FIDUCIARY ETHOS
THE DETAILS OF THE FPA’S FIDUCIARY
STANDARD OF CARE
Presented by: Ron Hagan
[email protected]
Developed by: Don Trone
[email protected]
PRESENTATION OBJECTIVES
Fiduciary Ethos meets two important objectives:
1.Defines the details of a fiduciary standard of care for financial planners; and
2.Serves as a model for the proposed “harmonized” fiduciary standard of care under the Dodd‐Frank Act
Copyright © 2009 – 2010 Strategic Ethos. All rights reserved
Ethos (ē‐thäs) gr.
The link between leadership behaviors, core values, and a decision‐making process
All great organizations have one thing in common ‐ a well‐defined ethos
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ETHOS OVERVIEW
Fiduciary Ethos has three important structural elements:
1.It is based on a “harmonized” standard of care, one that is applicable to any financial planner;
2.It provides a flexible decision‐making framework that defines a procedurally prudent process;
3.To the decision‐making framework we add the leadership characteristics that are essential to your role as a financial planner.
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INVESTMENT FOCUS
Although the focus will be on investment planning, the ethos decision‐
making framework introduced in this presentation will be used to structure similar fiduciary standards for the remaining financial planning disciplines:
¾ General Principles of Financial Planning
¾ Insurance Planning and Risk Management
¾ Employee Benefits Planning
¾ Income Tax Planning
¾ Retirement Planning
¾ Estate Planning
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FIDUCIARY ‐ WHAT DOES IT MEAN?
To begin to define the details of a "harmonized" fiduciary standard, we start by defining what it means to be a fiduciary:
A fiduciary makes a commitment to judge wisely and objectively, and to ensure that all processes and procedures are congruent with the goals and objectives of the client.
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STEWARDSHIP AND COVENANTS
The cornerstones of a fiduciary standard are the words, stewardship and covenant:
The rewards for being a fiduciary are not always apparent, and not always commensurate with the level of effort, process, and risk undertaken. This is the very essence of stewardship.
A fiduciary standard is a continuous process that requires an ongoing discipline to do the right thing, at the right time. This is the very essence of a covenant.
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FOUR PILLARS
There are four pillars to a well‐crafted fiduciary standard:
Principles
Process
Prudence
Consistency
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FOUR PILLARS
Principles
Fiduciary standards are defined in terms of Principles, as opposed to rules, which impose on the fiduciary the requirement to act in the best interests of the client. There is relatively little specific black letter law (rules) that govern the conduct of fiduciaries. Instead the fiduciary standard is based on several simple principles supplemented by industry best practices, regulatory opinion letters, and case law. Copyright © 2009 – 2010 Strategic Ethos. All rights reserved
FOUR PILLARS
Process
The process a financial planner must follow to demonstrate that decisions are made in the best interests of the client. A good illustration is the use of proprietary and commission‐based products; the Dodd‐Frank Act included an exception that would allow advisors to use such products. However, such a carve‐out is unnecessary.
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FOUR PILLARS
Prudence
We build upon Process and define the Dimensions, or the details, of a procedurally prudent process. We demonstrate that decisions are being made in the best interests of the client.
In the case of the Fiduciary Ethos, Dimensions are simple straightforward statements, that are based on a universal, “harmonized” language.
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FOUR PILLARS
Consistency
That the process can be effectively and efficiently applied across all client situations. Most litigation and arbitration is a result of omission rather than commission; financial planners can insulate their practice from liability by demonstrating that they have a procedurally prudent process that is consistently applied.
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FIDUCIARY ACTS
ERISA (Employee Retirement Income Security Act of 1974) –
federal legislation impacting qualified retirement plans.
