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Fiduciary Responsibility
Hatton Consulting recommends that all investors follow a prudent investment process. We have adopted the Foundation for Fiduciary Studies investment management process because we believe it to be the most exhaustive set of practice standards developed. Hatton Consulting holds itself to these high standards because we believe, in the end, the most successful investment outcomes are the result of following a disciplined and understandable investment process. With permission from the Foundation, the following is derived from their Handbook for Investment Fiduciaries.
Who is a "fiduciary"? According to the Foundation, there are more than five million people who have the legal responsibility for managing someone else's money, including members of investment committees of retirement plans, foundations, endowments, trustees of private trusts, private bankers, financial planners and investment advisors. Generally, someone meets fiduciary status if they:
1. Manage property for another.
2. Exercise discretionary authority or control over assets, and/or
3. Acts in a professional capacity of trust and renders comprehensive and continuous investment advice.
What follows is an outline of the practices that define a prudent investment process for investment fiduciaries. If you believe you are or may be a fiduciary, understanding your responsibilities is critical. It is important to note that fiduciary liability is not determined by performance, but rather on whether a prudent investment practices were followed.
According to the Foundation, the primary duty of the fiduciary is:
" To manage a prudent investment process, without which the components of an investment plan cannot be defined, implemented or evaluated. Statutes, case law, and regulatory opinion letters dealing with investment fiduciary responsibility further reinforce this important concept."
There are twenty-seven practice standards. Each standard is backed by citations to legislation, case law and/or regulatory opinion letters that serve as the basis for the practice. The legislative basis for each practice relate to:
1. ERISA - Employee Retirement Income Securities Act (impacts qualified retirement plans).
2. UPIA - Uniform Prudent Investors Act (impacts private trusts, and may impact foundations and endowments).
3. MPERS - Uniform Management of Public Employees Retirement Systems Act (impacts state, municipal and county retirement plans).
Benefits of the Practices
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Establishes evidence that the fiduciary is following a prudent investment process, which may minimize litigation risk.
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The practices are adaptable to all types of portfolios, regardless of size.
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Serves as a practicum for all parties involved.
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May help to increase long term investment performance by identifying more appropriate procedures for: 1) diversifying the portfolio across multiple asset classes, 2) evaluating investment management fees and expenses. 3) selecting money managers and/or mutual funds. 4) terminating money managers or mutual funds.
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Help to discover investment and/or procedural risks not yet identified.
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Encourage fiduciaries to compare their practices with their peers.
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Establish benchmarks to measure the progress of investment committee and/or consultant.
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May enable the fiduciary to lower insurance premiums for Errors and Omissions coverage.
The Practice Standards: To obtain the Handbook for Investment Fiduciaries click here. The handbook will provide detail on each practice standard.
1.1) Investments are managed in accordance with applicable laws, trust documents, and written investment policy statements.
1.2) Fiduciaries are aware of their duties and responsibilities.
1.3) Fiduciaries and parties in interest are not involved in self dealing
1.4) Service agreements and contracts are in writing and do not contain provisions that conflict with fiduciary standards of care.
1.5) There is documentation to show timing and distribution of cash flows and the payment of liabilities.
1.6) Assets are within the jurisdiction of U.S. courts and are protected from theft and embezzlement.
2.1) A risk level has been identified.
2.2) An expected modeled return to meet investment objectives has been identified.
2.3) An investment time horizon has been identified.
2.4) Selected asset classes are consistent with identified risk, return and time horizon.
2.5) The number of asset classes is consistent with portfolio size.
3.1) There is detail to implement a specific investment strategy.
3.2) The investment policy statement defines duties and responsibilities of all parties involved.
3.3) The investment policy statement defines diversification and rebalancing guidelines.
3.4) The investment policy statement defines due diligence criteria for selecting investment options.
3.5) The investment policy statement defines monitoring criteria for investment options and service vendors.
3.6) The investment policy statement defines procedures for controlling and accounting for investment expenses.
3.7) The investment policy statement defines appropriately structured, socially responsible investment strategies (when applicable)
4.1) The investment strategy is implemented in compliance with the required level of prudence.
4.2) Fiduciary is following applicable "Safe Harbor" provisions (when elected).
4.3) Investment vehicles are appropriate for the portfolio size.
4.4) A due diligence process is followed in selecting service providers, including the custodian.
5.1) Periodic performance reports compare the performance of money managers against appropriate index, peer group and IPS objectives.
5.2) Periodic reviews are made of qualitative and/or organizational changes to money managers.
5.3) Control procedures are in place to periodically review a money managers policies for best execution, soft dollars and proxy voting.
5.4) Fees for investment management are consistent with agreements and with the law.
5.5) "Finders Fees", 12b-1 fees or other forms of compensation that have been paid for asset placement are appropriately applied, utilized and documented.
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