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7 Rules Every Professional Fiduciary Must Follow

7 Rules Every Professional Fiduciary Must Follow
August 07
00:03 2018

(The second part in a series of three installments)

There are legal rules, then there are common sense rules. This article is about the common sense rule. And by common sense, we refer to those standards and practices that helps one excel in the front lines of the real world. Here are seven very practical rules every professional fiduciary must follow. (You might notice these are great rules for every professional, regardless of the field).

#1: Align Compensation to Client’s Best Interests
Unlike many other professions, a fiduciary has a legal obligation to place the best interests of their charge first among everything else. (As we shall see below, this can lead to awkward moments.) No where is this mandate so evident than in the area of compensation. In a world of many different fee models, some are better at avoiding the temptation to not act in the client’s best interests than others. Choose those fee structures. “Your compensation scheme should be such that when the client does well, the adviser does well,” says Robin Lee Allen, Managing Partner at Esperance Private Equity in New York City.

#2: Avoid Conflicts-of-Interest
Part and parcel to the above, a good fee structure helps here. A fiduciary must place the best interest of the client over any investment product. “Maintain loyalty to your client and the plan participants, avoid conflicts-of-interest, and obtain appropriate professional advice,” says John C. Hughes, an ERISA/benefits attorney with Hawley Troxell in Boise, Idaho. “You should do these things because it will minimize your potential liabilities and assist in fulfilling your duty to act as a prudent expert would in the same context.”

Here’s a potential problem. What if you’re employer interprets “conflict-of-interest” differently. That’s where you might have advantages if you’re independent. A good fiduciary never wants to be placed in a position that requires one to sell one’s soul to the company store. “You must run your own shop,” says Randy Kurtz, Chief Investment Officer at Betavisor, LLC in Chicago, Illinois. “If you work for someone (person or firm), there may come a time when you are conflicted between your client’s best interest and your boss’.”

#3: Know Your Client
How can you act in someone’s best interests if you don’t know what those best interests are? The Oracle at Delphi offered us the maxim “Know Thyself.” But if a fiduciary could travel back in time to the Temple of Apollo, Pythia would no doubt have rephrased the famous aphorism to “Know thy Client.” It’s the fundamental fiduciary truism from which all other rules follow. “To be a true fiduciary,” says Meredith Briggs of Taconic Advisors, Inc. in Poughkeepsie, New York, “you have to fundamentally understand where the client wants to take their life and help them to create a Plan A and B to get there. You should surround yourself with other like-minded fiduciaries. And you should always put your client’s interests ahead of your own. When you truly understand where the client is looking to go, and hold the ethics to place their best interest above your own, it’s not very difficult to be a fiduciary, naturally!”

There is a trick to this rule, though. The client in front of you might not be the beneficiary whose best interests you must serve, even if the client and that beneficiary are one in the same person. As a result, when “knowing” your client, you mustn’t limit yourself to the three-dimensions you see before you. You need to consider the fourth dimension as well. “See the whole person,” says Laura French of the French Law Group, LLC in Conyers and Bogart, Georgia. “A fiduciary will face decisions that require balancing financial needs with the beneficiary’s short and long-term personal goals.”

4: Be Confident and Know When to Say “No”
As a fiduciary, you will be asked to make firm decisions that can dramatically impact the lives of those you serve. You need to do this self-assuredly. Self-assurance inspires trust in your actions. Remember, our concept of “fiduciary” comes down to use through trust law. That makes “trust” a very important matter. “Fiduciaries should be confident in their decision making,” says French. “The person making the appointment had great trust in naming he fiduciary. Keep that knowledge in mind when making decisions!”

With that huge responsibility, however, comes the necessity to sometimes say, “No.” If you’re too diplomatic to take on the role of a parent or guardian, then maybe you shouldn’t step up to the role of fiduciary. This can sometimes lead to awkward situation, but not if you fully “know” your client. “The fiduciary must carry out the intentions of the client, not follow the direction of the beneficiary(ies) in order to uphold the terms of the document and maintain the integrity of the plan,” says Allison Grebe Lee, a Financial Planner/Trust Officer for Allen Trust Company in Portland, Oregon.

#5: Communicate
We’re not talking quantity here, we’re talking quality. The most voracious talkers are usually the best sales reps. A fiduciary isn’t a sales rep. A fiduciary is an adviser. Advisers listen, and then speak with distinct – and sometimes blunt – clarity. “The most important factor in a smooth fiduciary-beneficiary relationship is communication,” says French. “It must be open, transparent, and mutual.”

Ah, “mutual.” That means communications is a two-way street. The onus is on the client to share updates that might change the fiduciary’s understanding of “best interest.” Again, it’s not the volume of the correspondence, it’s developing an efficient communications system that invites the client to bring up matters of import. Lee says, “The client must be kept informed of account activities in order to ensure the beneficiaries have all the information they need to protect their interests.”

#6: Document
If communication can be seen as an active form of interaction, documentation represents the passive form. Memories fade over time, so getting it in writing is a good way to subtly remind others of the basis of decisions.

French says, “Cover your behind. Document. Document. Document. This means all decisions, challenges, regular or unusual situations.”

#7: Execute Well, Consistently
What profession doesn’t have this, or some similar phrase mounted on their office wall (usually accompanied by a picture of a cat in a precarious posture). The proof of your value, as they say, is in the pudding. Do it well and do it consistently and you may find other rewards soon follow. “If you can execute well on behalf of clients for their benefit you will soon reach a point where you don’t need to sell your services,” says Allen.

Actions speak louder than words. Anticipating actions well in advance of a deadline speaks well of one’s work ethic (not that deadlines can’t sometimes be used to procure divine inspiration). For example, Kurtz says, “You have to engage in year-round tax loss harvesting. You can’t just save that for the end of the year, even though it can be cumbersome.”

Despite what these rules imply, a good fiduciary must do, as Travis T Sickle, CEO of Sickle Hunter Financial Advisors in Tampa, Florida, says, “the absolute best job you can do.”

And that a good rule for everyone, no matter where they work.

The Complete Series of Installments:
Part I: The Three Most Important Practical Things You Must Know as a Professional Fiduciary |
Part II: 7 Rules Every Professional Fiduciary Must Follow |
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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