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Choosing an advisor with fiduciary responsibility who, by definition, implements prudent financial management practices, is like taking precautionary life saving measures while in the water. An advisor with fiduciary responsibility will minimize short and long-term financial risk and identify investment opportunities that will lead to increased value, while always placing the clients’ best interest ahead of their own. The following excerpt discusses what fiduciary responsibility means for the 21^st century.

New Directions in Fiduciary Responsibility

by Stephen Viederman.  To view the complete article visit Institutional Shareowner

This vision of fiduciary responsibility carries new and redefined obligations for fiduciaries.

• Fiduciaries should be knowledgeable about the social, environmental, political and cultural issues that affect their portfolios and which are analytic tools integrated with more conventional financial analysis. These issues include among others climate change, labor conditions and human rights worldwide, diversity on boards and in the workforce, and product safety.
• Fiduciaries should use investment managers who have the skills and resources to implement an investment program that incorporates the interrelationships between financial decision-making and social and environmental issues, and who are also knowledgeable about these issues. This is not portfolio screening.
• Fiduciaries should review their entire portfolios, not individual assets or even individual asset classes. Single decisions affect total portfolios that in turn have societal effects. For large institutional investors the bottom line is portfolio-wide. This requires awareness that negative economic externalities (e.g. pollution) and positive returns in a single company (e.g. pharmaceuticals) may benefit a particular firm they own, but will likely damage the asset value of other firms they own.6
• Fiduciaries should develop proxy-voting guidelines, make them available to their beneficiaries, and disclose their actual votes on proxy resolutions. Fiduciaries are the stewards of capital entrusted to them to look out for all their beneficiary interests.
• Fiduciaries should demand greater transparency and disclosure from the companies in their portfolios on social and environmental issues as well as issues of corporate governance. They will also need to encourage best practice, and better practice.
• Fiduciaries should practice the same levels of transparency and disclosure they demand of companies on all aspects of their activities. Fiduciaries should explore the potential of alternative investments and alternative investment strategies to channel funds into new areas that are socially just and environmentally sound, as well as financially viable.
• Fiduciaries should ask their lawyers how to accommodate these new responsibilities and obligations, rather than ask if they can. Even in situations where a legislature has directed that the highest financial rate of return is the sole purpose of a pension fund, such as the case of New York, this new analytical approach to financial decision-making need not be an obstacle. Substantial research shows that consideration of the risks and opportunities that social, environmental, political and cultural issues raise can improve financial performance, or at least have no negative effect.

This view of fiduciary responsibility and the obligations of fiduciaries is not a radical approach to institutional investing. In fact it is very conservative because it makes best use of all available information that can positively and negatively affect financial returns. The transparency of analysis and action that results should help address not only long-term societal impacts of investment decisions, but also immediate needs for greater disclosure from companies.

The transition from the present view of fiduciary responsibility to a new view may take some time. But the debate on these issues must begin now to the benefit all beneficiaries, shareholders and stakeholders alike.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.