A fiduciary manages another party's assets and has a legal and ethical obligation to put the other party's interests first. For a financial advisor, that means helping a client make decisions in his or her best interest, even if it means reduced compensation – or no compensation – for the advisor.
Mistakes fiduciaries make include failure to:
- Establish written policies and procedures. Anything done in a client’s name must be in writing in an investment policy statement (IPS). This is nonnegotiable.
- Follow policies and procedures. The IPS is a living, breathing document that should be referenced frequently. It doesn’t need to be difficult or constricting, but it needs to be followed as a matter of due diligence.
- Deal with bad investment options. Fiduciaries must regularly monitor the investments they are tasked with overseeing; both qualitative and quantitative aspects of their funds. Then make a change if these investments aren’t best suited.
- Pay attention to fees. Fiduciaries are responsible for keeping a watchful eye on the fees charged to clients, and fees attached to any transactions.
- Administer correctly, monitor periodically. Sometimes fiduciaries can focus so tightly on investments that they lose sight of other responsibilities—such as following the plan document, making sure that plan contributions are paid in a timely manner or keeping an eye on plan expenses and taking steps to keep them under control. A fiduciary needs to keep a handle on all of these responsibilities.
- Identify and avoid conflicts of interest. If a conflict of interest arises, it is the fiduciary’s responsibility to disclose it, and then manage the client’s portfolio accordingly, including making any necessary changes and adjustments.
- Differentiate between corporate and plan fiduciary roles. Any individual is a fiduciary under ERISA Section 3(21) if he or she exercises any authority or control over the management of the plan or the management or disposition of its assets; if he or she renders investment advice for a fee (or has any authority or responsibility to do so); or if he or she has any discretionary responsibility in the administration of the retirement plan.
- Appropriately manage company stock. While maintaining the clients' interest first, fiduciaries are required to manage the company stock as well as any plan they are charged with managing.
- Give clients the help they need. Fiduciaries are responsible for understanding the commitment of the position. Having advisors to serve as a 3(21) fiduciary investment advisor and/or 3(38) fiduciary investment manager is an intelligent decision, but does not take away fiduciary liability as the employer/plan sponsor. Fiduciaries are responsible for specific duties within your employer-sponsored retirement plan. It is the fiduciary’s responsibility, however, to make sure they are completing the job that they were hired to do.
- Take action. Sometimes fiduciaries and/or fiduciary committees procrastinate on taking action—or do take action, but fail to make a record of it. Either one of these actions can leave the fiduciary and/or committee open to pricey lawsuits.
As you have seen, documentation of fiduciary responsibilities and actions are an important policy and procedure when accepting the role of a fiduciary.
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