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The Three Most Important Practical Things You Must Know as a Professional Fiduciary

The Three Most Important Practical Things You Must Know as a Professional Fiduciary
July 24
00:03 2018

(The first part in a series of three installments)

Many different organizations and regulatory bodies that are attempting to define “fiduciary.” This may cause the legal definition of the term to ebb and flow. Despite this constant fuzziness, there remain practical “operational” definitions of what a fiduciary must know, must do, and must not do. In this article, the first of three installments, we tackle the issue of what a fiduciary must know.

Self-awareness is not only an admirable trait, it can keep you out of danger. In a sense, being self-aware means knowing what you need to know. Those who demonstrate self-awareness are less likely to fall into the trap of merely thinking they know what they need to know. To help fiduciaries increase their own self-awareness, we present the following broad categories representing the three most important practical things you must know as a professional fiduciary:

Know the Client

“So much print has been wasted (in my opinion) on the definition and role of a fiduciary,” says Clifford L. Caplan at Neponset Valley Financial Partners in Norwood, Massachusetts. “I think the definition is exactly as stated – everything that is done on behalf of the client is in their ‘best interests’.”

In a sense, then, for fiduciaries, the client sits at the center of the universe. “It is not about the adviser,” says Robin Lee Allen, Managing Partner at Esperance Private Equity in New York City. “It is about the client. There is no explanation needed here.”

To paraphrase Sun Tzu, a fiduciary must know his client as he knows himself. You must walk in the shoes of the client. “You have to know, really know, your clients and what they want,” says Randy Kurtz, Chief Investment Officer at Betavisor, LLC in Chicago, Illinois. “You can only act in someone else’s best interests if you really understand that person.”

Know the clients in both the strategic sense and the tactical sense. Broadly speaking, Meredith Briggs of Taconic Advisors, Inc. in Poughkeepsie, New York, says, “The three most important things you must know about a client to truly be a fiduciary: Where are they now? Where do they want to go? What resources do they have to get them there? To fully understand where a client is on their own personal journey allows for true fiduciary advisers to make recommendations that are purposefully in the client’s best interest.”

In addition, it helps to also take a more focused view. Caplan says “a fiduciary must know the client’s short, intermediate and long-term investment objectives as well as the client’s liquidity needs”

Finally, the “client” is not just one person, but the constellation of people that revolve around the client. “Know who all of the key individuals are for an account,” says Allison Grebe Lee, a Financial Planner/Trust Officer for Allen Trust Company in Portland, Oregon. “Who are the other fiduciaries? Who are the beneficiaries? Who are the potential bad actors? A fiduciary needs to represent a client’s interests, but may also be required to take action by another fiduciary.”

Know the Regulations

While the client is most important, a self-aware fiduciary will also be aware the surrounding regulatory environment. Staying up-to-date on compliance matters helps insulate the fiduciary from the ever-present risks associated with the job. John C. Hughes, an ERISA/benefits attorney with Hawley Troxell in Boise, Idaho, says, “A professional fiduciary must know: (1) that you are a fiduciary, (2) the standards to which you are held, and (3) the potential consequences associated with not appropriately fulfilling your duties. It is critical to know these things so that you are able to fulfill your duties and avoid personal liability.”

Bear in mind these regulatory rules go well beyond the current discussion regarding federal matters. “A fiduciary must understand the regulatory framework,” says Laura French of the French Law Group, LLC in Conyers and Bogart, Georgia. “In addition to state or federal law, a fiduciary may be subject to state bar, accounting board, or licensing agency oversight.”

Oversight bodies can sometimes present a broad array of options. In these cases, the plan or trust document contains the language the frames the regulatory rules. “Keep in mind that the best fiduciaries exercise high attention to detail, but low attachment,” says Grebe Lee. “Fiduciary responsibilities include remaining impartial and following the letter of the governing document, while compassionately balancing the needs of beneficiaries.”

Ultimately, though, compliance comes down one’s ethical duties and a singular focus. French says “a fiduciary’s obligations are toward and in favor of the beneficiary. All actions must be taken in good faith with the beneficial party’s interest at heart.”

Know the Mechanics

When the rubber meets the road, the fiduciary must know how to execute the assigned duties. Unlike some professions, the fiduciary doesn’t receive assignments or simply take orders (there are less expensive options if this is all that is needed). While a fiduciary is constantly “on” and needs to make decisions on behalf of the client, the range of those decisions can be circumscribed in a legal document. This is what really starts the ball rolling in terms of mechanics. “The fiduciary’s role is dictated by the terms of the appointment,” says French. “In a court appointed situation, the court order and state law control. In a private trust, the trust document will control.”

Beyond legal matters, there are money matters, and those involve several topics that, while the fiduciary may not be expert in, more than passing knowledge is required. “You have to know taxes,” says Kurtz. “While you will not be giving tax advice (unless you are a CPA), you have to know taxes in order to provide sound advice.”

Taxes measure the consequences of actions. Expenses, on the other hand, measure the cost of maintaining the trust in good form. “A fiduciary must know are all costs including management fees and transaction fees,” says Caplan.

Finally, and since fiduciaries generally are assigned the responsibility for investing assets, a deep knowledge of finance and investment must be obtained in order to manage those assets in the best interests of the client. “You have to know the relationship between risk and return, says Kurtz, “and how diversification and correlation affect that. It is not enough to ask someone their risk tolerance, the fiduciary has to advise on risk.”

To circle back to our initial foray into self-awareness, a fiduciary “must know the facts, the client and their own capability,” says Travis T Sickle, CEO of Sickle Hunter Financial Advisors in Tampa, Florida.

And when the fiduciary knows he doesn’t know what he needs to know, then it’s time to identify where that knowledge can be obtained. “Know what your knowledge limits are and reach out for assistance when you hit them,” says Grebe Lee. “A fiduciary has responsibility to their client to provide the best, most current information to help them make decisions – not being properly trained is not an excuse for making poor fiduciary decisions.”

The Complete Series of Installments:
Part I: The Three Most Important Practical Things You Must Know as a Professional Fiduciary |
Part II: What Every Professional Fiduciary Must Actively Do |
Part III: As a Professional Fiduciary, You Must Never Do Any of These 7 Things |

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA,  and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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