15 Essential Steps. Fiduciary. Standard of Care. for the Financial Advisor s

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Standard of Care


Essential Steps


Your fiduciary duty, simplified.

Fiduciary responsibilities are integral to the work of a financial advisor. It’s your job to not only act with a high fiduciary standard of care, but it’s also your job to communicate this with your clients. Your clients, both current and prospective, have grown increasingly anxious about the state of their savings and

investments. Most advisors feel overwhelmed by the complexity of the fiduciary standards and wonder how to maintain best practices as their business grows... This checklist will change that.

Here at


, we help advisors simplify their business.

Blueleaf’s simple account aggregation, client interaction and state of the art reporting software equips you with the information and communication tools that can be leveraged to maintain the highest level of

fiduciary standard of care. This checklist will cover best practices and what you can do as a Blueleaf user. If you’re not a member of the Blueleaf community yet, no problem. This checklist still serves as a

fundamental outline of 15 fiduciary best practices you need to know as a financial advisor, regardless of what’s in your technology tool kit. Click here if you’d like to learn about Blueleaf Advisor »



Roger Levy, LLM, AIFA®

Roger is a friend of



CEO of Cambridge Fiduciary Services, LLC, Roger has 25+ years experience guiding fiduciaries, including investment advisors, with their fiduciary obligations and building due diligence records of their investment process. As a CEFEX Analyst, he offers fiduciary consulting and assessment services. Click here to email Roger »
 Today he shares a checklist of 15 fiduciary best practices. First, a quick preface:

“My trusted advisor...” That is how financial advisors like to be thought of by their clients. How an advisor earns that trust is another matter. Usually, it is not just a case of smarts or reputation. Most often, it is a question of time. Yet, the advisor is in a position of trust from the very moment that the advisor is engaged. From that moment, the advisor assumes fiduciary

responsibilities towards the client and a position of trust is created. 

Why not build that into the advisor marketing strategy? By establishing and explaining a “prudent” process that conforms to a fiduciary standard of care, the advisor acknowledges his fiduciary role and identifies a process designed to achieve appropriate outcomes. This can be a distinguishing feature of an advisor’s model.

Meet the pro.





pop up with simple suggestions.

Roger tells all.

Follow Roger as he walks through each essential element of this best practices checklist.

Essential Steps

to achieve a Fiduciary Standard of Care



Governing Laws and Controlling Documents

-When you claim to conform to a fiduciary standard of care, you need to know the source of that standard. Generally speaking, that standard is derived from years of court decisions involving the law of trusts, where courts have found that when you are in a position of “trust” you take on certain responsibilities involving duties of care and loyalty. With the passage of time, statutes have been enacted to apply those fiduciary duties to particular relationships and


For advisors, first among these statutes is the Investment Advisors Act of 1940 (“IA”). Under the IA, investment advisors, unless excluded or exempt, are required to be registered with either the SEC or their state authorities, depending on the advisor’s activities and assets under management. Curiously, the IA has no specific language imposing a fiduciary duty on advisors, but Section 206, which has antifraud language prohibiting advisors from engaging in any practice that is fraudulent, manipulative or deceptive, has been interpreted as reflecting a

congressional recognition "of the delicate fiduciary nature of an investment advisory relationship.” So, it is now well settled that Registered Investment Advisors (“RIA’s”) owe a fiduciary standard of care to their clients.

The next most important statute from a fiduciary perspective is ERISA – the Employee Retirement Income Security Act of 1974. This applies to qualified retirement plans but its fiduciary standard, the highest known to law, is well recognized as representing “fiduciary best practices.” The statute is enforced by the Department of Labor (“DOL”) which has issued extensive regulations regarding fiduciary duties and “prohibited transactions.”


