We do the right thing.
A fiduciary is someone who acts in a position of trust on behalf of, or for the benefit of, a third party. Fiduciaries may hold title of property for the benefit of another person, exercise discretionary authority or control over assets, or act in a professional capacity of trust and render investment advice. This definition includes trustees, investment committee members, investment advisors, money managers, custodians, consultants, and potentially accountants, attorneys, and actuaries.
Fiduciaries are charged with managing the investment of funds in accordance with specific standards of care. The standard to which the law holds fiduciaries is a process standard, not an outcome standard. It is literally "how you play the game" that counts. The reasoning is that, if you follow the proper process, better outcomes are likely to occur. The best possible outcome considers more than just the investment return of your portfolio. It involves the right relationship between risk and return, proper portfolio diversification, the avoidance of conflicts of interest, and the fulfillment of other fiduciary standards.
At times, our clients may also be serving in a fiduciary capacity, for example as investment committee members or trustees of foundations and retirement plans. In these situations, we educate our clients about fiduciary standards of care. We focus their attention first and foremost on the investment process. We review their current practices to identify investment or procedural risks. Our expertise in asset allocation also plays an important role in meeting fiduciary obligations. The strategic diversification of assets is a critical requirement of fiduciaries, and lack of adequate diversification is cited as one of the most common breaches of fiduciary duty.
Fiduciary Standards of Care*:
- Document investment policies and the process used to make investment decisions
- Diversify portfolio assets in accordance with objectives and specific risk/return profile
- Use "prudent experts" to make investment decisions
- Control and account for all investment expenses
- Monitor the activities of service providers - i.e. money managers, custodians
- Avoid conflicts of interest
Common Mistakes Made by Fiduciaries*:
- Inadequate knowledge of fiduciary responsibilities
- Inappropriate asset allocation
- Lack of investment policy statement
- No money manager due diligence process
- Failure to monitor money managers
- No accounting or control of expenses