The 5 Levels of Fiduciary

Taking a similar approach, we could segment the fiduciary universe into five levels:

The Level I Fiduciary is merely defined in terms of a best interests standard. The challenge for the Level I Fiduciary is that there are no principles or practices associated with the standard. How do you measure the success of a Level I Fiduciary when there is no yardstick?

The Level II Fiduciary is defined in terms of a rules-based best interest standard. Ordinarily a fiduciary standard is defined in terms of principles, not rules. In this case, an exception is being made to accommodate Labor’s rule. The challenge for the Level II Fiduciary is that there is an inverse relationship between rules and a margin of excellence. Too many rules, or complex rules, often will desensitize moral aspiration. Most of us do our best work when we want to, not when we’re told we have to do something.

The Level III Fiduciary is defined in terms of a principles-based best interests standard. Principles are intended to inform the professional of their duty to judge wisely and objectively. The challenge for the Level III Fiduciary is being able to demonstrate that they are providing a prudent decision-making process. They know how to talk the talk, but do they know how to walk the walk?

The Level IV Fiduciary is defined in terms of principles and practices that define the details of a best interests standard. A central feature is that the Level IV Fiduciary also can demonstrate that they satisfy the requirements of a uniform fiduciary code of conduct. The first book to introduce such a concept was “The Management of Investment Decisions” (Trone, Allbright and Taylor), which was published in 1996. For more than 20 years we have been preparing advisors to serve at a Level IV standard. Now the Labor Department and its advocates want the industry and retirement savers to settle for a Level II standard.

The Level V Fiduciary is defined in terms of principles, practices and behaviors that amplify the quality of outcomes associated with a best interests standard. The Level V Fiduciary should be able to demonstrate the capacity and ability to:

1. Manage the details of a uniform fiduciary code of conduct — be a good governor;
2. Judge wisely and objectively — be a good steward; and
3. Inspire and engage those they serve — be a good leader.

Soon everyone will be a fiduciary; and yet, most will not. When a professional holds themselves out as a fiduciary, or when an organization claims that its members meet a fiduciary standard, the question that needs to be asked is: At what level? As with leadership, Level V should be reserved for those fiduciaries that are most exemplary.