for the Financial Advisor’s Fiduciary - Blueleaf Advisor

23 Pages·2014·3.99 MB·English

15

Essential Steps

for the Financial Advisor’s
Fiduciary

Standard of Care

In partnership with:
Roger L. Levy, LLM, AIFA®, of Cambridge Fiduciary Services, LLC
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Introduction
Your fiduciary duty, simplified.
Fiduciary responsibilities are integral to the work of a financial advisor. It’s your job to not only act with a
high fiduciary standard of care, but it’s also your job to communicate this with your clients. Your clients,
both current and prospective, have grown increasingly anxious about the state of their savings and
investments. Most advisors feel overwhelmed by the complexity of the fiduciary standards and wonder how
to maintain best practices as their business grows... This checklist will change that.
Here at Blueleaf, we help advisors simplify their business.
Blueleaf’s simple account aggregation, client interaction and state of the art reporting software equips you
with the information and communication tools that can be leveraged to maintain the highest level of
fiduciary standard of care. This checklist will cover best practices and what you can do as a Blueleaf user.
If you’re not a member of the Blueleaf community yet, no problem. This checklist still serves as a
fundamental outline of 15 fiduciary best practices you need to know as a financial advisor, regardless of

what’s in your technology tool kit. Click here if you’d like to learn about Blueleaf Advisor »
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Meet the pro.
Roger Levy, LLM, AIFA®
Roger is a friend of Blueleaf.
CEO of Cambridge Fiduciary Services, LLC, Roger has 25+ years experience guiding fiduciaries, including
investment advisors, with their fiduciary obligations and building due diligence records of their investment
process. As a CEFEX Analyst, he offers fiduciary consulting and assessment services. Click here to email Roger »


Today he shares a checklist of 15 fiduciary best practices. First, a quick preface:

“My trusted advisor...” That is how financial advisors like to be thought of by their clients. How an advisor earns that trust is
another matter. Usually, it is not just a case of smarts or reputation. Most often, it is a question of time. Yet, the advisor is in a
position of trust from the very moment that the advisor is engaged. From that moment, the advisor assumes fiduciary
responsibilities towards the client and a position of trust is created. 

Why not build that into the advisor marketing strategy? By establishing and explaining a “prudent” process that conforms to a
fiduciary standard of care, the advisor acknowledges his fiduciary role and identifies a process designed to achieve appropriate
outcomes. This can be a distinguishing feature of an advisor’s model.
The following is a checklist to guide you in establishing a process to achieve a fiduciary standard of care.
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15
Essential Steps
to achieve a Fiduciary Standard of Care
THE ULTIMATE CHECKLIST

Roger tells all.
BlueBubbles
&

pop up with simple
Follow Roger as he walks through
suggestions.
each essential element of this best
practices checklist.
Let’s get started...
1. Know the Fiduciary Framework

