As the overall manager of the investment process, investment stewards have a responsibility to delegate to professionals roles they are not equipped to handle themselves. The regulated investment professionals to whom they turn for assistance in the management of a plan or portfolio are what we call investment advisors. We define investment advisors as "professionals who are responsible for providing comprehensive and continuous investment advice, including wealth managers, financial advisors, trust officers, financial consultants, financial planners and fiduciary advisers."
"Comprehensive and continuous" is the operative term here. There are many service providers, sales people, etc., who make their living servicing investment portfolios in some fashion, but not all of them operate as fiduciaries. Those who are giving ongoing advice to the stewards on the management of the plan are deemed to be fiduciaries. In that case, they will be held to standards of conduct as defined by the appropriate rules. (Note: The purpose of this post is not to go over in detail the standards of conduct for advisors, as that is what we do in this blog on a day-to-day basis. Rather, it is to put into context the overall role of the advisor in the investment process and fits into our "Fiduciary Basics" category. For more information on the rules for fiduciaries, start with our post on Practice 1.1)
Basically, an advisor can be engaged to fulfill any role that defaults to the investment steward. Whether that means engaging in a limited scope capacity, advising over the entire process while leaving discretionary decisions to the steward, or even being engaged to take discretion of all the steward's duties, it is critical that the scope of services is agreed upon in writing at the outset of the engagement, specifically addressing the assumption of fiduciary responsibility.
Unforunately for the investing public, it is not always evident who does or does not assume a fiduciary role. Investment advisors operate under a wide range of job titles and are governed by a fragmented and outdated regulatory structure. Non-fiduciary service providers often operate under job titles that include the words "advisor" or "consultant" and can even give "incidental" advice without assuming any fiduciary responsibility. An influential and controversial report by the RAND Corporation highlighted these issues when it found that even when explained to them, most investors still could not differentiate between fiduciary and non-fiduciary advisors. Also, because of the disjointed regulatory structure and lack of uniform advanced education requirements, even the advisors who are fiduciaries often have a limited understanding of the fiduciary code of conduct.
Clearing up this confusion and enhancing consumer protections are among the goals of financial regulatory reform that is currently being debated by Congress. It remains to be seen, however, just how effective new legislation will be. You can keep up to date with the progress of regulatory reform, which will have major implications on how advisors operate and how investors identify them, by following the "regulatory update" posts on our blog.
For more information on basic fiduciary responsibilities for investment advisors, check out the following resources:
- fi360's Self-Assessment of Fiduciary Excellence for Investment Advisors: http://safe.actifi.com
- fi360's Prudent Practices for Investment Advisors handbook: http://www.fi360.com/main/practices_sa.jsp
- The RAND Report on Investor and Industry Perspectives on Investment Advisers and Broker-Dealers: http://www.rand.org/pubs/technical_reports/TR556/
- Scott Simon, AIFA® describes the different flavors of investment advisors for Morningstar Advisor: http://advisor.morningstar.com/articles/article.asp?docId=17902&pgId=rss
- The definitions section of ERISA: http://frwebgate3.access.gpo.gov/cgi-bin/TEXTgate.cgi?WAISdocID=09927814470+0+1+0&WAISaction=retrieve
- The Investment Advisers Act of 1940: http://www.sec.gov/rules/extra/ia1940.htm
- The Department of Labor's Employee Benefits Security Administration: http://www.dol.gov/ebsa/
- Reish article on the hazards of investment advice to both advisors and participants: http://reish.com/publications/article_detail.cfm?ARTICLEID=457
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