What is Your Fiduciary Identity?

By Ron Hagan, CEO

It seems these days that nearly every investment advisor who serves retirement plans uses the phrases "fiduciary solution" or "fiduciary support" in their sales literature.  With plan sponsor lawsuits against service providers rising, many advisors are evaluating the prudence of assuming too strong a fiduciary posture.

The trouble is that many advisors are not really sure of the boundaries that define their fiduciary risk.  But with plan sponsors hiring advisors based on fiduciary issues, it is hard for advisors to back off.  So what should advisors do?

First determine if your firm's services are actually intended to help retirement plan sponsors satisfy their fiduciary duty.  If not, do not make statements that imply or declare that your firm does so.

Second stop delivering documents to plan sponsors that give them the impression that you are helping them meet their fiduciary duty.  There is an important legal difference between your getting involved in fiduciary governance functions versus only delivering investment reports.  The more an advisor performs governance functions, the greater their liability becomes.  The really wasteful part of spending energy on plan governance functions is that various laws lay all of the accountability for them on plan sponsors.  This is true regardless of how much help they might receive from an advisor.  So why chance it.  Steer clear of plan governance functions.  It would also be good to be sure that you know what defines a fiduciary governance function.

Third, conduct a self assessment of your firm's practices.  Are they anti-fiduciary?  Evaluate your firm's practices against the fiduciary standard to which your clients are responsible.  (Click here to obtain a copy.)  Does your firm support conformity to the standard?

Fourth, if you promote your firm as a "co-fiduciary", be certain that you disclose the limits of its role.  In growing numbers, retirement plan sponsors are learning that some investment providers who emphasize their status as a co-fiduciary employ a misleading claim.  The era is passing quickly for advisors who obtain assets under management on the strength of a claim that they relieve plan sponsors of all of their fiduciary liability.  In fact, the plaintiff bar is actively pursuing advisors who make such claims when sponsors are sued by plan participants' class action lawsuits.  The co-fiduciary tactic is both dangerous for advisors and diminishes your chance of winning new business.

The emergence of a fresh round of investment management industry scandals and lawsuits is making plan sponsors wonder who they can trust.  Calming their fear is a key to a successful advisor marketing and client retention program.  But how do you calm decision makers' fears and prove your trustworthiness?

An increasing number of investment advisory firms are seeking certification from CEFEX under the Global Fiduciary Standard of Excellence.  There is mounting evidence that a CEFEX certification is a powerful way to impart a fiduciary seal of approval on a firm's services.

For example, InterServ, LLC, a CEFEX certified advisor, recently won a $28 million retirement plan client mostly due to its investment committee's members' worries about their fiduciary risk.  InterServ unseated a 16 year incumbent advisor who had nothing more to attest to its competency in supporting its clients' fiduciary duty than the old co-fiduciary claim.

The most important action for advisors to take might very well be emerging in the form of CEFEX certification.  Since its rollout in mid 2006, centers of influence within the retirement plan community are evaluating the way that CEFEX conducts its certification audits.  One nonprofit group, called the Fiduciary Roundtable, issued a circular to its members in January 2007 calling for them to engage only CEFEX certified investment advisors and investment managers.

If you have not looked into CEFEX yet, you should check into it before its momentum catches you off guard.  (Click here and request information about CEFEX's certification program for Investment Advisors.)