It is easy to understand why the Financial Services Industry and the Legal Profession struggle with fiduciary concepts. For the most part, the relationship between the Financial Services Industry and the client/participant has been nurtured by suitability. Subsequently, a culture of suitability has been the impetus for behaviors in accord with its legal implications, interpretations, applicable policies and procedures, and incentive design. Rather than requiring a firm place its interests below that of the client/participants, the suitability standard only details that the broker-dealer must reasonably believe that any recommendations made are suitable for clients/participants, in terms of each client’s unique circumstances. Inevitably, since the polestar of the Financial Services Industry is suitability, then its fulfillment is manifested in the results.
Like the Financial Services Industry, it seems that the Legal Profession is preoccupied with results. This is evident in their Class Action filings against Employer Sponsored Retirement Plans.
Common Allegations in Class Action Filings
. Unreasonable fees/operating expenses/expense ratios (including wrong class of shares);
. The chosen investments performed poorly relative to some of the other instruments available;
. Inadequate disclosure of fees and revenue sharing;
. Excessive administrative and record-keeping fees.
In contrast to a culture of suitability, ERISA and The Department of Labor’s recent fiduciary responsibility clarification tries to promote a culture wherein all participants labeled fiduciaries must legally operate under a standard that puts the clients’ best interest first. In both teachings and spirit, Trust Law instructs ERISA. Trusts are characterized by the relationship between the trustee and the beneficiary of the assets dominated by the former’s fiduciary duties to the latter. The relationship between the trustee and beneficiary is measured and recognized not by the result of the interaction but the sincerity of the behaviors that yield the result. From this viewpoint, perhaps, the allegations can be revised and categorized to more accurately reflect ERISA’s intentions:
Breaches of Prudence
. There was no viable methodology to choose investment options
. There was no viable oversight methodology to review performance/expenses of chosen
(existing) investment options
. There was no viable plan to communicate with participants; poor communication
. There was no viable methodology to choose administrators and record-keepers .
The evidence seems to demonstrate that the Financial Services Industry and Legal Profession have fallen into a “comprehension gap” created by their respective cultures. The gap can only be filled by those who have the Subject Matter Expertise and functional experience with the proper tools and that is exactly what is expected.
If “a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and…with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity…would use in the conduct of an enterprise of a like character and with like aims…”1
Identifying and understanding the fundamentals and expertise required to fulfill fiduciary duties is paramount. In simplicity, functionality, and application, they are the following:
. Financial Planning/Wealth Management
. Financial Technology (Fintech)
Financial Planning/Wealth Management
To be clear, there is no perfect or “best” methodology. It is also true that any methodology is only as good and effective as its inputs and the insights of those who are providing those inputs. A place to start would be having some familiarity with tools most associated Modern Portfolio Theory, having some Capital Market Assumptions, and choosing benchmarks. It is worth noting that fulfilling Fiduciary Duties also includes recognizing whether or not the Investment Committee/Employer Sponsor has the skill-sets to create a viable methodology that results in an outcome in the best interests of the participants.
Financial Technology (FinTech)
Financial Technology provides the tangible evidence of the behaviors and methodologies that fulfill the duty pillars of fiduciary responsibility; prudence and loyalty. In simplicity, this requires Financial Planning Software/Analytics, Client Relationship Management (CRM) capability, and Reporting Software/Mechanisms. In this capacity, because of varying levels of skill, degree of subject matter expertise, and staff changes, the technology should be easy to integrate and functionality driven.
Perhaps this is a tricky proposition. Not only does one have to have a sense of the laws that bind the highest duties that a fiduciary owes to the beneficiary of an asset (primarily ERISA), application comprehension of these laws is important. Does a Class Action attorney have specific mastery of ERISA and its applications? Does an ERISA attorney understand Wealth Management, its applications/analytics, and how FinTech evidences behaviors? Does an Investment Committee Member understand ERISA and how it is applied? Does an Investment Committee Member understand Wealth Management, its applications/analytics, and how FinTech evidences behaviors that demonstrate prudence and loyalty?
The methodologies that evidence prudence and loyalty are subjective. Legal interpretations are subjective. Having a sense of Fiduciary Fundamentals is not. Determining if its present is currently a challenge for both the Financial Services Industry and Legal professional. Finding someone who understands these fundamentals should be an extremely high priority for both.
29 U.S.C. § 1104(a) (2000)