Insights from the experts in investment fiduciary responsibility.

Fiduciary Excellence Part 1: Organizing a Client Portfolio

Posted by Terra McBride, MBA, AIF®, Vice President of Marketing & Professional Development on January 07, 2019

Permalink |     

Fiduciary Excellence Part 1: Organizing a Client Portfolio

Managing the assets of another person or of an organization puts you in a special relationship of trust, confidence and legal responsibility. In other words, you are a fiduciary. As such, you are bound by the dual duties of loyalty and care.

Even though the DOL fiduciary rule has been vacated, the Impartial Conduct Standards are in play. Your duty of loyalty as a fiduciary is encapsulated within the Impartial Conduct Standards. And therefore, you are required to act in the best interest of your clients, with no more than reasonable compensation and no misleading statements.

Understanding what it means to be a fiduciary is one thing. Conducting yourself as a fiduciary is something else entirely. Last October, I earned my Accredited Investment Fiduciary® (AIF®) Designation. During my studies, I was surprised to learn that the law does not speak of performance in instances of a fiduciary breach. It’s all about process. Sure, a client may sue an advisor because of performance. But if the advisor can clearly demonstrate that they followed a prudent process, it’s extremely difficult for the litigant to claim there was a fiduciary breach based solely on performance.

I imagine your goal is to strive for fiduciary excellence with all of your clients. But what does that really look like? Well, our philosophy (rooted in case law, by the way) is that fiduciary excellence can only be achieved through prudent processes, consistently applied. Nearly 20 years ago, Fi360 created the Fiduciary Quality Management System, which clearly breaks down the steps you must take to apply a prudent process consistently.  This system has a four-part structure – Organize, Formalize, Implement and Monitor.

Let’s take a look at the Organize step at a high level.*

FQMS Step 1: Organize

The first step of the Fiduciary Quality Management System is to Organize. This step entails knowing and following the rules, understanding and acknowledging roles, avoiding or properly managing conflicts of interest and protecting client assets. I won’t dig into each of these items for this blog post. But if you’re interested in learning more about the Organize step in detail, check out Rich Lynch’s Coaching Call for Fi360 Designees dedicated to this topic.

Governing Documents

One of the criteria in our Prudent Practices® Handbook is to create and maintain a fiduciary file. The list of files we suggest including in this file is pretty lengthy and is often ignored. Governing documents will help you define roles, set criteria, establish service requirements and demonstrate procedural prudence. Some of the key documents you need include:

  • Summary Plan Document
  • Summary of Material Modifications
  • Investment Policy Statement (IPS)
  • Trust Document
  • Investment Committee Policies or By-laws
  • Spending Policy
  • Conflict of Interest Policy

Closely following this recommendation is not only crucial to keeping you organized from the outset, but it sets you up well for documenting your prudent investment process.

Understand and Acknowledge Roles and Responsibilities

This may seem obvious but it’s important to determine who is in a fiduciary role and who is not. Think of the fiduciary as the commanding officer on a ship. That person is in charge and is responsible for the whole process. So, making sure everyone understands who fills that role is critical.

Next is the investment committee. For this group to function properly, there should be clearly defined policies or by-laws. The investment committee will also define the process for managing the portfolio. We recommend including members of senior management as well as staff from the rank and file. The bottom line is that anyone who serves on the investment committee must be willing to be objective, work together and put the interests of plan participants first. Another point that may seem obvious but it’s good to have an odd number of members for the investment committee, in the event you need to take a vote. And we suggest setting up the structure so that some of the members rotate out after a select period of time. This allows for a fresh perspective on the work being done.

Avoiding | Managing Conflicts of Interest

Don’t over-complicate this. If there is anything that prohibits you from being completely objective or if you believe there is a conflict of interest, then there probably is and you must remedy it. We strongly recommend putting a conflict of interest policy in place ahead of time, even if there is no conflict currently. You must plan for the “What if?” scenario.

Here’s a simple exercise for you:

Mary, a board member for a local eleemosynary, has serve on the board for three and a half years and has become influential because of her work ethic, investment expertise and ability to resolve conflicts when they arise. There is concern among several board members about their third-party advisor (a friend of the committee chairman) who has been engaged for five years and they feel is getting paid too much for the services provided. Some committee members are pushing for replacing the current advisor with Mary, who is a full-time investment advisor.


Can Mary serve as both an investment committee member and the investment advisor?

What process should be followed in replacing the investment advisor?

While it is in no way illegal for Mary to act as both the investment advisor and an investment committee member, it creates an immediate conflict of interest. We would recommend Mary choose one role or the other. Regardless of Mary’s decision, the committee should go through a proper vetting process when replacing the investment advisor, even if Mary opts to throw her hat in the ring for the role.

Protecting Client Assets

There are some simple safeguards you can put into place that will go a long way in protecting client assets. Investment stewards must assess their service provider agreements and determine whether the relationship is “reasonable.” The only way to do that is to decide whether the services being provided are reasonable for what is being paid. Under ERISA, service providers MUST deliver:

  • A description of services
  • Status as a fiduciary or registered investment advisor
  • Receipt of direct and indirect compensation

A best practice is to include these disclosures in all service agreements. Be sure to regularly review all vendor contracts and do it at least every three years.

Qualified plan assets should be held within the purview of a viable judicial system, so that they can be seized if there is suspicion of mismanagement. All plan sponsors must have a fidelity bond to protect from theft of the assets. Custodians require insurance, internal controls and physical security measures. And finally, plan assets and data must be secured against cyber threats. This last point is so important, we decided to add it as a criterion to our fiduciary handbooks.

The foundation of a prudent process is laid in the first step of the Fiduciary Quality Management System. Being able to consistently apply your prudent process can only happen when you are organized from the outset.


*Feb. 28, 2019 is National Fiduciary Day! In celebration of the occasion, we are featuring highlights from each our Prudent Practices® right here. Stay tuned to the blog throughout this month for subsequent posts that highlight the other steps of the Fiduciary Quality Management System.

Previous Post Next Post Return to Blog

Updated weekly

Have an idea for the Fi360 blog?
Send us your question or comment

Subscribe to the Fi360 Blog

Let’s get to work. Connect