With the final month of 2009 fast approaching, 2010 is looking to be a big year in the fiduciary arena as regulators and legislators prepare to pass key regulations and legislation, and the high court delivers a key ruling and also considers whether to take up more fiduciary issues.
This week, the Department of Labor announced another delay in the effective date of the investment advice regulations that were originally published in January. The delay is in line with a previous announcement made by Phyllis Borzi, the Assistant Secretary of the Employee Benefits Security Administration, that the agency would pull the rules finalized in January and issue new rules. With a new effective date of May 17, 2010 set, DOL will likely seek to release new proposed investment advice rules for public comment in early 2010 and finalize the rules by May. DOL is also expected to finalize its long awaited 408(b)(2) plan fee and expense disclosure rules in early 2010.
Meanwhile, on Capitol Hill, House Financial Services Committee Chair Barney Frank announced that the House vote on financial regulatory reform will likely not occur until the second or third week of December. The House Financial Services Committee is still working this week to finalize pieces of the comprehensive legislation the House will consider. Once the legislation is ready, the House is expected to take at least three days to consider the package of financial reforms, including the extension of the fiduciary standard to all investment professionals who provide advice, as detailed in the Investor Protection Act (HR 3817).
In the other chamber of the... Read full post
Posted on: November 19, 2009
By: Kristina Fausti
The first of the Prudent Practices is all about knowing and following the rules. This goes for all rules impacting the portfolio, including legal requirements and those set in documents related to the establishment and management of investments. The starting point for the fiduciary process is similar to the starting point in any management task or starting a new business: know your goals and objectives, know the rules, and know what limitations you face. Let's take a look at the Practice and criteria themselves:
Applicable law and oversight depends on the type of portfolio being managed. One of the first things you will want to do as a fiduciary is to verify with legal counsel the appropriate body of law governing the plan or portfolio. In general, corporate qualified plans like 401(k)s and pensions fall under ERISA with Department of Labor oversight; Taft-Hartley multiple-employer plans, which have a special sub-set of rules under ERISA, do as well. Most other fiduciary portfolios fall under state oversight. In these cases, there are uniform codes drafted by a national commission that states may choose to adopt (MPERS for public retirement plans, UPMIFA for foundations and endowments, and UPIA for private trusts) or they may have adopted their own legislation or tweaked the uniform acts for their state. You will need to... Read full post
Posted on: November 17, 2009
By: Bennett Aikin
Since its release in mid October, much of the financial services regulatory reform discussion has focused on the House Financial Services Committee's Investor Protection Act. That is until Tuesday, when the Senate Banking Committee released their Restoring American Financial Stability Act. In her post last Wednesday, Kristina explained that the major difference in how the bills address the fiduciary issue is that the House bill would add provisions to the Securities Exchange Act that would require brokers who provide advice to meet the same standards as advisers while the Senate bill would remove the broker-dealer exemption from the Investment Advisers Act and require all brokers to register as advisers. Each has presented a different way to solve the same problem, and each one offers different challenges to overcome, as evidenced by the reactions coming from advocacy groups for advisers, brokers, the insurance industry, consumers, etc. For his part, Barney Frank of the House Committee said he liked the Senate's bill and was encouraged that both were moving in the same direction.
Here are more links related to the Senate bill:
Posted on: November 16, 2009
By: Bennett Aikin
Last month, we looked at how investment fiduciaries could generally be broken down into three different categories. Now we'll begin looking at each type in more depth, starting with the investment steward.
As noted in that first post on the types of investment fiduciaries, investment stewards are the trustees, investment committee members, plan sponsors and others in similar positions who are responsible for managing the money of others. The Department of Labor defines their basic responsibilities thusly:
[T]o run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must act prudently and must diversify the plan's investments in order to minimize the risk of large losses. In addition, they must follow the terms of plan documents to the extent that the plan terms are consistent with ERISA. They also must avoid conflicts of interest. In other words, they may not engage in transactions on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, services providers or the plan sponsor.
