Fi360

Fiduciary Links: A Nod to the Past and a Look to the Future

Posted by fi360 Team on May 27, 2014

>>>>>Blaine’s monthly Fiduciary Corner column for Investment News was published this week, and it focuses on how advisors might be better off watching case law, rather than legal and regulatory developments, for insights on how the fiduciary standard will be shaped going forward. Blaine’s column specifically mentions recent decisions affecting how advisors need to treat fee disclosure, IRA rollovers, and other hot button issues. For an example of the historic impact court decisions have had, let’s take a look at one of the seminal cases regarding the fiduciary standard of care.

Historically the fiduciary duty of care, and its subsidiary duty of suitability, can be traced to a relatively obscure but momentous 19^th century common law case, Harvard College v. Amory (1830). The dispute centered on management of a $50,000 trust, comprised mostly of financial and manufacturing stocks, and the subsequent loss of 40 percent.

In holding the surviving trustee, Francis Amory, not at fault for having closely followed the decedent’s instructions, Justice Putnam famously articulated the Prudent Man, or Investor, Rule by stressing process, not results. All that can be required of a trustee, he wrote, is to conduct himself faithfully, exercise discretion, and “observe how men of prudence, discretion and intelligence manage their own affairs.”

Investment fiduciaries owe a large debt of gratitude to Justice Putnam. At the time, it may have seemed like just another property dispute, but today nearly all courts will judge an investment decision not on the severity of any loss, but on the process followed by the fiduciary. Thus, if a fiduciary discharges its duties, as described in ERISA, “with the care, skill, prudence, and diligence under the circumstances then prevailing…that a prudent man acting in a like capacity and familiar with such matters would use,” then he or she will not be held liable.

In 1935, the legal bar developed the original Restatement of Trusts, or fiduciary guidance for managing trusts under common law, updating those requirements in 1959 and 1992. The most recent Restatement resulted in widespread state adoption of the model Uniform Prudent Investor Act, which mandates diversification as the most important strategy for reducing risk.

Now on to the rest of the week’s best links:

News and columns from the leading trade, consumer, and mainstream media:

4 considerations when evaluating alts [InvestmentNews]
Older investors turn to the web to manage assets [InvestmentNews]
SEC’s White calls third-party adviser exam idea ‘creative’ [InvestmentNews]
Roth IRAs growing twice as fast as traditional IRAs: EBRI [ThinkAdvisor]

From the organizations/associations/government/academia:

CEFEX sent a letter earlier this year to the SEC asking for the reconsideration of the use of third-party audits. This issue has received renewed interest as of late from the SEC Commission Daniel Gallagher.

From the blogs: