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As a Professional Fiduciary, You Must Never Do Any of These 7 Things

As a Professional Fiduciary, You Must Never Do Any of These 7 Things
August 14
00:03 2018

(The third part in a series of three installments)

As a driver, you must know how to operate a vehicle and you need to know the rules of the road. There’s something else you need to know. These aren’t formal rules. They are warning signs. These are not the roads less traveled. These are the roads you should never travel (think “military testing area”). The same holds true for practicing fiduciaries. You have practical things you must know and common-sense rules to follow, but then you also have places you never want to step into.

Unlike many other professions, fiduciaries benefit most when they color within the lines. While other jobs reward those who think outside the box, rampant creativity often lands a fiduciary in trouble. In an industry where we find new and exotic investment offerings on a regular basis, maintaining the discipline to be boring can be a challenge. Unfortunately for the professional fiduciary, the real world is wrought with liability minefields. Straying off course even little bit can prove harmful.

Now, we’re not talking about the sort of “nevers” that apply to everyday life, as Travis T Sickle, CEO of Sickle Hunter Financial Advisors in Tampa, Florida, point out when he says to never “lie, cheat or steal.” That goes without saying.

Neither are we referring to the broad (and perhaps most important) never which all fiduciaries have memorized, that is to never do “anything that doesn’t put the client’s interest first,” as Robin Lee Allen, a Managing Partner at Esperance Private Equity in New York City, states.

We want to focus on the type of “nevers” that, in the heat of the moment or humdrum routine of everyday life, fiduciaries can find themselves slowly sliding down that slippery slope towards. In fact, if, as you read these, you catch yourself muttering something about “there’s always an exception,” then you’ve just discovered where that slippery slope lies.

#1: Never Provide Legal Advice
You’re smart. You know a lot of things. You’ve been around the block once or twice. All these factors sometimes compel you to say things you’re never supposed to say. One of those “nevers” is offering legal advice. It goes without saying that, as you begin to accumulate years of experience, you learn how legal professionals respond in certain specific circumstances. It’s very tempting to offer this “obvious” advice to a confused client. After all, isn’t in their “best interest” to avoiding wasting the time and paying the legal fees?

Perhaps. But if you’re not a lawyer and you start offering legal advice, you open yourself up to a whole lot of trouble. “Never provide legal advice (unless you are an attorney engaged in that capacity),” says John C. Hughes, an ERISA/benefits attorney with Hawley Troxell in Boise, Idaho. Whether it’s advice on what type of personal trust is best suited for a particular situation or how to address ERISA compliance matters in corporate retirement plans, it’s better to know how to politely advise the client to seek the counsel of a competent attorney.

#2: Never Get Emotionally Involved
You like your clients. You really do. And, as a fiduciary, you’re always looking out for their best interests. It’s not that different than a parent’s relationship with a child. Eventually, you begin to feel an obligation to please them, to enable them, to protect them from all the possible nastiness the world can throw at them.

While others may be encouraged to bring passion to their job, fiduciaries risk much should they let emotions get the better of them. “A fiduciary should not get emotionally involved in decisions,” says Allison Grebe Lee, a Financial Planner/Trust Officer for Allen Trust Company in Portland, Oregon. “As the duty of the fiduciary is to protect the client’s interests, not provide for the wishes of the beneficiary(ies).” Never allow emotion to oblige you to tell a client “yes” when you know it’s wrong.

#3: Never Violate Your Trust
Along these lines, it’s critical to remember that clients hire fiduciaries because they trust those fiduciaries will say “no” when the time comes. Trust is the key word here. If it’s not clear by now, you should be able to see how our first two “nevers” can place a fiduciary in a position that compromises trust. Paramount above all else is preserving the trust in the relationship. This requires an open, honest, and sometimes blunt dialogue.

Laura French of the French Law Group, LLC in Conyers and Bogart, Georgia, says to never “break trust. A fiduciary should be clear and direct with the beneficiary. Dancing around issues can lead to misunderstandings and will foster mistrust.”

#4: Never Play Favorites
Again, we’re building on the previous “nevers.” If fiduciaries are too afraid to say “no,” if they aren’t open and honest in their communication, they’ll find it difficult to make hard decisions in the case of multiple beneficiaries. This can involve a split-interest trust where one beneficiary receives investment income and another receives investment gains. Another case might involve the interests of a corporate retirement plan’s sponsor versus the interests of the employees.

Fiduciaries straddles a thin line. Leaning one way or another can prove problematic. “A fiduciary should not favor any class of beneficiary,” says Lee, “as all beneficiaries should receive the same level of care and service as directed by the governing document.”

5: Never Place the Client in a Precarious Position
Quite simply, this is negligence. Sometimes it doesn’t appear that way, as we often mistake “cutting corners” with “efficiency.” All trust documents contain explicit instructions. If they pertain to you, don’t ignore them. This is particularly true of ERISA plans. Hughes says, “You must never engage in acts that may result in the loss of ERISA Section 404(c) protections (such as changing participants investments or not providing a ‘mapping’ notice). This is because doing these things will likely result in losses to the sponsor and the plan and/or personal liability to you as the professional fiduciary.”

6: Never Sell a Product
This is a classic “never” (how many of you were waiting for it?). You may buy a product on behalf of a beneficiary, but you must never sell a product. What’s the difference? “You must never sell ‘product’,” says Randy Kurtz, Chief Investment Officer at Betavisor, LLC in Chicago, Illinois. “You must be compensated only by your end clients.  Having more than one person paying you will inevitably create a conflict of interest.”

Meredith Briggs of Taconic Advisors, Inc. in Poughkeepsie, New York, says, “To be a professional fiduciary, you clearly can never put your own best interest ahead of the clients’. You can never take part in a system that incentivizes commission-based advice. You can never steer them in a direction that benefits someone else over them. You would never take car buying advice from the slick guy in the suit at the dealership…don’t make the same mistake with your financial plan and investments!”

It all comes down to this: “Never benefit improperly from your role,” says French. “A fiduciary is entitled to compensation. A fiduciary should not otherwise improperly benefit from his position.”

#7: Never Keep a Client Longer Than They Need You
This may be the toughest “never” to live up to, especially after you’ve developed that familial bond we referred to in the second item on our list. It may be that, over time, circumstances change, and the fiduciary has too much of a vested interest to offer objective advice. “You must never remain in a conflict position once discovered,” says French. “There may be a time a fiduciary has to step aside and relinquish his role. Once a conflict has arisen, it is time to get out.”

It’s not just that there “may” be a time, but for younger professionals acting as fiduciaries for older clients, there will be a time. “Never advise someone to postpone retirement when they can afford to retire and they desire to retire,” says Kurtz. “Too many advisors feel the “asset draw” during retirement is bad for the advisor!”

Thus ends our three-part series offering a practical guide for those seeking to provide fiduciary services. We’re certain each of the points made in these triad of articles can be expanded into their own stand-alone piece. Who knows? Depending on our readers’ reaction, perhaps we’ll see a few of those in the future.

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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