New Publication Defines the “Fiduciary Ethos” For Financial Advisors Acting as Fiduciaries

Posted on September 19th, 2011 at 9:31 AM

“Fiduciary Ethos; Living in a Fiduciary World” is superb guidance for any financial advisor serving as or planning to serve as a fiduciary to clients.  Whether the advisor is a financial planner, wealth manager or retirement advisor, or whether the clients are retail, institutional, individuals, private trusts, foundations, endowments, or retirement plans, the publication written by Donald P. Trone is a must-read.  Perhaps the best feature of the publication, endorsed by the Financial Planning Association (FPA), is that its guidance is grounded upon existing standards and codes promulgated by the FPA as well as the Certified Financial Planner (CFP) Board of Standards.

                “Fiduciary Ethos” begins with three important structural elements and branches out from there.  Those structural elements are: 1) the ethos base, which is a principles-based, fiduciary process standard; 2) a flexible, “universal”, decision-making framework that defines a procedurally prudent process; and 3) leadership behaviors that are essential to the role of the financial planner.  Thus, Fiduciary Ethos contains the following traditional six-step financial planning process (now coupled with some of the essential leadership behaviors in parentheses):

1)      Define Roles and Responsibilities (be objective)

2)      Analyze Goals and Objectives (be intelligent)

3)      Strategize, in light of risk tolerance, time horizon, assets and expected performance (be innovative)

4)      Formalize recommendations and communicate (be decisive)

5)      Implement recommendations (be courageous) and

6)      Monitor performance with objectives and communicate (be honest)

                Indeed, the essential leadership behaviors contained in Fiduciary Ethos correspond to FPA and CFP Board principles.  For example, “objectivity” as a FPA and CFP Board principle is expanded to include “prudent, patient, purposeful and pragmatic.”  Likewise, “competence” as a FPA and CFP Board principle is expanded to include “competent, intelligent, analytical, strategic, and communicative.”  Finally, “professionalism” as a FPA and CFP Board principle is expanded to include “innovative, decisive, exemplary, disciplined and motivational.”

                Fiduciary Ethos fully explains each of the six traditional steps outlined above.  Financial advisors should familiarize themselves with all of those explanations.  As an example, let’s examine the explanation associated with the fifth step, which is to monitor.  There are several essential leadership behaviors associated with this step.  The first is honesty, defined as “marked by integrity, reputable, moral.”  The overview states: “Once the optimal investment strategy has been designed, the IPS [Investment Policy Statement formalizing the recommendations], and the strategy implemented, the final critical step is the ongoing monitoring of the investment program.”  To that end, financial advisors must monitor the performance of selected money managers and evaluate the “continuing viability of the client’s goals and objectives.”  That evaluation may reveal the need to reinitiate some or all of the six steps of the financial planning process.

                A second essential leadership behavior associated with the monitoring step is diligence, defined as “steady, earnest, energetic, stays on task.”  What this means in practice is that financial advisors should prepare periodic reports that compare performance with objectives on a monthly, quarterly and annual basis.  Here are four questions that need to be answered:

1)      What is the current asset allocation of the overall portfolio?

2)      Does it need to be rebalanced?  If so, what are the client’s cash flows for the coming six months; and can those cash flows (contributions and disbursements) be used to rebalance the portfolio?

3)      How has each money manager performed relative to the manager’s index and peer group?  Is there evidence that a money manager may be deviating from the strategy?

4)      Are there managers that should be placed on a watch list, or even terminated?

Termination of a manager is covered in detail.  Apart from performance, considerations include changes in the portfolio team, legal or regulatory problems, changes in strategy, and changes in risk-adjusted performance.

                The third and fourth essential leadership behaviors associated with the monitoring step are accountability and genuineness.  The former relates to controlling and accounting for costs and expenses.  The latter relates to conflicts of interest, self-dealing and breaches of a code of conduct, all of which relate to the duty of loyalty that financial advisors owe their clients.  Notably, Mr. Trone remarks, “There is a higher propensity for investor litigation because of the failure of so many financial institutions and investment products, and dissatisfied investors are more vocal and more visible.” 

                The final essential leadership behavior associated with the monitoring step is motivation, defined as “ability to persuade others to take positive action, committed to the success of the organization, and the well being of staff and clients.”  This relates to the concept of professionalism, or, as stated in recent Securities and Exchange Commission pronouncements, the “culture of compliance.” 

                The fiduciary’s duties are not satisfied, though, even after performing each of the six traditional steps.   The process is ongoing, because assessment follows monitoring.  The publication details the assessment procedures that fiduciaries should follow.  Mr. Trone attaches a Financial Planning Services Checklist as well as a Self Assessment Instrument to assist advisors comply with the entire process.

                In conclusion, Fiduciary Ethos provides valuable guidance to the fiduciary.   Finding one’s fiduciary ethos undoubtedly will elevate this client service profession to a level that will benefit both the client and the financial advisor!  After all is said and done, fiduciary ethos is found when clients are meeting their goals and objectives, the financial advisor is meeting his or her own goals and objectives, and clients staff and peers view the financial advisor as an effective leader.  


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