fi360 Blog

Go to sources re: 403(b) plans

A question came in last week about fiduciary processes in the sponsoring and advising of 403(b) plans.  In their question, they provided some context:

We have many government entities as clients, and some of these have 403(b) plans not subject to ERISA.  They are structured in many cases such that each participant has a “stand alone” plan using insurance contracts.  Plan sponsors, historically, have no responsibility for the operation of these contracts, other than to submit contributions.  What references do you have for this type of environment? 

While we haven't focused directly on 403(b) plans, we were able to dig up some useful information for them.  Perhaps most pertinent to our audience is a white paper on Principal's website, including a section from our good friends Fred Reish and Bruce Ashton, that indicates the "no responsibility" assumption that has existed historically may no longer apply under recently updated regulations.  In fact, their conclusion is that most 403(b) plans will be subject to ERISA fiduciary provisions.

Speaking of Reish, they have touched on various aspects of 403(b) in their bulletins and reports.  To see the list, search publications on Reish.com for "403(b)".  Don't forget the parentheses and make sure you expand your search dates to "All".

We also found what looks like a pretty good source in 403bwise.com.  It includes information for participants, employers and advisors.  If you, like our question-asker are already familiar with the basics, I'd suggest skipping right to the page on new regulations, which itself contains links to all the pertinent links on the IRS's website. 

Finally, at our 2008 conference, we had Robb Smith as a speaker on 403(b) updates.  Our designees can access a recording of the session, by visiting the Online CE section of the designee portal.  For any non-members out there, we'll give you a sneak peak at his presentation materials and handouts.  It should be noted that this session was presented with knowledge of the then-pending new regulations, but before they had gone into effect, so some information may be dated.

Fi360 National Conference reminder--Portal now available

Just a reminder that the 2009 fi360 National Conference is approaching fast.  This year's conference is on May 6-8 in Scottsdale, AZ.  You can register using this downloadable form, and if you write on the form that you read about the conference on the blog, we'll take $100 off of the current registration price. 

The conference is a great event for fi360 members and non-members alike that brings together a great mix of industry professionals who are leading the way in advancing the fiduciary cause.  We recently launched our Conference Portal, which includes an interactive agenda with session descriptions and bios for our speakers, so check it out if you want to learn more about this year's speakers, including:

• Fred Reish, AIFA: Leading ERISA attorney who will look at the future of financial laws, regulations and fiduciary trends
• Bob Veres: Inside Information publisher and Financial Planning columnist who will lead the session, "Planning in Mayhem" 
• Roger Gibson: Best-selling author of Asset Allocation: Balancing Financial Risk will look at the relevance of diversification in today's financial landscape
• Jennifer Connelly and Bob Clark: The PR guru for investment professionals and Investment Advisor columnist team up for a session on leveraging public and media relations to stand out in the media
• Brian Hamburger: A leading compliance and regulatory consulting attorney will serve the role as mythbuster, proving and dispelling the greatest myths of regulatory compliance
• Marcia Wagner: Leading ERISA attorney who will be a part of multiple sessions looking at the most pertinent legal issues facing fiduciaries today
• Fellow bloggers Josh Itzoe, AIF and Susan Mangiero, AIFA
• New partner of fi360, Tom Kmak
• And more (apologies to those I've left out)

We hope you'll decide to join us, it really is a great event that allows us the chance to interact in person with all the people we normally only cross paths with electronically and via phone during the rest of the year and exchange new ideas and experiences with an elite group who are ahead of the curve in embracing the fiduciary role.  We'll also be holding pre-conference AIF training and fi360 Toolkit sessions at our host venue, so if you have been considering either of these fi360 services, this would be a great way to work it in to one trip.

If you have any questions about the conference, you can leave them in the comments section below, email us at conference@fi360.com or call us toll-free at 866-390-5080. 

