The Fiduciary Standard and Why It Matters

The Fiduciary Standard
And Why It Matters
Blaine F. Aikin, AIFA®, CFA, CFP®
CEO, fi360

Who is a fiduciary?
• Someone who stands in a special relationship of
trust, confidence, and/or legal responsibility
• Fiduciaries act in roles that involve:
– reliance upon them by virtue of their special knowledge or skills
– control over property
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Historical Perspective
…[W]e cannot do everything ourselves; different people are
more capable in different matters.
…[I]n cases where we ourselves cannot be present, the vicarious
faith of friends is substituted; and he who impairs that
confidence, attacks the common bulwark of all men, and as far
as depends on him, disturbs the bonds of society…
- Cicero, 106-43 BC, Oration for Sextus Roscius of America

High Professional Expectations
of the Fiduciary Standard Today
“A trustee is held to something stricter than the morals of the
market place. Not honesty alone, but the punctilio of an honor
most sensitive, is then the standard of behavior [for fiduciaries].
… Uncompromising rigidity has been the attitude of courts of
equity when petitioned to undermine the rule of undivided
loyalty by the ‘disintegrating erosion’ of particular exceptions. …
[The fiduciary standard] will not consciously be lowered by any
judgment of this court.”
- Judge Benjamin Cardozo
Meinhard v. Salmon, 1928

Common and Statutory Law
Define Fiduciary Obligations
• Anglo-American law is derived from the “Common Law.”
• Origins of the modern fiduciary standard are found in the
common law of trusts.
• Trust law is codified in most states through uniform laws
• Uniform Prudent Management of Institutional Funds Act
(UPMIFA) is particularly relevant

Fundamental Fiduciary Duties:
Loyalty and Care
• Loyalty – obligation to serve the client’s best interests
• Duty of care – obligation to act with the skill, care, and good
judgment of a professional

Duties Associated with the
Fiduciary Standard
Fiduciary
Standard
Duty of
Loyalty
Avoid /
Manage
Conflicts
Disclosure Proxy Policy
Principal
Trades
Suitability
Both Duties
of Loyalty
and Care
Best
Execution
Reasonable
Fees &
Expenses
Duty of
Care
Safeguard
Client
Assets,
Privacy
Procedural
Prudence
Due
Diligence
Monitoring
Record-
Keeping

Qualities of fiduciary duties
• Serve to deter abuse
• Apply broadly (because every circumstance can’t be anticipated)
• Typically evaluated in hindsight
• Involve substantive safeguards that can’t be overridden by agreement
– serve client’s best interests
– prudence
– good faith
• Procedural safeguards required to demonstrate conformity
9

What Circumstances Give
Rise to Fiduciary Status?
1. “Named fiduciary” in trust or ERISA plan documents
2. Provide advice in a professional context
3. Exercise discretion
4. Have the authority to delegate duties to a co-fiduciary

Fiduciary Roles
• Stewards – manage the overall decision-making process
• Advisors – provide advice that is material to decision-making
in a professional context (with compensation, based upon
superior skill)
• Investment Managers – make investment decisions and
select the individual securities to implement a specific
investment mandate

Functional Fiduciaries
• It’s not what you call yourself that’s decisive, it’s what you do.
• If you exercise discretion or give personalized advice for
compensation, you are a fiduciary.
• You are a fiduciary to the extent you perform fiduciary
functions.

OK, so I’m a fiduciary.
Now what?
• Determining that you are a fiduciary leads to other key
questions*:
– To whom am I a fiduciary?
– What are my guiding principles (duties) and responsibilities (scope of
engagement)?
– What are the consequences of failure to exercise fiduciary
obligations?
*SEC v. Chenery, 318 U.S. 80, 85-86 (1943)

The Essential Question
Were my actions consistent with fulfillment of
the fiduciary duties of loyalty and care?

Substantive and Procedural
Safeguards of Mandatory Rules*
• Substantive safeguards serve to preserve fundamental fiduciary duties
such as loyalty and utmost good faith
• Even if a client allows an advisor to have a conflict, the advisor must serve
the best interest of the client
• Procedural safeguards require the advisor to be able to demonstrate that
actions taken serve the client’s best interest, i.e., the advisor must be able
to show procedural prudence, consistent with the duty of care
* Source: The Fiduciary Obligations of Financial Advisors Under the Law of Agency, a
paper authored by Robert H. Sitkoff which was sponsored by Federated Investors

Global Fiduciary Precepts
1. Know standards, laws, and trust provisions.
2. Diversify assets to specific risk/return profile of client.
3. Prepare investment policy statement.
4. Use “prudent experts” and document due diligence.
5. Control and account for investment expenses.
6. Monitor the activities of “prudent experts.”
7. Avoid conflicts of interest and prohibited transactions.

From Precepts to Practices
• Precepts are principles founded in law.
• Practices are applications of the precepts, founded in law and
research.
• A Standard of Practices constitutes a body of knowledge as to
what is required for a person or organization to meet
recognized expectations.

Why the fiduciary
standard matters

Helps mitigate the risk of fraud

Serves society’s values

The Fiduciary Standard and Why It Matters

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