5 Critical Factors To Consider in Fiduciary Accounts

And one that depends on the situation

401k, retirement, fiduciaryThese key points should be analyzed.

When selecting investments for fiduciary accounts, it’s critical to use prudent selection criteria. Some of the most widely used criteria, including those in Fi360’s Fiduciary Score, require three years of live history before they are calculated.

That track record gives those responsible for selection confidence in the investment manager’s stability and ability to execute.

While the three-year history is used as a gating factor for many, there may be instances where it’s prudent to select newer investments for fiduciary accounts. Waiting for three-years of history should not be a hard rule, but rather a guiding principle for evaluating investments with readily available characteristics.

When a new investment is available that offers benefits unique relative to those already on the market, it may immediately be a prudent investment selection for fiduciary accounts.

Some examples include:

  • an offering which is new solely in terms of pricing structure, such as a new mutual fund class or a mutual fund strategy being applied through a different vehicle type (such as a collective investment trust) with the same manager, but a lower expense ratio
  • an innovative new offering, such as novel ‘in retirement income’ or environmental/social/governance (ESG) fund

Ignoring those investments with less than three years can significantly restrict your selection universe.

In fact, as of August 31, 2017, over 21 percent of the U.S. mutual fund share-classes covered by Morningstar have less than three years of history.

Further, in the target date arena where there’s been a lot of repricing and product innovation lately, it’s even more pronounced; with over 33 percent (870 of 2,578) having less than three years of history.

Factors which should be considered in determining whether a new investment warrants consideration for a fiduciary account include:

  1. uniqueness and strength of benefits relative other, readily available investments
  2. alignment of any unique benefits with the goals and needs of the specific account for which it’s being considered
  3. availability of alternative prudent selection criteria robust enough to make a prudent evaluation
  4. experience and skill of the individual or team, and expected successors, evaluating the alternative criteria
  5. persistence in the availability of alternative criteria to facilitate ongoing monitoring

To prepare for the potential of selecting investments that may require alternative evaluation criteria, we recommend including language in your investment policy statements (IPS’s) Investment Selection language to account for that possibility.

Below are examples of investment selection language we use in the IPSs available within Fi360’sFiduciary Focus Toolkit software:

Each investment shall be managed by a Prudent Expert.  When selecting a new investment, the Investment Manager will evaluate the possible alternatives against the due diligence criteria set forth in INVESTMENT SELECTION/MONITORING CRITERIA APPENDIX of this IPS.  

When warranted due to unique potential benefits relative to other available investments, options for which the due diligence criteria set forth in INVESTMENT SELECTION/MONITORING APPENDIX of this IPS are not available may be considered.  In those instances, alternative prudent selection criteria to those set forth in INVESTMENT SELECTION/MONITORING CRITERIA APPENDIX of this IPS will be used to evaluate the appropriateness of each investment.  After any selection of investments for which alternative prudent selection criteria were used, those alternative criteria will be added to INVESTMENT SELECTION/MONITORING CRITERIA APPENDIX of this IPS.

Sometimes it’s prudent to lead by researching and evaluating innovative investment options before they develop three years of history. Doing so with a focus on your duty of loyalty and a fiduciary standard of care will help you Implement these decisions profitably (for your clients and yourself).

John Faustino, AIF, is Chief Product and Strategy Officer with Pittsburgh-based Fi360.

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