Mark to Market for fiduciaries

In the Fiduciary Lessons Learned from Scoundrels and Thieves Webinar two weeks ago, Fiduciary Finding #4 was: Value isn't a matter of opinion.  We then spoke on the importance of mark to market pricing and independent valuations when dealing with non- or lightly-regulated securities in non-auction exchanged settings. 

One question sent in from our audience regarding mark-to-market was how can it be relied upon as an accurate indicator of asset value in severe market downturns or failures, as we've seen recently in the banking industry?

There has been much written on this criticism of mark-to-market.  A study from the University of Chicago's Booth School goes over the inefficiencies of mark-to-market vs. the inefficiencies of historical cost valuation, concluding, basically, with "it's complicated." The Seeking Alpha blog has a great post on the controversy and advocates a hybrid model of mark-to-market and historical cost. And, this article from Associated Content gives the short and sweet argument for why mark-to-market is harmful, especially when dealing with securities that are built for long term maturity.

While these are legitimate arguments and the potential for negative consequences are real, the bottom line is that marking to market provides full transparency that is in the best interests of investors and a necessity for fiduciaries. It takes a sophisticated investor or analyst to determine real value in these investments, and if mark-to-market pricing or independent valuations are not available, then a fiduciary probably doesn't have the necessary information to justify this type of investment.  We're not debating the effects of mark to market on the relative health of the financial industry, we're advocating for fiduciaries to make prudent investment decisions in a environment of full transparency.

In this article from Bloomberg, an analogy is made comparing mark to market to forcing a homeowner in California to value their house as a wildfire is approaching his doorstep, saying it would bankrupt them.  But the reality is that the banks were going ahead and selling that house while conveniently omitting the fact that the building was already burning.

Other Resources:

• The SEC's recent study on mark to market, which includes extensive discussion of SFAS No. 157, which was another question from the Webinar.
• The Financial Accounting Standards Board's Summary of Statement No. 157

* * *

Check back as we answer more questions from the webinar and leave your thoughts in the comments below.

Press Release: Partnership with Fiduciary Benchmarks

FIDUCIARY BENCHMARKS AND FIDUCIARY360 ANNOUNCE PARTNERSHIP

March 17, 2009 (Portland, OR and Pittsburgh, PA) – Fiduciary Benchmarks, Inc. (FBi), the retirement industry’s premier benchmarking organization, and Fiduciary360 (fi360), the global leader in fiduciary insights, today announced formation of a new partnership. The collaboration will offer fi360’s designees and analytical and reporting software subscribers discounts to all of FBi’s annual plan fee, service and success measure benchmarking via FBi’s comprehensive benchmarking reports.

"FBi is breaking new ground and providing a service that offers the opportunity for greater transparency and valuable, practical information that hasn’t been readily available,” says Blaine Aikin chief executive officer of fi360. “Access to this information complements our members’ ability to deliver a fiduciary standard of care.”

FBi is establishing the retirement industry’s largest database of non-proprietary plan data that is aggregated and analyzed to provide Financial Advisors, Consultants, Recordkeepers and the plan’s they serve with fee, service, and success measure benchmarking information, including:

• Complete fee transparency
• Fee comparison against a benchmark universe of plans
• Service comparison against a benchmark universe of plans
• Success measure comparison against a benchmark universe of plans
• Plan complexity and outsourcing benchmarking
• Best practices and fiduciary oversight benchmarking
• Satisfaction survey benchmarking

“Fi360 has aggregated the premier group of fiduciary-focused intermediaries so there were obvious synergies between our organizations,” says Tom Kmak, CEO of FBi. “As they enter plan data for benchmarking, the robustness of our database benefits from their contributions"

The retirement plan industry has more than doubled in the past 10 years, growing to 780,000 defined contribution plans with more than $2 trillion in assets. The industry’s rapid growth, which is projected to reach $15 trillion in assets by 2015, and the complexity of investment fee structures for defined contribution plans, has led to increased legislative and regulatory activity and a 250% rise in fiduciary insurance premiums since 2000

“Fi360’s designees and subscribers are already following best practices for investment fiduciaries and now can add complete fee, service and success measure benchmarking to their practices,” says Craig Rosenthal, FBi senior vice president, advisor sales & service.

