Many financial services professionals, particularly investment advisors and managers, have realized the importance of fiduciary processes and the beneficial impact they can have for themselves and the investors they serve. Many more are coming around as a financial crisis and regulatory reform has changed the landscape. But can the same be said for investment stewards? Have the benefits of implementing fiduciary processes resonated enough to motivate them to make changes? An email we received last week from an advisor who was trying to convince a prospective client to engage him to conduct a fiduciary review highlighted suggests not.
The prospective client, an investment steward for a retirement plan, had told them, "You've spent a lot of time over the what, how, when, where and who of fiduciary processes - particularly in the investment arena. The one thing I'm not catching is the why." This statement gets to the heart of what many advisors struggle with; how can I convince prospective clients (plan sponsors and participants, foundation or endowment investment committee members, trustees, and retail investors) that incorporating a prudent investment process is important? Several thoughts were either articulated by the email originator or come to mind from previous conversations we have had related to this topic.
Through this and other discussions, we focused on the following arguments for stewards implementing a prudent process:
- Helps to avoid complaints for breach of fiduciary responsibility that may lead to litigation or, in the case of brokers, arbitration
- Reduces liability by helping to uncover investment or procedural risks
- Helps ensure compliance
- Should lead to better investment performance
The first three points indicate that the process can prevent bad things from happening and the fourth focuses on the potential and significant positive result. We mentioned in a previous blog post that adherence to the fiduciary practices can lead to better performance. With limited data to support this claim, we suggest discussing particular practices (S-1.4, 3.1, 4.1, 4.2, 4.4, and 4.5 immediately come to mind) with the skeptical steward to logically explain why one would expect that implementing a prudent process by adhering to the fiduciary practices will generate improved performance. However, we expect there are other things we have not thought of.
For that reason we would love to hear from you. If you are a financial service professional, have you been able to motivate the investment stewards with whom you interact to embrace the notion of improving their investment management process? If so, how did you do so? Investment stewards that are reading this blog post have probably already decided that carrying out your fiduciary responsibility is a high priority. What was it that got your attention and drove you to establish and maintain a prudent investment process?
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