Blog

Insights from the experts in investment fiduciary responsibility.

Document Your Best Intentions

Posted by Ryan Lynch, AIF®, Client Success Expert on March 08, 2016

Permalink |     

Document Your Best Intentions
Ryan Lynch, AIF®, Client Success Expert

In 11/22/63, Stephen King’s hero, Jake Epping, is a high school teacher turned time-traveler.  Having been shown a tear in the fabric of spacetime by Al, proprietor of the eponymous local diner, Jake stumbles back to September 9, 1958.  After a brief tour of his home town of yesteryear, Al launches into the “rulebook” on time travel to prepare Jake for his mission: save President Kennedy at all costs.  Through the ensuing “test” trips, Jake learns that some events he alters – with the best of intentions – lead to unintended and unsavory outcomes in the present day. 

In 2012, breach of fiduciary duty was cited as the top complaint in FINRA arbitration cases.  In the major court cases we have seen over the past decade, breaches occur because of a failure to act (or act prudently), rather than a failure to achieve a certain outcome.  In Tussey v. ABB, the defendant was found liable, among other sins, for failure to monitor recordkeeping fees and negotiate for rebates.  Again, in Nolte v. Cigna, excessive fees resulted in an eight figure settlement.  In both cases, a process that included the monitoring of fees (Practice 4.4 of the Prudent Practices) could have protected the defendants from litigation.

Boasting to prospects about one’s process is one thing, but documenting it is quite another.  As we teach in the AIF® Training, documentation prevents “Monday morning quarterbacking”.  What if a poorly-performing manager is replaced by a promising one who ends up liquidating the fund six months later?  What if I miss the boat on the international equities boom?   Chances are if a disaster strikes due to circumstances beyond one’s control, a breach of fiduciary duty did not occur.  However, the documentation to back up your decision will make that next quarterly review go much more smoothly, and quell any bad blood before it has a chance to boil.

Stephen King contends that even with the advantage of foreknowledge, we can never be certain of how our decisions will impact the future.  Despite our best intentions, mistakes will be made and we may need to weather an occasional storm.  However, a documented process is the rudder that will keep the ship on course.  That way, when a favorite fund manager is implicated in a scandal or the next recession hits, we can point to a well-documented, consistent, and yes, prudent process.  It may be the only thing that we can truly control in this business.

Previous Post Next Post Return to Blog
Let’s get to work. Connect