Identifying the fiduciaries
Posted by Bennett Aikin, AIF®, VP of Professional Development, fi360, Inc. on September 10, 2015
Fiduciary duty is determined by facts and circumstances and it is not uncommon for fiduciaries to be unaware of their status. One of the first issues that will arise in breach of fiduciary duty litigation is determination of whether the defendent, in fact, owed a fiduciary duty. For the protection of the fiduciaries and investors alike, it is better to address this issue up front, by properly identifying the fiduciaries, documenting their status and role in the investment policy statement, and requiring the fiduciaries to acknowledge their status in writing. Not only will this help prevent misunderstandings, it ensures every step in the investment process is accounted for and that the fiduciaries are taking the proper steps to fulfill their role.
So what makes a person a fiduciary? There are four general categories of fiduciaries in regards to managing an investment process:
- Those who are "named" in plan or trust documents
- Those whose function equates to providing comprehensive and continuous investment advice
- Those who have the discretion to buy and sell investable assets
- Those who have the authority to appoint other fiduciaries
Where there can be some doubt as to fiduciary status is the case of hired investment advisors. In the case of litigation or arbitration, a judge or panel would ask some form of the following three questions to determine status:
- What were the scope of services being offered?
- What was the client's level of sophistication in managing investments?
- How many investment options were suggested to the client?
Again, it would be better for all parties if these questions were asked before any disputes arise that might lead to litigation or arbitration. Better yet, the client and advisor should go over these questions and have a mutual understanding of fiduciary status before an engagement is solidified. If the advisor is brought on for a single, one-time purpose, such as a manager search, then the advisor is might not be a fiduciary, whereas being hired on a retainer basis almost certainly arises fiduciary duty. The more sophisticated the client is, and therefore less dependent on the advisor, the less likely the advisor will be deemed a fiduciary. And, if an advisor only suggests a single investment option, the advisor has ostensibly taken on investment discretion over the account and would be deemed a fiduciary.
Once the determination of fiduciaries is made, it is best to have the fiduciaries acknowledge their status in writing. You can view a sample acknowledgement of fiduciary duty letter here. Not having a signed acknowledgement won't shield a fiduciary from their liability, but having one both prevents misunderstandings in the event of dispute and creates a greater awareness of the expectations of the fiduciary relationship.