Three other uniform statutes also impact fiduciary responsibility –

UPIA – The Uniform Prudent Investor Act, which applies to private trusts

UPMIFA – The Uniform Prudent Management of Institutional Funds Act, which applies to endowments,

foundations and nonprofit organizations

UMPERSA – The Uniform Management of Public Employee Retirement Systems Act, which applies to state,

county and municipal retirement plans

These uniform statutes have been adopted by the majority of states, except UMPERSA, which is adopted in only a few states.

With an understanding of the regulatory framework, it is also important for an RIA to know what documents govern the client’s circumstances. So when advising a trustee, one must know the provisions of the trust document and any amendment. For a retirement plan, the plan document must be reviewed together with any other document that

impacts the investment process, such as board resolutions of the plan sponsor and investment policy statement. For other institutions, such as foundations and endowments, the charter must be reviewed as well as the terms of any restricted gift.

This is as simple as understanding the laws for (a) where you are and 
 (b) the services you provide. Consider going through the laws with a

business mentor or lawyer in your network. The jargon can be intimidating, but the practical application can be surprisingly easy to understand.


There are two principles which drive fiduciary responsibility. The first is that a fiduciary owes a duty of loyalty to each client, i.e. a duty to put the client’s interests before his own. The second is a duty of care, which requires the fiduciary to fulfill his responsibilities with the care, prudence, skill and diligence of a “Prudent expert.”

All that follows in this Checklist has these two fiduciary principles in mind suggesting that, when advising a client or making a decision on a client’s behalf, the advisor should apply three tests:

(i) Is this course of action in the client’s best interests?

(ii) Have I taken into account everything needed to arrive at this decision? and

(iii) Is the decision prudent?

prudent (adj.) : acting with or showing care and thought for the future.

This one’s quite basic: Put the client first, consider their “whole picture” when making decisions, and always keep the future in mind.


While the IA permits oral advisory contracts, it is implicit under fiduciary best practices that advisory contracts should be in writing. Such contracts should confirm the advisor’s fiduciary status (a requirement for ERISA clients) and

describe the services which the advisor will provide. The description should distinguish between those services which are fiduciary in nature, e.g. asset allocation modeling, portfolio construction, manager selection, and those services which do not involve fiduciary responsibility, e.g. providing access to investment research or providing a market outlook. The agreement should describe compensation arrangements (and for ERISA clients, distinguish between direct and indirect compensation). Sometimes overlooked, the contract should be consistent with disclosures made by the advisor in its “brochure” ADV Part 2a disclosure document, required under the IA.

3. Institute Comprehensive and Compliant

Engagement Agreement

Write the contract out, using a balance of detail and simplicity. Transparency from the get-go benefits both you and your client.

TIP: This is a great time to decide whether you’ll advise on their “whole financial picture” or simply the assets you manage directly.


It is a best practice to establish a fiduciary file. The contents will vary depending on the type of client but generally a well maintained fiduciary fill will contain:

• Advisory agreement and any amendments

• Disclosure documents

• Controlling documents e.g. trust or plan documents

• Marketing material

• Investment Policy Statement (“IPS”)

• Management agreements with separate account managers

• Investment reports

• Meeting minutes

• Prospectuses

Having a systematized file methodology will facilitate client relationships and allow easy access to documents that impact the investment process.

4. Establish a Fiduciary File

We suggest you use online secure file sharing for your fiduciary file. It’s easy to set up and both parties can access the folder any time. Be sure it syncs to a file on your hard drive as well.

Blueleaf Advisors: This is a good use of the Dropbox account you use with clients.


The Investment Policy Statement is the business plan for managing a client’s investments and should be established for each client, irrespective of whether the client is an individual, trust, endowment, retirement plan, or other institution. The IPS should be sufficiently detailed that a third party could apply it but not so detailed that it requires frequent amendment.

