMoney.com article on who wasn’t a Madoff victim). And, now, stories are emerging everywhere of missed opportunities beginning as early as 1992. The 2005 Markopolos letter to the SEC is especially astonishing as it correctly outlines the impossibility of Madoff’s performance and correctly identifies it as a Ponzi scheme and yet resulted in no substantive SEC action.

Acting as his own custodian and avoiding any kind of transparency look to be a huge part of how he managed to get away with it for so long, but also the most prominent red flag that should preclude an investment fiduciary from choosing this type of investment. Both an ABC News article and a Kiplinger’s column look at how acting as his own custodian should have been the first and clearest sign that something wasn’t right.

Practice 3.4 in the Prudent Practices for Investment Stewards handbook (and its legal substantiation) tells you of the fiduciary duty in this regard, “A due diligence process is followed in selecting service providers, including the custodian.” The lack of an independent, well-known custodian would not withstand a reasonable due diligence process and you would quickly move on.

If you want to learn more about the Madoff fraud, the most comprehensive look at the entire scandal that we found is from Bernard Madoff’s Wikipedia entry. It is clear and well written and includes extensive citations, so you can find more detailed information on the parts of the article that interest you most.

Fi360 designees and subscribers making their mark

401k Wire has completed its annual "100 Most Influential People in Defined Contribution" list and it includes a large number of AIF/AIFA designees and Tools subscribers. 401k Wire does require a subscription to read, but you can see the list via the above link.  Fi360 would like to say congratulations to the following individuals and thank them using their positions of influence to further the fiduciary cause.

• #2 - Fred Reish, AIFA, fi360 Conference speaker
• #19 - Don Trone, AIFA and fi360 co-founder
• #32 - Marc Zimmerman, AIF
• #33 - Yaqub Ahmed, AIF
• #40 - Tommy Thomasson, CEO of DailyAccess Corp., a CEFEX Certified Recordkeeper
• #44 - John Kim, AIF
• #48 - Bruce Ashton, AIFA
• #61 - Al Otto, AIFA, Tools subscriber
• #58 - Mike DiCenso, AIF
• #60 - Dorann Cafaro, Tools subscriber
• #67 - Patrick Rieck, AIF
• #83 - Charlie Epstein, AIF, Tools subscriber
• #84 - David Hinderstein, AIF
• #86 - Chad Larsen, AIF
• #89 - Randy Long, AIF
• #91 - Gregg Andonian, AIF, Tools subscriber
• #95 - Barbara Delaney, AIF
• #96 - Mark A. Davis, AIF

In addition to these designees and subscribers, we'd like to congratulate the following people who we also consider friends of fi360:

• #14 - Brian Graff
• #17 - Steve Saxon
• #28 - Vince Giovinazzo
• #46 - Dave Musto
• #75 - Lou Harvey, fi360 Conference speaker
• #76 - Marcia Wagner
• #80 - Phil Chiricotti
• #99 - Jerome Schlichter

There were also 35 AIF/AIFA designees on the honorable mention list.  Between the designees, subscribers, and friends of fi360, 25% of the most influential people in defined contribution have an affiliation with fi360.  This speaks volumes to the space AIF/AIFA designees and Tools subscribers occupy as leaders in moving the industry in the right direction.  We can't wait to see next year's list and the positive impact these individuals and all fi360 members have on the industry in 2009.

If you are a designee or subscriber who has received an honor or recognition for your practices or impact on the industry, make sure you let us know at blog@fi360.com.