MPERS (Uniform Management of Public Employee Retirement Systems Act) – for trustees of state, county, and municipal retirement plans. UPIA (Uniform Prudent Investor Act) – for trustees of personal trusts. UPMIFA (Uniform Prudent Management of Institutional Funds Act) – for trustees of foundations, endowments, and other charitable assets. UNIFORM FIDUCIARY CONDUCT
1. Define goals and objectives. 2. Diversify portfolio assets with regard to a specific risk/return profile. 3. Prepare a written investment policy and document the process used to manage investment decisions. 4. Use prudent experts (professional money managers and service providers) to implement the investment policy. 5. Monitor the activities of hired prudent experts. Copyright © 2009 – 2010 Strategic Ethos. All rights reserved
LEGAL SUBSTANTIATION
Every Dimension (detail) of the Fiduciary Ethos process is fully substantiated by legislation, regulations, and case law.
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ETHOS FRAMEWORK
ETHOS FRAMEWORK
Ethos is based on a sequential and congruent framework, which begins with a traditional 6‐step Financial Planning Process: For each Step we also have identified the leadership behavior that is essential for that Step.
On an ongoing basis is the need to assess performance. Copyright © 2009 – 2010 Strategic Ethos. All rights reserved
DETAILS OF A STEP
Each Step of the Process is further defined (refined) by Decision‐
Making Dimensions – there are a total of 17 Dimensions
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DETAILS OF A DIMENSION
Each Decision‐Making Dimension has a corresponding leadership behavior.
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LINK CODE OF ETHICS TO LEADERSHIP
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Copyright © 2009 – 2010 Strategic Ethos. All rights reserved
Copyright © 2009 – 2010 Strategic Ethos. All rights reserved
“I am a leader by default, only because nature does not allow a vacuum.”
Bishop Desmond Tutu
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20
When you first assemble a group, it’s not a team right off the bat. It’s only a collection of individuals.
“Coach K”
(Duke Basketball Coach Mike Krzyzewski)
20
The things we fear most in organizations—fluctuations, disturbances, imbalances—are the primary sources of creativity.
Margaret J. Wheatley
20
If I had to sum up in a word what makes a good manager, I’d say decisiveness. You can use the fanciest computers to gather the numbers but, in the end, you have to set a timetable and act.
Lee Iacocca, former Chairman, Chrysler
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Courage is rightly esteemed the first of human qualities … because it is the quality which guarantees all others.
Winston Churchill
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“There are seven things that will destroy us:
Wealth without work; Pleasure without conscience; Knowledge without character; Religion without sacrifice; Politics without principle; Science without humanity; Business without ethics.”
Mahatma Gandhi
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20
ETHOS FRAMEWORK
The Ethos series is based on universal decision‐making dimensions which can be used to define a variety of standards:
¾ Financial planning standard
¾ Fiduciary standard
¾ Suitability standard (for agents and brokers)
¾ Stewardship standard (for non‐trust assets)
¾ Governance standard (for a board of directors)
¾ Project management standard (for staff)
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ETHOS SOFT SKILLS
Ethos also serves as the framework for developing essential fiduciary soft skills – the professional’s ability to:
¾ Serve as an effective leader
¾ Build trust – the new currency for Wall Street
¾ Maintain loyalty – the corollary to “trust”
¾ Effectively manage a decision‐making process Copyright © 2009 – 2010 Strategic Ethos. All rights reserved
BENEFITS OF A DEFINED ETHOS
1. It demonstrates to clients, compliance officers, and regulators that you have a procedurally prudent process in place. 2. The Dimensions can double as a training curriculum – for educating your clients and staff.
3. It may help you discover blind spots – shortfalls and omissions to your financial planning process.
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BENEFITS OF A DEFINED ETHOS
4. It can facilitate the sharing of best practices with other financial planners.
5. At some point in the future, P&C insurers providing liability insurance for financial planners will likely start providing “good planner” discounts to those planners who can demonstrate conformance to a defined standard. 6. It can help improve the financial planning services you provide to your clients; an objective worthy of all of our efforts. Copyright © 2009 – 2010 Strategic Ethos. All rights reserved
UNETHOS ASSESSMNT PROCEDURES
Did investment performance meet expectations?
Did you mess with the portfolio? Copyright © 2009 – 2010 Strategic Ethos. All rights reserved