Accordingly, a well-constructed IPS will address the following topics:

• Identify those involved in the investment process and describe their roles

• Describe the investment objective

• Identify acceptable asset classes

• Describe permitted investment vehicles

• Identify investment selection and monitoring criteria

• Define investment watch list and replacement criteria

• Identify Qualified Investment Default Investment and Establish “safe harbor” protection 
 (Section 404(c) relief) for ERISA plans

• Describe criteria for selecting, monitoring and evaluating service providers

• Establish procedures for controlling and accounting for investment expenses

• Establish procedure for disclosing and managing conflicts of interest

5. Prepare an IPS

Create a template file that lists each topic and then fill it out for each client. Blueleaf Advisors: Paired with the Blueleaf sharing feature, your IPS will add to your ability to become a value-add COI for

referrals from your clients’ other advisors (lawyers, accountants, etc.).


It is well recognized that diversification drives investment performance more than security selection, and Modern Portfolio Theory, though criticized, offers a prudent methodology for asset allocation and portfolio construction. Applying generally accepted investment theories, a prudent process will therefore involve the following steps:

• Identify an investment time horizon

• Identify an appropriate level of risk

• Identify an expected modeled return

• Select asset classes that are consistent with the portfolio’s time horizon, risk and return objectives and IPS

6. Achieve Prudent Portfolio Diversification

If you have a client portal, you’re already offering 24/7 transparency for clients to see “where my money is” and are avoiding misunderstandings around diversification. With the right portal, investment plans, risks, return, asset class, etc, can all be accessed by clients in an automated system that they actually understand.


The IPS will identify acceptable asset classes which will typically include the following:

• Stable Value/Money Market

• Fixed Income – US/International

• US Large Cap Equities

• US Mid Cap Equities

• US Small Cap Equities

• International Equities

• Asset Allocation Funds (Target Retirement Date/Lifestyle)

• Alternative Investments


The IPS will describe permitted investment vehicles. These will likely include:

• Mutual funds

• Collective trusts

• Separate accounts

• Individual securities

Note that for ERISA clients, the selection of separate account managers may relieve other plan fiduciaries from liability for the investment decisions of the manager, provided that the manager meets certain criteria and

acknowledges its fiduciary responsibility as an asset manager.


Consistent with the IPS, the advisor should apply a consistent and dependable investment selection and monitoring process.

A.) Apply Quantitative Analysis

• Identify a recognized benchmark index to be used over a full market cycle (e.g. a minimum of 5 years) and an appropriately defined peer group of investment managers, with superior 5 year standard deviation (volatility of returns)

• Identify consistency of investment approach and appropriateness of investments in light of investment objective and IPS constraints, including liquidity needs

• Verify fair and reasonable investment management expenses
 B.) Apply Qualitative Analysis

• Verify stability and culture of the organization

• Determine that there are no pending or continuing regulatory issues or litigation that may affect investment performance

• Verify the timeliness, accuracy, and content of investment reports deemed to be necessary to evaluate the manager’s performance and responsiveness of the manager to requests for information from the client

• Look for superior portfolio construction and risk management discipline, where appropriate.


The advisor must periodically monitor and evaluate investment performance and must establish a process for this purpose:

• Establish frequency for performance reporting/monitoring

• Match Reporting to IPS Criteria

• Require Summary of performance for all investment options

• Recommendations for change, if necessary

• For ERISA plans, identify information to be reported to participants, if appropriate

10. Establish Monitoring and Evaluation Process


This is just a matter of scheduling. Make a plan and utilize calendar reminders, if needed. Blueleaf Advisors: Your clients have 24/7 performance reporting via their portal, so there’s no need to decide on a “frequency” of reporting.


A frequent client question, particularly where investment committees are involved, is “When is it time to fire a

manager?” To address this question, the advisor must institute a process. This will require establishment of “Watch List” criteria:

Establish “Watch List” Criteria

• Failure to meet performance monitoring criteria over a defined period

• Changes in investment style or objectives

• Changes in investment manager or business (e.g. acquisition or divestiture)

• Regulatory action or litigation likely to impact returns

• Deviating from any applicable third party manager rating


The advisor may or may not be responsible for engaging other service providers, such as a broker, custodians or, in the case of ERISA plans, record keepers. In either case, as a fiduciary, the advisor should assist the client with this


How will you recruit providers?

