Intro to the Prudent Investment Practices

Not only do investment fiduciaries have a major role in the fiscal health of individual investors and of our country, they also carry major personal liability. And yet many fiduciaries either are unaware of the full extent of their responsibility or do not follow a defined process. Their success or failure is ultimately judged by the process they follow, rather than the specific decisions they make. For this reason, the Prudent Practices for Investment Fiduciaries were introduced as a guide for an investment process that covers all of the major responsibilities of an investment fiduciary. 

This is the first post in a new series we're introducing to the fi360 Blog, in which we'll highlight the individual Practices in order, beginning with today's post on the formation of the Practices. In the meantime, you can always visit the Practices page from our website to learn more and download PDF copies of the handbooks that detail the Practices, as well as other supporting documents and information.

The Practices were formed first by looking at the the major pieces of U.S. law governing investment fiduciaries: ERISA, UPIA, MPERS and UPMIFA. From these four laws, seven common principles, or, as we call them, Precepts, can be derived that address the basic tenets of fiduciary responsibility: the duty of loyalty, exclusive purpose and utmost good faith.

Another important influence on the structure of the Practices is the idea of a standard. Using the International Organization for Standardization (ISO) as a model, standards are a body of knowledge that are substantiated and authoritative. Standards are comprised of Practices that detail the application of the Precepts, with each Practice further detailed by Criteria for the implementation of the Practice. Specifically, we have adapted the ISO 9000 standard as an organizational model for the Practices, which is a quality management system that stresses continual improvement (see graphic below).

Using the Precepts as the guiding principles; legislation, regulation and case law for the specific requirements; and organized around the four-step investment management process, we developed the Practices and supporting Criteria, forming a complete Standard. The objectives of the Practices are to define a prudent process that is comprehensive, but not cumbersome, provide a checklist approach to guide any investment fiduciary in the pursuit of fiduciary excellence, and enable any organization to assess its fiduciary process.

The Practices are detailed in the handbooks Prudent Practices for Investment Stewards and Prudent Practices for Investment Advisors, each book containing the same Practices, but with specific information for the implementation of the Practices for the different types of investment fiduciaries. There is also a Prudent Practices for Investment Managers handbook with a different set of Practices for money managers based on best practices. All of the Practices can viewed in the Periodic Table below (click on the image for a larger view), which shows both sets organized within the quality management system.

The Practices are available to the public and intended for all investment fiduciaries who want to strengthen their fiduciary processes. Legal citations in the handbook were provided by the law firm of Reish & Reicher, with full legal substantiation provided in a separate Legal Memoranda handbook. The handbooks also have been reviewed by the Personal Financial Planning Division of the AICPA.  Implementing and demonstrating adherence to the Practices limits liability as a fiduciary, as they help establish evidence that a prudent investment process is being followed and ensure that all fiduciary duties and responsibilities are being addressed by the various parties in the investment process, among other benefits.

This is only a brief introduction to the Practices and we encourage you to download copies of the handbooks for a more thorough introduction and to review the Practices themselves. If you have any questions, let us know either in the comments below, or by emailing us at blog@fi360.com. 

Next month, we'll look in detail at Practice SA-1.1, "Investments are managed in accordance with applicable laws, trust documents, and written investment policy statements."

Comments

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