Governing Laws and Controlling Documents -
When you claim to conform to a fiduciary standard of care, you need to know the source of that standard. Generally
speaking, that standard is derived from years of court decisions involving the law of trusts, where courts have found
that when you are in a position of “trust” you take on certain responsibilities involving duties of care and loyalty. With
the passage of time, statutes have been enacted to apply those fiduciary duties to particular relationships and
circumstances.
For advisors, first among these statutes is the Investment Advisors Act of 1940 (“IA”). Under the IA, investment
advisors, unless excluded or exempt, are required to be registered with either the SEC or their state authorities,
depending on the advisor’s activities and assets under management. Curiously, the IA has no specific language
imposing a fiduciary duty on advisors, but Section 206, which has antifraud language prohibiting advisors from
engaging in any practice that is fraudulent, manipulative or deceptive, has been interpreted as reflecting a
congressional recognition "of the delicate fiduciary nature of an investment advisory relationship.” So, it is now well
settled that Registered Investment Advisors (“RIA’s”) owe a fiduciary standard of care to their clients.
The next most important statute from a fiduciary perspective is ERISA – the Employee Retirement Income Security
Act of 1974. This applies to qualified retirement plans but its fiduciary standard, the highest known to law, is well
recognized as representing “fiduciary best practices.” The statute is enforced by the Department of Labor (“DOL”)
which has issued extensive regulations regarding fiduciary duties and “prohibited transactions.”
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Three other uniform statutes also impact fiduciary responsibility –
• UPIA – The Uniform Prudent Investor Act, which applies to private trusts
• UPMIFA – The Uniform Prudent Management of Institutional Funds Act, which applies to endowments,
foundations and nonprofit organizations
• UMPERSA – The Uniform Management of Public Employee Retirement Systems Act, which applies to state,
county and municipal retirement plans
These uniform statutes have been adopted by the majority of states, except UMPERSA, which is adopted in only a few
states.
With an understanding of the regulatory framework, it is also important for an RIA to know what documents govern
the client’s circumstances. So when advising a trustee, one must know the provisions of the trust document and any
amendment. For a retirement plan, the plan document must be reviewed together with any other document that
impacts the investment process, such as board resolutions of the plan sponsor and investment policy statement. For
other institutions, such as foundations and endowments, the charter must be reviewed as well as the terms of any
restricted gift.

This is as simple as understanding the laws for (a) where you are and 

(b) the services you provide. Consider going through the laws with a
business mentor or lawyer in your network. The jargon can be intimidating,
but the practical application can be surprisingly easy to understand.
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2. Know Fiduciary Duties

There are two principles which drive fiduciary responsibility. The first is that a fiduciary owes a duty of loyalty to
each client, i.e. a duty to put the client’s interests before his own. The second is a duty of care, which requires the
fiduciary to fulfill his responsibilities with the care, prudence, skill and diligence of a “Prudent expert.”
All that follows in this Checklist has these two fiduciary principles in mind suggesting that, when advising a client or
making a decision on a client’s behalf, the advisor should apply three tests:
(i) Is this course of action in the client’s best interests?
(ii) Have I taken into account everything needed to arrive at this decision? and
(iii) Is the decision prudent?

prudent (adj.) : acting with or showing care and thought for
the future.
This one’s quite basic: Put the client first, consider their
“whole picture” when making decisions, and always keep
the future in mind.
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3. Institute Comprehensive and Compliant
Engagement Agreement

While the IA permits oral advisory contracts, it is implicit under fiduciary best practices that advisory contracts should
be in writing. Such contracts should confirm the advisor’s fiduciary status (a requirement for ERISA clients) and
describe the services which the advisor will provide. The description should distinguish between those services which
are fiduciary in nature, e.g. asset allocation modeling, portfolio construction, manager selection, and those services
which do not involve fiduciary responsibility, e.g. providing access to investment research or providing a market
outlook. The agreement should describe compensation arrangements (and for ERISA clients, distinguish between
direct and indirect compensation). Sometimes overlooked, the contract should be consistent with disclosures made by
the advisor in its “brochure” ADV Part 2a disclosure document, required under the IA.

Write the contract out, using a balance of detail and simplicity. Transparency from the get-go
benefits both you and your client.
TIP: This is a great time to decide whether you’ll advise on their “whole financial picture” or
simply the assets you manage directly.
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4. Establish a Fiduciary File

It is a best practice to establish a fiduciary file. The contents will vary depending on the type of client but generally a
well maintained fiduciary fill will contain:
• Advisory agreement and any amendments
• Disclosure documents

• Controlling documents e.g. trust or plan documents
We suggest you use online secure file sharing for
your fiduciary file. It’s easy to set up and both
• Marketing material
parties can access the folder any time. Be sure it
syncs to a file on your hard drive as well.
• Investment Policy Statement (“IPS”)
Blueleaf Advisors: This is a good use of the
• Management agreements with separate account managers
Dropbox account you use with clients.
• Investment reports
• Meeting minutes
• Prospectuses
Having a systematized file methodology will facilitate client relationships and allow easy access to documents that
impact the investment process.
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