In addition to partnering to offer benchmark reports to fi360 designees and tools subscribers, FBi CEO Tom Kmak will be speaking at the 2009 fi360 National Conference and the companies are reviewing additional potential collaborations including new product development, research and benchmarking training.

# # #

About Fiduciary Benchmarks
Fiduciary Benchmarks, Inc. (FBi) is the industry’s leading provider of comprehensive qualitative and quantitative benchmarking for defined contribution plans. Founding partners include Tom Kmak, former CEO of JPMorgan Retirement Plan Services, Ron Eisen, President of Investment Management Consultants, and Olena Berg Lacy, former Assistant Secretary of Labor and currently Director and Senior Advisor for Financial Engines. For more information about FBi, please visit www.fiduciarybenchmarks.com.

Now is the time for a fiduciary standard

On Friday, I stood with the Vanguard Group's founder, Jack Bogle, and spoke on the need for anyone offering financial advice to be held to the fiduciary standard. The current economic climate has only added to the public distrust of financial services representatives, especially when compared to professionals such as doctors, nurses and clergy.  And yet, after our physical and, for some, spiritual health, our financial well-being is probably our highest priority.  In order to elevate the trust in our industry to the levels of these "classic" fiduciaries is for legislative and regulatory reform to fully adopt the fiduciary standard and clearly place the interests of investors above all else.

My new Fiduciary Corner column in InvestmentNews covers the basics of my remarks, including the differences between a suitability standard and a fiduciary standard, why a structural fix isn't enough, and how lowering the bar below a fiduciary standard isn't acceptable. 

Here also are links to more information on my and Mr. Bogle's remarks, both at the press conference and the IA event (some sites may require registration to view full articles):

• Mr. Bogle's conference remarks (from his blog)
• Financial Planning (via Money Management Executive)
• InvestmentNews
• Investment Advisor
• Press release and supporting documents (See March 13, 2009)

Check back as we update the list above and make sure to read the full article at InvestmentNews.com.  If you like it, make sure you click the "Recommend" button at the start of the article.

Press Release: Blaine Aikin and John Bogle call for fiduciary standard

INVESTMENT INDUSTRY LEADERS’ MESSAGE TO CONGRESS: “STOP THE HEMORRHAGING ‘TRUST’ DEFICIT IN THE CAPITAL MARKETS; ENACT A FIDUCIARY STANDARD NOW”
Bogle, Aikin Support Growing Industry Movement Urging Investment Advice Providers be Legally Held to Higher Ethical Standard; Put Clients’ Interests First

WASHINGTON - Two prominent leaders in the investment industry joined forces today in calling on Congress to enact federal legislation to put a demanding fiduciary standard in place for all those providing investment advice and/or managing other people’s money – and to do so swiftly.

Vanguard Mutual Fund Group Founder John C. “Jack” Bogle and Fiduciary360 (fi360) President/CEO, Blaine F. Aikin, today described the “deficit” of public trust in the capital markets as massive, and a growing barrier to a full market recovery. Bogle concluded, “Investors will not return to the markets in force until they trust them.” Enacting and fully and publicly enforcing a tough fiduciary standard will go a long way to restore public trust in both Wall Street and in regulators. Their remarks were made during the IA Compliance Summit 2009 being held at the Omni Shoreham Hotel in Washington, D.C.

Recent public opinion surveys by The Harris Poll were cited. According to Harris, 71 percent of the public believes most people on Wall Street ‘would be willing to break the law if they believed they could make a lot of money and get away with it.’ In another Harris survey conducted just last month, Harris found that 71 percent of the American public also gave the SEC negative ratings.

