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What a 'Harmonized' Fiduciary Standard Should Look Like

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There are two operative words in developing a standard, particularly a fiduciary standard: “consensus” and “substantiation.” The public and the industry want to see “consensus,” whereas regulators and the courts are more concerned about “substantiation.” A standards developer, such as the Foundation, needs to be able to demonstrate both; that there is a consensus across the industry for the standard, and that every dimension to the standard is substantiated by either legislation, regulations or case law–or in the absence of such substantiation, industry best practices.

A good illustration is the requirement under existing fiduciary legislation (ERISA, UPIA, UPMIFA and MPERS) that a fiduciary demonstrate their “procedural prudence”–the details of their decision-making process. Such a requirement raises three related questions:

1. What constitutes the scope and breadth of activities that constitute procedural prudence?

2. Where do generally-accepted investment theory and industry best practices converge to define procedural prudence?

3. Are there consistent references in legislation, regulations, regulatory opinion letters and bulletins and case law that substantiate a particular dimension of a procedurally prudent process?

The answers to these questions are best left to industry experts; not to regulators, and certainly not to legislators. It is for these reasons that the Foundation was founded in 2000: To provide a ways and means to bring together objective industry experts to mine the answers to these questions, and then to build industry consensus through speaking, teaching and writing.

The Three Pillars of a Fiduciary Standard

To begin to define the details of a “harmonized” fiduciary standard, we need to start by defining what it means to be a fiduciary. I would suggest the following:

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.

I would further define two additional terms, which I believe are the cornerstones to a fiduciary standard: “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.

A word that consistently appears in the above definitions and existing fiduciary legislation is “process,” and therein rises the first pillar to a “harmonized” fiduciary standard–it’s about the process an advisor must follow to demonstrate that decisions are made in the best interest of the client.