• Assess needs

• Adopt RFI/RFP process

• Get sample reports and references

• Understand cost structure

• Understand Relationship with other Providers and Revenue Sharing Arrangements (for 401(k) plans) How will you Monitor Service Providers?

• Conduct Annual Expense Review and Performance Evaluation

• Repeat RFP process every 3/5 years


It is axiomatic that investment expenses reduce investment returns. Advisors have a fiduciary responsibility to ensure that all fees and expenses are fair and reasonable given a portfolio’s size and complexity. Accordingly, a periodic review should be instituted:

What Fiduciaries Must Know:

• Are all Fees and Expenses identified and disclosed? Insist on full transparency!

• Are the fees and expenses fair and reasonable, taking into account the services provided?

• Are fees and expenses consistent with service agreements?

• Are fees and expenses competitive with those of other providers?

NOTE for ERISA Plans: Fees and Expenses are number 1 target for DOL audit and a primary target for participant fiduciary breach claims.


Control and account for all investment expenses

When it comes to reporting your “fair expenses” to clients, it’s all about putting them in context with their portfolio performance. Set up your automated reporting system to include your fees, so clients always see them in context with performance.


... and ERISA prohibited transactions.

The fiduciary duty of loyalty requires advisors to avoid conflicts of interest. For example, collecting fees and

commissions is a potential fiduciary breach unless one offsets the other. Thus, much of the debate currently about the fiduciary standard involves the conflicts which are inherent in most broker/dealer business models. This is now

leading to more broker/dealers establishing a fee based RIA model. Nonetheless, conflicts will still persist in many advisor relationships. Consequently, advisors should institute a process for disclosing conflicts – the IA requires

disclosure for RIA’s – and for obtaining informed consent from the client. Note that for ERISA purposes, conflicts of interest can result in prohibited transactions, leading to fines and other penalties.


Avoid Conflicts of Interest

Make sure your performance reporting software is integrated with your CRM system. This way, there’s a very clear path from client content to the activity performed.


To evidence that the advisor conforms to a fiduciary standard of care, the advisor must maintain documents supporting the advice rendered and decisions taken. There is no substitute for a contemporaneous record!

Frequent communication with clients mitigates the risk of misunderstandings and imprudent measures being taken on the client’s behalf. Where communication impacts the investment process, the communication should be made in writing or recorded in the fiduciary file.

The Fiduciary Checklist will help to establish that the advisor has employed procedural prudence in managing a client’s investments or investment process. Note, however, that employing a prudent process is not an absolute answer to any challenge that is made about an investment outcome. An imprudent investment is still an

imprudent investment no matter how diligent the process leading to its selection. The value of a prudent process it that it allows you to make informed and reasoned decisions and thus more likely to achieve outcomes that are judged to be appropriate.


Document and Communicate



1. Know the Fiduciary Framework 2. Know Fiduciary Duties

3. Institute Comprehensive & Compliant Engagement Agreement 4. Establish a Fiduciary File

5. Prepare an IPS - Investment Policy Statement 6. Achieve Prudent Portfolio Diversification

7. Select Prudent Asset Classes

8. Identify Prudent Investment Vehicles

9. Identify Investment Selection and Monitoring Criteria 10. Establish Monitoring and Evaluation Process

11. Define Investment Replacement Criteria 12. Monitor and Supervise all Service Providers

13. Control and Account for all Investment Expenses 14. Avoid Conflicts of Interest

Your One-Page Checklist!

Additional Resources:

• To learn how Blueleaf.com can add

transparency to the work you do with

your clients, visit our website or email

us directly at info@blueleaf.com.

• Reach out to Roger Levy, CEO of

Cambridge Fiduciary Services, directly

at rll@cambridgefiduciaryservices.com

with questions or for individual help

setting up a fiduciary standard of care.


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