Roland|Criss Blog

When the Stock Market Crashes, What Should a Fiduciary Do?

by Ron W. Hagan

If you are like most retirement plan and foundation executives who have contacted us in August, you have probably been overwhelmed with "breaking news" emails and cable news commentary about the stock market's reaction to the shakiness of the U.S. economy. With this much news, especially adverse in nature, it is easy to swing on a pendulum from over indulgence on one end, to a mental callous on the other. How do these short term market fluctuations, as well as longer term forecasts, impact fiduciary decisions, and conduct? Now, let's bring it on point relative to your role, a member of an executive team responsible for the oversight of pension assets or a non-profit board accountable for donor contributions. How do these short term market fluctuations, as well as longer term forecasts, impact fiduciary decisions, and conduct? While this is a broad and deep question, the answer is a relatively straight forward one, but not necessarily an easy one. Fortunately for us who sit in the fiduciary chair, the boundaries of liability are established. If we stay in those borders and exercise faithfully in our roles, we will be fit and prepared to handle whatever comes our way. If we remain dedicated to the disciplines and workflow processes, we can trust that the fiduciary outcomes will exceed expectations and legal requirements. While this doesn't eradicate the sting of the market losses, it does provide the confident peace of mind that the hand is at the wheel and the assurance that you have not missed anything. One of our clients said it very well when he stated, "my fiduciary concern is not tied to what I know or what I am doing, but my anxiety is created by what I don't know or what we aren't doing." Maintain high proficiency in the disciplines of fiduciary duty; governance, administration, investments, and controls, and trust the disciplines. It builds the fiduciary muscle to endure and persevere in your role. Roland|Criss has a program to help you achieve a greater awareness of the fiduciary disciplines. Contact any one of our senior professionals.

Caught in the Middle

 by Ronald E. Hagan
CEO -  Roland|Criss

The financial consulting industry is embroiled in an internal fight.  At issue is the national effort to make all investment advisors legally required to put their clients' interests first.  In other words, to make all financial consultants accountable as fiduciaries.

Insurance companies and securities brokerage firms oppose strongly the fiduciary requirement.  They argue that a fiduciary standard covering all insurance agents, mutual fund brokers, bond brokers, pension consultants, and the like would only increase their costs.  They imply that the costs would be passed on to retirement plans, foundations, and retail clients.

Under today's rules, investment consultants may receive both direct and indirect financial benefits from investment product sources like mutual fund companies and insurance annuity issuers.  These benefits influence consultants' recommendations.

If they were held to fiduciary accountability, financial consultants would not be able to factor their income into their recommendations.  The tendency to color advice based on which product sources pay advisors the most income is, however, pervasive.  Even consultants that are registered under the Investment Advisers Act of 1940, which imputes to them a fiduciary duty to their clients, are able to skirt that law and receive extra money rewards.

The widespread opposition among financial consultants to a universal fiduciary standard for all investment vendors tears the cover off the trusted advisor concept.  This is bad news for those caught in the middle such as retirement plan sponsors, endowments, foundations, and private trusts.  The fiduciary laws to which they are accountable provide no relief from the duty to put the interests of their retirement plans' participants, charitable donors, and beneficiaries first.  Given the extent to which duty bound fiduciaries rely on investment "professionals" for the tough decisions they face, it seems only right that advisors who enrich themselves at the expense of trusting clients should get in the middle, too!

Hoodwinked

by Ron W. Hagan
Executive Vice President - Roland|Criss

Have you ever been influenced slyly by someone who feigned good intentions only to cheat you out of your hard earned money or your perception of value?

Maybe you didn’t end up getting as much as you thought you’d get for that car you traded in. Or maybe that vacation wasn’t as “all inclusive” as the sales person promised.

Being cheated, beguiled, bamboozled and duped stings doesn’t it?  While it’s a blow to the mind, it has an even sharper edge to the heart.  As I think through this, it’s one thing to make a mistake; the human mind will adapt and learn how to avoid such a blunder in the future. However, the heart can quickly distrust.  Overcoming broken trust is a much different process and has wide scale ramifications in the world of financial stewardship.