Bogle has earned a reputation on Wall Street for his criticisms of the mutual fund industry’s relatively high costs to investors. Today, Bogle drew a vivid picture of the industry background leading up to the current financial crisis and how much of it could have been avoided with the proper safeguards in place. He concluded that the enactment of a fiduciary standard is a concrete and practical measure Congress can take and one that President Obama should support in the spirit of his call for greater responsibility. "The President has called for a new era of responsibility; this should include the financial services industry.”

Aikin further pointed out some of the significant distinctions between a basic suitability or “commercial” standard required of some advisors and brokers in the industry and the far tougher requirements of a fiduciary standard that guides most fee-based and independent advisors. “The difference between a fiduciary standard and a commercial standard is significant. It’s a difference of ‘kind’ not just ‘degree.’ It could be compared to the difference between a medical doctor and a drug company sales rep. Your doctor’s responsibility is to do what’s best for you, the patient. The drug company sales rep’s job is to sell medications.”

Bogle concurred, saying, “Surely it should be clear to clients whether they are relying on a trained investment professional paid solely through fully-disclosed fees, or a sales rep who sells the products and services of the company he represents, whether life insurance, annuities, mutual funds or anything else.”

Aikin also highlighted lessons learned from recent industry scandals such as Madoff, Stanford and others, explaining that had established rules designed to meet a fiduciary standard been more carefully and fully enforced, much of the wrongdoing could have been detected early on, saving investors billions of dollars in lost value and lessening the severity of the current financial crisis.

“A fiduciary standard is critical to restoring trust in capital markets and intermediaries,” said Aikin. Only a fiduciary standard requires complete transparency, a level playing field and business and investment practices designed to put investors’ best interests first, ahead of the advisor’s. Restoring that trust is the only way to truly stabilize the markets and sustain a viable and long-lasting recovery.”

John C. Bogle is founder and former CEO of the Vanguard Mutual Fund Group. Blaine F. Aikin, AIFA^®, CFA^®, CFP^® is President/CEO of fI360, a Sewickley, Pa-based firm that provides training, software tools and resources to investment professionals to guide them in meeting a fiduciary standard.

###

ADDITIONAL DOCUMENTS

• Fi360 Tearsheet
• CEO Blaine Aikin's Bio
• Blaine's Statement
• The Fiduciary Distinction
• Background Paper

John Bogle to Speak with Blaine Aikin on the Urgency to Enforce a Fiduciary Standard to Bolster Investor Confidence in the Markets

CEO Blaine Aikin and Jack Bogle, founder and former CEO of The Vanguard Group will hold a press briefing this Friday at 10:30 AM at this week's IA Compliance Best Practices Summit on the urgent need for regulators to enforce a fiduciary standard for all financial advisers and brokers, as a way to restore trust and confidence in the financial markets shattered by risky investments, bad loans and investment schemes created by Madoff, Stanford and others. More information about the session can be found at: www.fi360.com/main/pdf/alert_IASummit031109.doc

Statements from the session will be available after 11:00 AM on Friday at www.fi360.com/main/pdf/release_IASummit031309.doc

Fiduciary Links: "Lessons Learned from Scoundrels and Thieves" Webinar Edition

Our latest Resources Webinar generated a number of inquiries looking more for information and sources than direct questions to fi360, prompting this Webinar edition of Fiduciary Links:

