Fiduciary Responsibility: Liability and Consequences

Ober, Stuart
November 2005
Journal of Financial Planning;Nov2005, Vol. 18 Issue 11, p50
Academic Journal
The role of fiduciaries is one of the most important, yet least understood, in which investment professionals participate. This article, drawing deeply on the work of the Foundation for Fiduciary Studies, is designed to help financial planners understand the responsibilities of a fiduciary. A fiduciary is generally defined as someone who manages someone else's assets. Financial planners are considered a fiduciary normally when they are registered with the SEC or when their actions provide comprehensive and continuous advice, though "facts and circumstances" ultimately determine the applicability. This definition applies regardless of type of compensation, whether the planner is a registered representative or registered investment adviser, or whether the planner has or does not have client discretion. The article outlines the Foundation's seven Uniform Fiduciary Standards of Care, including diversifying assets to the client's specific risk/return profile, preparing an investment policy statement, and controlling and accounting for investment expenses. A five-step investment management process is described. This includes analyzing the client's current position, implementing an investment policy, and monitoring the investment performance. The article then outlines the 27 "practices" for those five steps as recommended by the Foundation, what practices are generally accepted in the investment industry and what is required by law, and practical applications of those practices. A due-diligence process should be developed, and it must be demonstrated that it was followed. Several due-diligence procedures are described.


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