Where am I going with this anyway? In our independent fiduciary business, we are known for making retirement systems and charitable organizations safer places for putting money.  We do this by testing intensions, evaluating decision making processes, and determining the fairness of the fees that are charged to investors who don’t know how to discover these on their own.  It is a wildly purposeful mission.  

Excelling as a fiduciary requires that you persist in pursuing the best; to not waver in pressing in to what is right on behalf of those who are depending upon you.  In our capacity, it is highly rewarding to help interpret and define the difference between what is best from what is deceptive. In the investment industry, these lines are very murky.

Fiduciary Yardsticks

by Ron W. Hagan
Executive Vice President - Roland|Criss

Renowned big thinker and trusted management guide, Peter Drucker, wrote, “Each institution will be the stronger the more clearly it defines its objectives.”  He further stated, “It will be more effective the more yardsticks and measurements there are against which its performance can be appraised.”

In the realm of stewardship, such as boards of directors, retirement plan committees, and foundation investment committees, how do we follow the guidance of Mr. Drucker?  Is it possible to meet objectives if none are conceived, thought through, and owned?

Is it possible that in these fiduciary environments our attention has been diverted?  Intentional or not, many governing bodies find themselves in a strategic quandary; reviewing and monitoring information that has no connecting point to stated objectives. 

This happens in board rooms across the country, typically around investment related matters where third party consultants are relied upon to define and measure performance for board and committee members.  In this scenario the fiduciaries’ efforts are analogous to flying a kite without a string.  There is no connection.

In these days, when the word 'fiduciary' has seen more play time, air time, and court time than the last 100 years combined, it might well be worth the time for boards and fiduciary committees to devise agame plan to determine their objectives.  And, of course, I would be remiss if I did not suggest that you get some coaching that is based on a proven track record. 

If Peter Drucker were with us today, he might very well conclude our conversation with his question: “Are your performance yardsticks appropriate to your objectives?”

We can help you.

A Firm Foundation

“Outstanding!” said Phil Melberg of Roland|Criss’ Foundation Roundtable in Washington, D.C. on December 9^th.

To all the panelists and participants, please accept our deepest appreciation for your contribution to the Washington, D.C. Foundation Roundtable. Your participation was invaluable. We are excited to walk this path with you, defining industry standards, interpreting best practices, and measuring results in an effort to excel in our fiduciary roles. What's next? In response to an overwhelming acceptance of the IFLC Foundation Standard, we are planning a follow-up event scheduled for February 17, 2011 in Washington, D.C. For those of you who were unable to join us, this will be a wonderful opportunity to contribute to standards development, enhance your awareness, and network with colleagues. What we heard from you… Standardized fiduciary practices will benefit the foundation community. Most believe that regulatory enforcement will increase. Many foundation executives are unclear about UPMIFA's requirements for fiduciaries. Fiduciary best practices would help your organization in the areas of governance, administration, and controls and practices. Fundraising and development would be enhanced if a foundation can demonstrate adherence to a fiduciary standard.

For more information visit us at www.rolandcriss.com or contact us at admin@rolandcriss.com.

To Lead or To Be Led

by Michelle Sly-Laughlin
Regional Director - East, Roland|Criss       

While attending the Council on Foundation's Conference on Investment Management for the Future, a participant posed a question, she asked “what increased level of responsibility do endowment and foundation executives have to demonstrate prudent investment decisions given the massive amount of dollars that they collectively invest in the market.”  In essence how do we minimize the risk of future market scandals?

As the fog begins to lift from the market scandals over the past two years, the answer should be clear: foundation executives should consider reforming their stewardship game plan to demonstrate increased vigilance in their fund strategies, policies, and fund manager performance measurements.

It occurred to me that many of these endowments and foundations depend on their investment advisors and investment managers to execute their investment strategies.  Based on what we’re hearing from the foundation executives, the time is now for them to mount a pursuit of excellence and impose new standards among advisors and managers. 



