FIDUCIARY ETHOS THE DETAILS OF THE FPA S FIDUCIARY STANDARD OF CARE

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F

IDUCIARY

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THOS

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ETAILS OF

THE

FPA’S

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IDUCIARY

STANDARD OF

CARE

Presented by: Ron Hagan ronhagan@rolandcriss.com Developed by: Don Trone don@5ethos.com

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RESENTATION

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BJECTIVES

Fiduciary Ethos meets two important objectives: 1.Defines the details of a fiduciary standard of care for financial planners; and 2.Serves as a model for the proposed “harmonized” fiduciary standard of care under the Dodd‐Frank Act

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Ethos

(

ē

‐

thäs)

gr.

The link between leadership

behaviors, core values, and a

decision‐making process

All great organizations have one thing in common ‐a well‐defined ethos

Fiduciary Ethoshas three important structural elements:

1.It is based on a “harmonized” standard of care, one that is applicable to any financial planner; 2.It provides a flexible decision‐making framework that defines a procedurally prudent process; 3.To the decision‐making framework we add the leadership characteristics that are essential to your role as a financial planner.

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THOS

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VERVIEW

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NVESTMENT

F

OCUS

Although the focus will be on investment planning, the ethos decision‐

making framework introduced in this presentation will be used to structure

similar fiduciary standards for the remaining financial planning disciplines:

¾ General Principles of Financial Planning

¾ Insurance Planning and Risk Management

¾ Employee Benefits Planning

¾ Income Tax Planning

¾ Retirement Planning

¾ Estate Planning

F

IDUCIARY

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W

HAT

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OES

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T

M

EAN?

To begin to define the details of a "harmonized" fiduciary standard, we start by defining what it means to be a fiduciary: A fiduciary makes a commitment to judge wisely and objectively, and to ensure that all processes and procedures are congruent with the goals and objectives of the client.

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S

TEWARDSHIP

AND

C

OVENANTS

The cornerstones of a fiduciary standard are the words, stewardshipand covenant:

The rewards for being a fiduciary are not always apparent, and not always commensurate with the level of effort, process, and risk undertaken. This is the very essence of stewardship. A fiduciary standard is a continuous process that requires an ongoing discipline to do the right thing, at the right time. This is the very essence of a covenant.

F

OUR

P

ILLARS

There are four pillars to a well‐crafted fiduciary standard:

Process

Prudence

Consistency

Principles

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Principles

Fiduciary standards are defined in terms of Principles, as opposed to rules, which impose on the fiduciary the requirement to act in the best interests of the client. There is relatively little specific black letter law (rules) that govern the conduct of fiduciaries. Instead the fiduciary standard is based on several simple principles supplemented by industry best practices, regulatory opinion letters, and case law.

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OUR

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ILLARS

F

OUR

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ILLARS

Process

The process a financial planner must follow to demonstrate that decisions are made in the best interests of the client. A good illustration is the use of proprietary and

commission‐based products; the Dodd‐Frank Act included an exception that would allow advisors to use such products. However, such a carve‐out is unnecessary.

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Prudence

We build upon Process and define the Dimensions, or the details, of a procedurally prudent process. We demonstrate that decisions are being made in the best interests of the client.

In the case of the Fiduciary Ethos, Dimensions are simple straightforward statements, that are based on a universal, “harmonized” language.

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OUR

P

ILLARS

Consistency

That the process can be effectively and efficiently applied across all client situations. Most litigation and arbitration is a result of omission rather than commission; financial planners can insulate their practice from liability by demonstrating that they have a procedurally prudent process that is consistently applied.

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OUR

P

ILLARS

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F

IDUCIARY

A

CTS

ERISA (Employee Retirement Income Security Act of 1974) – federal legislation impacting qualified retirement plans.

MPERS (Uniform Management of Public Employee Retirement

Systems Act) – for trustees of state, county, and municipal retirement plans.

UPIA (Uniform Prudent Investor Act) – for trustees of personal trusts.

UPMIFA (Uniform Prudent Management of Institutional Funds

Act)– for trustees of foundations, endowments, and other charitable assets. 1. Define goals and objectives. 2. Diversify portfolio assets with regard to a specific risk/return profile. 3. Prepare a written investment policy and document the process used to manage investment decisions. 4. Use prudent experts (professional money managers and service providers) to implement the investment policy. 5. Monitor the activities of hired prudent experts.

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EGAL

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UBSTANTIATION

Every Dimension (detail) of the Fiduciary Ethosprocess is fully substantiated by legislation, regulations, and case law.

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THOS

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RAMEWORK

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THOS

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RAMEWORK

Ethosis based on a sequential

and congruent framework, which

begins with a traditional 6‐step

Financial Planning Process: For

each Step we also have identified

the leadership behavior that is

essential for that Step.

On an ongoing basis is the need

to assess performance.

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ETAILS OF

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S

TEP

Each Step of the Process is further defined (refined) by Decision‐

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ETAILS OF

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D

IMENSION

Each Decision‐Making Dimension has a corresponding leadership behavior.

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Copyright © 2009 – 2010 Strategic Ethos. All rights reserved 20 “I am a leader by default, only because nature does not allow a vacuum.” Bishop Desmond Tutu 20 When you first assemble a group, it’s not a team right off the bat. It’s only a collection of individuals. “Coach K” (Duke Basketball Coach Mike Krzyzewski)

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20 The things we fear most in organizations—fluctuations, disturbances, imbalances—are the primary sources of creativity. Margaret J. Wheatley If I had to sum up in a word what makes a good manager, I’d say decisiveness. You can use the fanciest computers to gather the numbers but, in the end, you have to set a timetable and act. Lee Iacocca, former Chairman, Chrysler

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20

Courage is rightly esteemed the first of human qualities … because it is the quality which guarantees all others.

Winston Churchill

“There are seven things that will destroy us: Wealth without work; Pleasure without conscience; Knowledge without character; Religion without sacrifice; Politics without principle; Science without humanity; Business without ethics.” Mahatma Gandhi

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THOS

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RAMEWORK

The Ethos series is based on universal decision‐making dimensions which can be used to define a variety of standards: ¾ Financial planning standard ¾ Fiduciary standard ¾ Suitability standard (for agents and brokers) ¾ Stewardship standard (for non‐trust assets) ¾ Governance standard (for a board of directors) ¾ Project management standard (for staff)

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THOS

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OFT

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KILLS

Ethosalso serves as the framework for developing essential fiduciary soft skills – the professional’s ability to: ¾ Serve as an effective leader ¾ Build trust – the new currency for Wall Street ¾ Maintain loyalty – the corollary to “trust” ¾ Effectively manage a decision‐making process

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B

ENEFITS OF

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D

EFINED

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THOS

1. It demonstrates to clients, compliance officers, and regulators that you have a procedurally prudent process in place. 2. The Dimensions can double as a training curriculum – for educating your clients and staff. 3. It may help you discover blind spots – shortfalls and omissions to your financial planning process.

4. It can facilitate the sharing of best practices with other financial planners. 5. At some point in the future, P&C insurers providing liability insurance for financial planners will likely start providing “good planner” discounts to those planners who can demonstrate conformance to a defined standard. 6. It can help improve the financial planning services you provide to your clients; an objective worthy of all of our efforts.