• Final slides used in the Webinar and, soon, the recording of the event are both available from the Resources Webinars page.
• The Trust Index Study referenced on slide 13 is available here. Also, the news sections from both of the authors, the University of Chicago Booth School of Business and the Northwestern University Kellogg School of Management both feature frequent updates to their studies that are both timely and informative.
• Attendees recommended RegEd for compliance training and the book "Hedge Fund Due Diligence" by Randy Shain (fi360 is not familiar with either's content, and this does not serve as our endorsement). 
• In response to the flood of recent scandals that prompted the Webinar, Finra just announced the creation of the Office of the Whistleblower to "expedite the review of high-risk tips by FINRA senior staff and ensures a rapid response for tips believed to have merit."
• The latest on what will happen to Stanford-serviced accounts is that Stanford most likely will be unable to continue as a broker-dealer and the court-approved receiver is looking for ways to transfer accounts to other agents, brokers, etc. upon their releases, which are just beginning to trickle in.
• The best news coverage or information on current status that I can find on the scandals mentioned:
  • Madoff: Wikipedia, NYT, and the Madoff Trustee Site
  • Stanford: NYT, Wikipedia and the Receivership page
  • Bear Stearns: Client info from their home page, Wikipedia, and NYT
  • Westridge: NYT and PPG
  • Ohio Workers Compensation Fund: NYT and Wikipedia
  • Satyam: NYT

Hopefully these links provide good further reading on the topics covered in the Webinar.  Stay tuned throughout the week as we answer more questions from the Webinar and make sure to leave any links you may have in the comments section below or let us know what other information you are looking for and we'll see what we can find.

The future of Modern Portfolio Theory

This post is our first stemming from yesterday's Webinar, "Fiduciary Lessons Learned from Scoundrels and Thieves."  We had several variations on the question of "Will Modern Portfolio Theory hold up going forward?" 

Winston Churchill said “Democracy is the worst form of government except for all those others that have been tried.”  That basically sums up my view of Modern Portfolio Theory; although, unlike democracy, a primary attraction of MPT is its simplicity for implementation (rather than being acknowledged as the way things ought to be).

MPT is clearly flawed. It is overly simplistic in its assumptions. Returns distributions are not bell shaped. Anomalies exist. Input variables (risk, return, and correlations) are not known in advance with certainty. The list could go on and on.

Unfortunately, alternative theories have their own limitations. The most profound problem with most alternatives is that they are impractical to implement. Take the arbitrage pricing theory, for example. It makes perfect sense that portfolio returns will be influenced by multiple macro-economic factors. But what factors? How should the factors be weighted? Are their impacts linear? Are they stable over time? This list also goes on and on.

This debate over MPT is not merely an academic exercise for advisors. As fiduciaries, advisors are required to apply generally accepted investment principles. The major pieces of legislation governing fiduciary conduct (ERISA, UPIA, UPMIFA, MPERS, etc.) and the case law built over time clearly lean heavily on the concept of MPT to determine generally accepted investment principles. Pioneering advisors who wish to radically depart from what is “general accepted” to adopt untested (yet perhaps promising) new theories do so with some degree of fiduciary risk.

So where does this lead us? Market theories and practices evolve and the law governing fiduciary conduct will follow along. Old theories can be refined and new ones can be scrutinized.  The most important attribute of an outstanding professional advisor is exceptionally good judgment. Let’s lay out the facts and see where our collective best judgments take us.

* * * * *

Check back as we answer more questions from yesterday's webinar and leave your thoughts in the comments below. 

Fiduciary Lessons Learned from Scoundrels and Thieves

Today's Resources Webinar looked at eight "Fiduciary Forensics Findings" found by looking at the recent string of financial scandals.  These eight findings serve as tips and red flags for fiduciaries to avoid these situations and possibly help prevent them.  Those eight findings are:

1. The best defense is a great IPS
2. Rely on RFPs, not references when choosing service providers
3. Self-custody is a big red flag
4. Value isn't a matter of opinion
5. Trade records are telling
6. Alternatives aren't for everyone
7. Key systems should be audited
8. Heuristics can help

You can download the final slides by clicking here and a recording of the event will be available within the next couple of days both here on the blog and on our Webinars page.  If you have any feedback or remaining questions from the Webinar, make sure you leave them in the comments section below or email them to resources@fi360.com.  For those of you who submitted questions during the webinar, we'll try to address as many of those as possible here on the blog in the coming days.

We appreciate everyone's interest in this Webinar and remind you to keep checking back to the Webinars page for information on our next one, tentatively scheduled for the first week of June.