It’s Not Only Stupid, It’s Dangerous.

by Ronald E. Hagan 
CEO, Roland|Criss

 

The results of an eye-popping survey* conducted by consumer groups, financial planning organizations, and an association of states’ securities regulators were announced this week.  The survey revealed that investors are oblivious to the vast differences in legal standards among the various classes of “investment advisors.”

  

 What’s wrong with this picture?  While nearly all of the respondents (97%) believe that stockbrokers, investment advisors that serve pension plans and foundations, and insurance agents should put investors’ interests first (the “fiduciary duty”), very few of them said they know that various laws say otherwise.

  

For example, sixty percent of the investors surveyed said they thought insurance agents had to uphold a fiduciary duty, which isn’t true, even though ninety-six percent said the fiduciary requirement should include insurance agents that sell annuity-based products.  (It’s no surprise that insurance agents are the most outspoken opponents of the government’s current effort to make a universal fiduciary standard apply to all investment advice givers.)

 

More Evidence of Confusion

 

Thirty-four percent of the investors surveyed believe that investment advice is the number one service provided by stockbrokers.  The law under which stockbrokers are licensed defines their primary role, however, as buying and selling stocks and other securities, with no requirement that they place their clients’ interests first; no fiduciary duty here!

 

Seventy-seven percent of respondents admitted they knew that registered investment advisers ("RIA") are licensed under a federal fiduciary standard.  Most respondents did not realize, however, that RIAs’ can escape consequences if they can get their clients to retain “full discretion” over investment decisions.  (This is the common practice among RIAs in the pension and foundation arenas.)

 

The Laws are Stupid and Dangerous

 

The survey proves what many experts in fiduciary standards already knew…investors have been bewitched by unfair sales tactics and bewildered by contradictory claims made by competing investment advice providers.  When the truth emerges, many investors feel stupid…some even angry.  Investors are not stupid, though.  The same cannot be said about the laws that empower stockbrokers, RIAs, and insurance agents to ply their trade.  Not only are the laws stupid, they are dangerous.  The danger lies in the widespread, but wrong assumption held by many pension and foundation executives that their investment advisor carries the fiduciary burden.  Many executives are finding out about the error in their assumption, the hard way.

 

Here’s How You Can Make Your Fiduciary Job Safer

 

In January 2011, the U.S. Securities and Exchange Commission will appear before the U.S. Congress to ask for an addition to the new financial services law.  The SEC wants a universal fiduciary standard to be added to the law.  The amendment will embrace any person or firm that delivers investment advice; pension consultants, RIAs, stockbrokers, insurance agents, and financial planners.

 

As you might guess, the investment advice providers are up in arms over the SEC’s initiative.  They have been fighting for position for months.  Pension plan sponsors and foundations have been mostly silent.  Why?  There are two likely reasons: (1) the vast majority of investment advisors benefit from the current state of confusion among investors and are content to let their clients' remain out of touch with the fiduciary debate, and (2) the fiduciary interests of plan sponsors and foundations are not well represented at the regulatory level.

 

You should be counted on this issue.  Send a comment to me on this Blog and I will see to it that your voice is heard when the Congress begins debating the issue.

 

*The Survey

Conducted by Infogroup Inc., which provides market research services, the survey tested the reactions of nearly 1,400 people that defined themselves as investors.  The survey’s sponsors included AARP, CFA, Certified Financial Planner Board of Standards, Inc., Financial Planning Association, Investment Adviser Association, National Association of Personal Financial Advisors, and the North American Securities Administrators Association, which developed the Uniform Prudent Investor Act (“UPIA”).

Improved Systems Can Enhance Foundation Outcomes

Ron W. Hagan

 

Stephen Covey, commenting on the difference between managing and leading, said, “Management works in the system; leadership works on the system.”  How would you define your role as a trustee of a foundation – manager or leader?  Some might say managers; others might say leaders.  Is there a right answer?