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| Fiduciary Focus: We Ain't Got No Fiduciary Duties |
| by
W. Scott Simon
| 03-17-04 |
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In the 1948 Humphrey Bogart film, The Treasure of the Sierra Madre, the character Gold Hat (played by Alfonso Bedoya for you movie trivia buffs) delivered some of the more memorable lines in motion picture history when he sneered: "Badges? We ain't got no badges. We don't need no badges. I don't have to show you any stinking badges!"
There have been endless variations in these lines over the years. In this month's column, to help illustrate a point in a far different context I'll add my own: "Fiduciary duties? We ain't got no fiduciary duties. We don't need no fiduciary duties. I don't have to show you any stinking fiduciary duties!"
When I provide consulting and expert witness services in matters concerning prudent fiduciary investing, I'm always a bit amazed when some person or entity pleads that they aren't a fiduciary. I always wonder: Do they hear what they are really saying?
A good example of the disconnect between what is said and what is really being said in this context involves the pleadings filed recently in a United States district court in Arizona by a large, nationally known financial-advisory firm. The firm is accused of what may amount to a classic "bait and switch" technique: It provides financial plans to potential clients--free, of course--that (for some strange reason) always seem to recommend the firm's expensive proprietary investment products.
Here is the firm's written defense to this practice: " [Written disclosures to clients who receive financial plans] are more than enough to constitute 'storm warnings' that the financial plans may not be 'objective' or 'unbiased' [against proprietary products] as supposedly represented."
Here is what this "weasel lawyer-speak" defense (I'm a lawyer so I can use this Latin phrase) is really saying: "Even though we tell you that we're being objective in our financial plans, you should be smart enough to realize that we really aren't being objective in recommending the sale of high cost proprietary products. And if you are too dumb to understand that and are harmed as a result, then it's too bad."
This defense, breath-taking in its gall, is the very antithesis of what it means to be a fiduciary: putting the interests of your client-beneficiary ahead of your own.
Indeed, enhancing the protection of beneficiaries was the fundamental underlying goal of the great reforms made in trust investment law in the 1990s. This financial advisory firm, managing billions of dollars of other people's money, seems to be doing all it can to frustrate this goal when it advances such a defense. Does anyone at the firm hear what it is really saying?
I have tried to show you in this column on fiduciary investment issues what a fiduciary is. Those who plead non-fiduciary status tell us what a fiduciary is not. In doing so, here is what they are really saying.
I Ain't Got No Fiduciary Duty to Put My Clients' Interests Ahead of My Own
Are you kidding? Hello! Why shouldn't I sell as many outrageously expensive proprietary products to my (unsuspecting) clients as I can? Isn't that what putting my own interests ahead of my clients' is all about? Hey, the only fiduciary duty I have is to me.
I Ain't Got No Fiduciary Duty of Loyalty
I'm not required to invest and manage portfolio assets solely in the interests of my clients--or even partially in their interests. Just so I never forget this, I memorized some commentary from the Uniform Prudent Investor Act: "A fiduciary cannot be prudent in the conduct of investment functions if the fiduciary is sacrificing the interests of the beneficiaries." Yeah, that's me!
I Ain't Got No Fiduciary Duty to Consider the Purposes, Terms, Distribution Requirements, and Other Circumstances of a Portfolio
Boy, that sure sounds like a lot of work! But whatever--I'm not required to do any of this stuff simply because I don't have to invest and manage assets "as a prudent investor would." Fiduciaries that actually go to the trouble to do all this work should get a life.
I Ain't Got No Fiduciary Duty to Determine Investment Objectives
Listen, the only investment objective I'm concerned with is fattening my wallet. Who cares about my clients' investment objectives?
I Ain't Got No Fiduciary Duty of Care
I'm not required to exercise reasonable effort and diligence in making and monitoring investments, with attention to my clients' objectives. Hey, I already told you that the only investment objective I'm concerned with is fattening my wallet. Aren't you listening?
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| W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing. Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals. For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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