Contrary to the beliefs of (too) many advisors, selecting funds for a fiduciary account based solely on their active or passive management style is not prudent.
In a February 2018 Fi360 blog post, “Do Bad Index Funds Exist,” Mike Limbacher noted that 17.3 percent of index funds scored in the fourth quartile of Fi360’s Q4 2017 Fiduciary Score rankings.
While this is better than the 25 percent expected in the fourth quartile all else equal, it shows that using “passive” alone as selection criteria is far from a fail-safe choice.
Driving the point home, in 2016, the first fiduciary breach lawsuit that focused exclusively on issues associated with an index fund was filed. That lawsuit was settled in 2017, with payment to participants addressing excessive fee claims. This shows plans that use index funds aren’t immune from lawsuits, and losses, associated with fiduciary breaches.
In Fi360’s recently released Q1 2018 Fiduciary Score ranking report, Limbacher observes that of the 317 asset managers who had more than 50 percent of their investments score in the top-half relative to category peers, 234, or 73 percent, had all their investments labeled as active. Clearly—there are plenty of actively managed funds that score well on Fi360’s fiduciary criteria.
It’s critical that advisors don’t take unreasonable short-cuts with fund evaluations. Both selecting funds solely because they’re passive, or ignoring funds solely because they’re active ignores the fiduciary “duty of care” requirement.
Prudent investment selection processes for fiduciary accounts require the use of data, not just labels. The Fi360 Fiduciary Score represents one objective means of comparing investments according to set criteria which advisors can use in their data-driven decision-making.
It’s not intended, nor should it be used as the sole source of information for reaching an investment decision, but it is a reasonable first screen for advisors to use.
John Faustino, AIF, is Chief Product and Strategy Officer with Pittsburgh-based Fi360.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