Investment Stewards make for an interesting case because they carry the most risk and are in charge of managing the entire investment process and yet are usually the least trained and experienced in investment decision making. Beyond the basic tenets of fiduciary responsibility described above, statutes, regulations and case law have defined more specifically what the prudent management of investment decisions entails. Liability arises in the gaps where certain duties are potentially not being performed, exposing investors to unnecessary risk or to less than diligent decision making. The best way to reduce liability for stewards is to follow processes, document decisions, delegate to professionals the roles they are not equipped to perform themselves and, above all, remember what is at stake for those who have placed them in a position of trust and act accordingly.
While investment stewards can limit their liability, they can... Read full post
Posted on: November 12, 2009
By: Bennett Aikin
Yesterday, the Senate Committee on Banking released more than 1,100 pages of draft financial regulatory reform legislation, over 200 pages of which addresses investor protection and securities regulation. While the Senate's Restoring American Financial Stability Act of 2009 seeks to address the same issues as the House's Investor Protection Act, the Senate has taken a very different approach to responding to the Obama Administration's mandate to raise the standard of conduct for broker-dealers providing investment advice to the fiduciary standard.
Specifically, the Senate Banking Committee proposes to remove the exemption from the Investment Advisers Act of 1940 for brokers who provide advice that is "solely incidental" to their brokerage activities. With the removal of this exemption, any broker who fits the definition of an "investment adviser" under the federal securities laws would be required to register as such with the SEC and be subject to investment adviser requirements, including the fiduciary standard.
The Senate committee's approach is markedly different from the House Financial Services Committee's proposal, which would keep the broker exemption in place and add a requirement to the Securities Exchange Act of 1934 that brokers providing advice to retail customers follow the same standard of conduct as investment advisers. However, the approach has proven to be messy because it keeps two separate sets of rules in place for brokers and investment advisers making the ultimate goal of "harmonizing" investor protection rules for financial professionals harder to achieve. It also has presented... Read full post
Posted on: November 11, 2009
By: Kristina Fausti
In another busy week of work towards regulatory reform, it was an investment product that made the most headlines this week. The Senate Special Committee on Aging held target date fund hearings last week, where the funds were criticized for disclosure problems, excessive fees, inconsistent design and conflicts of interest. The hearings prompted a slew of interest and commentary, as legislators want to fix some of the problems in the increasingly popular retirement funds. Here are just some of the target date fund related links from the past week:
On to the rest of the links...
In the... Read full post
Posted on: November 9, 2009
By: Bennett Aikin
Many financial services professionals, particularly investment advisors and managers, have realized the importance of fiduciary processes and the beneficial impact they can have for themselves and the investors they serve. Many more are coming around as a financial crisis and regulatory reform has changed the landscape. But can the same be said for investment stewards? Have the benefits of implementing fiduciary processes resonated enough to motivate them to make changes? An email we received last week from an advisor who was trying to convince a prospective client to engage him to conduct a fiduciary review highlighted suggests not.
The prospective client, an investment steward for a retirement plan, had told them, "You've spent a lot of time over the what, how, when, where and who of fiduciary processes - particularly in the investment arena. The one thing I'm not catching is the why." This statement gets to the heart of what many advisors struggle with; how can I convince prospective clients (plan sponsors and participants, foundation or endowment investment committee members, trustees, and retail investors) that incorporating a prudent investment process is important? Several thoughts were either articulated by the email originator or come to mind from previous conversations we have had related to this topic.
