In simple terms, advisers with fiduciary responsibility have a legal responsibility to put your needs ahead of their own. There are a number of important differences that separate advisers who have fiduciary responsibilities from those who don’t. The following article outlines who is and is not a fiduciary, responsibilities of a trustee, and the differences between advisors, consultants, and money manager.
Fiduciary Responsibilities and Liabilities
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Two pension laws, ERISA and the 2006 Pension Protection Act, establish the regulatory requirements for trustees who are responsible for the investment of retirement plan assets.
This article provides fiduciary information to trustees who use the services of financial advisors to help them invest assets and educate plan participants.
Who is a Fiduciary?
Anyone who has discretionary authority or control over the management of plan assets is a fiduciary. All trustees are fiduciaries. Non-trustees who also exercise control, for example the CFO of a company could also be labeled a fiduciary based on his or her responsibilities.
A financial advisor is a co-fiduciary if that person exercises control or influences trustees who are the decision-makers for plan assets. Influence and control can have a blurry distinction. For example, some trustees follow advisor advice 100% of the time. After all, the advisors are supposed to be the experts. But, in this example, the advisors are also the decision-makers.
Trustees are Always Fiduciaries
Trustees are always fiduciaries, but they have critical choices to make that enables them to delegate certain duties to qualified professionals and reduce their fiduciary responsibilities and liabilities in the process.
- Trustees can make unassisted investment decisions in which case they are exposed to the Prudent Expert Law
- Trustees can hire financial professionals who have the expertise to help them discharge their duties.
- Trustees who use the services of financial professionals must make prudent selection decisions when they hire experts.
- Trustees are named fiduciaries and they are liable for the advice of advisors unless they follow strict guidelines for selecting, monitoring, and obtaining disclosures from advisors.
Advisors, Consultants, and Money Managers
Two types of professionals provide financial advice and make investment decisions on behalf of retirement plan, endowment, and foundation trustees.
- Advisors and consultants provide the same core services.
- Written Investment Policy Statements
- Asset Allocation Models
- Money Manager Selection
- Risk Management
- Performance Analysis & Reporting
- Money Managers provide the following core services
- They manage individual portfolios (separate accounts) or pooled portfolios (mutual funds)
- Money managers only provide discretionary services – make and execute decisions without checking with trustees in advance
- Economic Research
- Investment Outlooks
- Security Analysis
- Security Selection (buys)
- Security Sells
- Multiple Levels of Asset Allocation
- Advisors and consultants provide discretionary and non-discretionary services.
- Most advisors and consultants provide non-discretionary services. That is, they give advice, but trustees are the final decision-makers.
- A small percentage of advisors and consultants provide discretionary services. That is, they make and execute decisions without checking with trustees in advance. For example, they may sell a fund and buy another fund with no authorization from trustees.
A high percentage of trustees of smaller asset amounts (under $25million) have unknowingly hired sales representatives to advise them on the investment of plan assets. Sales representatives are not fiduciaries. That’s because their role is limited to selling investment and insurance products. They are not compensated to help trustees and participants achieve plan and personal financial goals. The selection of sales representatives increases trustees exposure to fiduciary liability.