A series of articles on fiduciary practices leveraging the training and experience of CEFEX Analysts.
You are a firm that has carefully selected a thoughtful, empathetic staff, and sponsored them to obtain professional credentials. Your goal is to reinforce fiduciary conduct and a “clients-first” attitude. What more can you do to improve and to demonstrate your culture to clients and prospects?
One idea is to undertake an independent fiduciary assessment. As an Accredited Investment Fiduciary Analyst (AIFA) and CEFEX Analyst, I have personally witnessed the benefits and positive changes derived from independent fiduciary assessments at advisory firms.
“The independent assessment of our firm helped to verify that the policies and procedures we have in place are in fact appropriate and aligned with our client’s best interests,” Todd Early, Chief Investment Officer of Sovereign Investment Advisors, said. “We view the process as an additional checkup of our firm’s compliance program and operational procedures.”
A thorough fiduciary assessment should address all aspects of the fiduciary obligations of an investment advisor. CEFEX has been performing assessments for over 13 years and we have observed the many ways advisors improve their practices and ultimately their businesses.
Improving operations can lead to better organization and efficiency, which can increase productivity and reduce costs.
The IPS
While addressing important topics such as defining the responsibilities of all parties involved and risk, return, and time horizon parameters for the client, a well-written investment policy statement will also define the investment process including criteria for investment selection and monitoring. Having thorough vetting criteria for investments will often lead to using less expensive investments which will reduce investment costs, resulting in better outcomes.
The IPS serves as a business plan for the investment portfolio which is shared with the client. Is there a better way to demonstrate accountability? The written document is essential in telling the client how the firm will invest assets and then fulfilling that plan. This is the most significant way advisors are improving. The standard is described in the handbook Prudent Practices for Investment Advisors as Practice 2.6: IPS contains detail to define, implement and monitor the investment strategy.
“You’ll learn where you could improve the client experience and outcomes for the client,” Sam Swift, Advisor at TCI Wealth Management stated. “Even in cases where we were operating in fiduciary spirit, there were process improvements that we were able to make that ultimately improved outcomes for the client. As fiduciary continues to become a huge buzzword in the industry and carry the appropriate weight, I think being able to say our firm undergoes an annual audit by an independent third party to confirm we operate as such is extremely valuable.”
The service agreement
During the independent fiduciary assessment, the service agreement is thoroughly reviewed for conformity to the standard. An analyst will evaluate the agreement to ensure a client is able to ascertain that needed services will be delivered at a reasonable cost and with appropriate accountability.
A well-written service agreement clearly defines the fee being charged for service, how revenue sharing is handled (if applicable) and makes disclosures as regulated by ERISA 408(b)(2). The service agreement is a legal document and will hopefully never be tested in litigation, but as with the IPS, it is a written promise.
It should be clear and adhere to the highest standard. Over the years we have observed how advisors have revised their agreements to achieve that standard. We refer to Practice 1.5: Agreements are in writing and consistent with fiduciary standards in the standard.
Defined responsibilities
The independent fiduciary assessment refers to Practice 1.3 Responsibilities of all involved parties are defined and documented when reviewing processes and documents. Does the Advisor have a process to assist each of his/her fiduciary clients (retirement plans, eleemosynary organizations, trusts) to understand their fiduciary responsibilities?
Top advisors ensure investment committees have defined by-laws or operating procedures to which the committee adheres. When an Advisor assists a client in creating an investment committee with clearly articulated fiduciary responsibilities and duties, the likelihood of a function getting overlooked is significantly reduced.
The implementation of an investment plan and specifically a retirement plan is typically dependent on a team of service providers. The advisor is the quarterback who calls the plays and provides the clarity of roles to team members, for the benefit of the client.
In conclusion, independent fiduciary assessments will help a firm identify where policies, processes and documentation can be improved, and therefore help mitigate litigation and other risks. While the thought of having an outsider take a deep dive into your business may seem intimidating, it can boost the firm’s confidence and foster a culture of continuous improvement amongst all staff.
Jeff Ricchiuti, Chief Investment Officer of DirectAdvisors, noted that “the assessment confirmed that we are doing a lot of things right, and it also showed us that we have some areas in our practice that we can improve.”
The independent fiduciary assessment is a complement to individual credentials. It encourages advisors to implement and adhere to the industry’s best practices, resulting in a better firm.
Matt Boyle is the Director of Operations for CEFEX. Matt has an MBA and achieved his Accredited Investment Fiduciary® (AIF) and Accredited Investment Fiduciary Analyst® (AIFA) designations from Fi360. Since 2017, he has performed over 100 independent fiduciary assessments of Investment Stewards and Investment Advisors while also sitting on CEFEX’s Registration Committee.