Investing as a Fiduciary

From INVESTING AS A FIDUCIARY© Islepress 2004, 2010, 2016 by John Lohr and Ian Lohr

CHAPTER 1 FIDUCIARY RESPONSIBILITY

If you are the trustee of an employee benefit plan, a foundation, endowment or a common-law trust, you are probably a fiduciary, and as such have certain specific responsibilities, duties and liabilities.  Generally we use ERISA as the prototype for fiduciary responsibility.  However, it must be noted that ALL financial relationships in which someone else has a claim to the assets, like the beneficiaries of a trust, are subject to fiduciary rules and requirements.  We will examine the various regulatory requirements in the next chapter.  Being a Trustee has fiduciary implications and should not be taken lightly.

Fiduciaries have to provide individualized investment advice given pursuant to a mutual understanding (read: contract) on a regular basis pertaining to valuation or recommendations as to investing for a fee.  In the investment management consulting arena, this defines the money manager, and often the financial advisor, broker, or consultant.  The duties of a fiduciary require unconflicted loyalty to the client first and the penalties for fiduciary breach are stiff, as discussed above.  There are five general standards, which govern a fiduciaries conduct.

1. They must be solely in the interest of the participants and beneficiaries.  Benefits must inure to the individual plan participants who have a right to monitor the activities of the fiduciary and the investments of the plan.  But the trustees aren’t listening.
2. They must be for the exclusive purpose of providing secure benefits to participants and their beneficiaries.  But the trustees aren’t listening.
3. They must be discharged in accordance with written instruments and documents which should include written investment objectives.  Fiduciaries have the right to rely on professionals to assist them through this process.  But the trustees aren’t listening.
4. Investment duties must be discharged with the care, skill, prudence and diligence of an expert familiar with such matters.  A fiduciary must consider all the facts and circumstances he should know are relevant to the plan’s investment objectives.  But the trustees aren’t listening.
5. Investments must be diversified so as to minimize the risk of large losses unless under the circumstances it is clearly prudent not to do so.  It is difficult to conceive of a situation where it would be clearly prudent not to minimize the risk of large losses.  But the trustees aren’t listening.

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