Through this and other discussions, we focused on the following arguments for stewards implementing a prudent process:
- Helps to avoid complaints for breach of fiduciary responsibility that may lead to litigation or, in the case of brokers, arbitration
- Reduces liability by helping to uncover investment or procedural risks
- Helps ensure compliance
- Should lead to better investment performance
The first three points indicate that the process can prevent bad things from happening and the fourth focuses on the potential and significant positive result. We mentioned in a Read full post
Posted on: November 5, 2009
By: Rich Lynch
Today, the House Financial Services Committee will continue its consideration of the Investor Protection Act. Several amendments were considered by the Committee last week that have been viewed as weakening investor protections including the fiduciary standard, prompting several advisor industry and investor advocacy groups to express their disappointment to the Committee. The legislation is expected to be voted out of committe this week and referred to the full House. However, even if financial reform continues its smooth progression through the House, there are indications that it may face an uphill battle in the Senate, potentially slowing down Congress' agressive timetable for executing change.
Meanwhile, fiduciary issues took center stage in another type of hearing room on Capitol Hill as the Supreme Court heard oral arguments related to compensation for mutual fund advisors. The issues came before the court in the case of Jones v. Harris Associates, in which three shareholders sued Harris Associates, LP, the advisor to the Oakmark Funds. The shareholders claim that Harris Associates charged excessive fees and violated its fiduciary duty under Section 36(b) of the Investment Company Act of 1940, as amended in 1970.
During oral arguments, the parties and justices mostly focused on the appropriate legal standard and analysis that should be used by courts to determine if fees are fair. However, it's also notable that Justice Kennedy started off questioning by exploring the meaning of "fiduciary" and the scope of the fiduciary duty under the federal securities law. Other... Read full post
Posted on: November 4, 2009
By: Kristina Fausti
Last week was busy for the House Financial Services Committee, as they were voting on/discussing/marking up three bills that are a major part of financial regulatory reform. You can see some of the developments from those sessions in the "news" section below, including increased state oversight of RIAs, regulation of hedge funds, and oversight issues. Of course, with movement in reform comes statements from the major advocacy groups, including the Financial Planning Coalition, and many of the remarks at SIFMA's annual meeting were directed to reform issues as well. Further markup of the Investor Protection Act occurs this week, so expect the news to continue flowing.
On to the links...
In the news/commentary:
Posted on: November 2, 2009
By: Bennett Aikin
Carl Richards has a mission to create better investors. For years in the brokerage industry and as a financial planner, he saw average investors earning returns dramatically less than the average mutual funds they were investing in. The problem is investor behavior. Investors continually make the classic mistakes that result in their leaving money on the table that smarter investment behavior could have earned them.
He named the phenomenon the Behavior Gap, and he continues to explore and share how our relationship with money, and what we choose to value, can impact our lives.
Carl was kind enough to answer some questions for us related to his mission and to fiduciary issues.
fi360: One of Behavior Gap’s signature themes is that the process is far more important than the product and planning is more important than the plan. What does this mean in terms of the real value added by an advisor?
Carl Richards: We’re really talking about two related issues. The first is the product vs. process problem. For the longest time the traditional financial services had it backwards. They started with a product and tried to sell it to anyone that would listen without taking the time to understand if it was appropriate. I think that those of us who take the craft of advice seriously understand that the value is clearly in the ongoing process that we guide people through. The products we use at the end are just a byproduct. It seems to me that this attitude is becoming more and more accepted; now it’s just a matter of getting everyone to act that way.
The second issue deals with the idea that people really need a planner and not just a plan. Financial plans are worthless without the ongoing involvement of the planner. The more plan work I do, the less I think of it. Consider the massive amount of “assuming” that goes into a plan. Not only do we know that we are going to be wrong, it’s also out of date the moment we hit print. What clients want is a planner, someone that will help them navigate the financial landscape. They recognize we can’t know what will happen to them over the next 20 years. Clients just want to know we will be... Read full post
Posted on: October 29, 2009
By: Bennett Aikin
All content in the From the Fiduciary blog was created by third-party author who is solely responsible for the content contained therein. Posts in the From the FI360 blog do not necessarily reflect the opinion or approval of InvestmentNews.
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