12 best practices to transition to the new fiduciary standard

The Institute for the Fiduciary Standard, a Virginia think tank devoted to promoting adoption of the standard, is mindful of this challenge. To this end, it has identified the best practices designed to ease the transition to a new fiduciary marketplace. It released a second draft of 12 practices several months ago. Although they are a work in progress, advisors may wish to review them now in order to jump start their own transition, if needed, to a broader fiduciary marketplace.

1. 1. Affirm that the fiduciary standard under the Advisers Act of 1940 and common law principles govern the professional relationship at all times.

   2. Establish and document a “reasonable basis” for advice in the best interest of the client.

   3. Communicate clearly and truthfully, both orally and in writing. Do not mislead. Make all disclosures and important agreements in writing.

   4. Provide or instruct clients on how to obtain a written statement of total fees and underlying investment expenses paid by the client. Include any payments to the advisor or the firm or related parties from any third party resulting from the advisor’s recommendations.

   5. Avoid conflicts and potential conflicts. Disclose all unavoidable potential and actual conflicts. Manage or mitigate material conflicts. Acknowledge that material conflicts of interest are incompatible with objective advice.

   6. Abstain from principal trading unless a client initiates an order to purchase the security on an unsolicited basis.

   7. Avoid compensation in association with client transactions. If such compensation is unavoidable, demonstrate how the conflict is managed and overcome, and the product recommendation and compensation serve in the client’s best interest.

   8. Avoid gifts or entertainment that are not minimal and not occasional. Avoid third-party payments, “benefits,” and indirect payments that do not generally benefit the firm’s clients and may reasonably be perceived to impair objectivity.

   9. Ensure baseline knowledge, competence, and ongoing education appropriate for the engagement. 

   10. Institute an investment policy statement (IPS) or an investment policy process (IPP) that is appropriate to the engagement and describes the investment strategy. Have access to a representative universe of investment vehicles that provide ample options to meet the desired asset allocation and in consideration of generally accepted criteria. 

   11. Consider peer group ranking in ensuring underlying investment expenses are reasonable. 

   12. Affirm in writing (one’s) adherence to best practices and attain written affirmation from the firm that these business practices have been reviewed.

To learn more about the fiduciary standard, visit the Institute’s website.