Around this time of year, secondary schools typically hold a “career day,” and mothers and fathers are coaxed from their workplaces to participate in a “show and tell” with the next generation.
The central question in every event is: What does it take to be a fireman, a professional football player, a concert pianist?
Even as adults, we never outgrow the question: What does it take to start your own business or balance a career with family?
Upon reflection, I realize that no one ever asks me: “What does it take to be a fiduciary?” I’m asked: “What, or who, is a fiduciary?” almost daily but never, “What does it take?”
By now, most of you should be familiar with functional and technical definitions that suggest an answer to the question: What, or who, is a fiduciary?
Functional definition: Someone who is managing the assets of another person and stands in a special relationship of
trust, confidence and/or legal responsibility.
Technical, or common-law, definition: According to a January draft version of the “Preliminary Report on Financial Planner Standards of Conduct,” by the fiduciary task force of the Denver-based Financial Planning Association, a fiduciary shall: (1) put the client’s best interests first; (2) act with utmost due care and in good faith; (3) not mislead clients; (4) provide full and fair disclosure of all material facts; and (5) disclose and fairly manage material conflicts of interest.
The problem with these definitions is that they do not adequately answer the question: What does it take?
I think the answer can be summarized in three words: acquire, apply and advance.
Acquire. It takes specialized education and training. An investment fiduciary needs to acquire specialized knowledge and be committed to a lifelong process of learning; possess far more knowledge than what is needed to pass existing series exams administered by Washington-based NASD (i.e., 6, 7, 63 and 65).
Regulators should consider developing a new exam based on fiduciary practices and procedures, and require passage of this new exam before an investment adviser is permitted to advise fiduciary clients (retirement plans, foundations, endowments and personal trusts) and/or serve in a fiduciary capacity (provide comprehensive and continuous investment advice). The assets in fiduciary portfolios represent a substantial percentage of our nation’s liquid investible wealth and warrant special handling.
Apply. It takes the ability, capability, willingness and autonomy to apply the acquired advanced education and training in investment fiduciary responsibility.
This is where many investment advisers run into problems. There are a number of advisers who have the knowledge, technical skills and sound judgment to serve as a fiduciary or to counsel other fiduciaries (investment committees and trustees) but who are prohibited from doing so by their firms. Another example is the investment adviser who is associated with a firm that has real or perceived conflicts of interest — the conflicts marginalize the advice of the adviser, limiting the adviser’s ability to apply their special fiduciary training.
Advance. It takes a commitment to advance and apply the acquired fiduciary practices and procedures. In a very real sense, fiduciaries should look upon their work as a form of public service, never parlaying their position of trust for personal profit. Here the discussion parallels the numerous debates that currently are taking place across the investment industry about what it would take to make investment consulting (
financial planning) a profession. A fiduciary has to be willing to advance the interests of complete strangers — not just their clients — to apply their acquired specialized knowledge regardless of form or amount of compensation.
What does it take to be a fiduciary? It takes a person who is well educated and trained, who can apply their specialized knowledge and not be encumbered by regulatory structure or be marginalized by their firm’s business mix and who is committed to rising to the top of their profession and mastering the management of investment fiduciary decisions.
Donald B. Trone is president of the Center for Fiduciary Studies and chief executive of Fiduciary360, both in Sewickley, Pa. He was influenced in his thinking for this article by “The Professionalization of Work,” a 2001 treatise prepared by Robert G. Kennedy, Ph.D.
