BenefitsPro
What is a fiduciary (and why should we care)?
What better topic for the month of Valentinefs Day than that of fiduciary
duty? As those once and forever smitten by the arrow of cupid can attest, love
means, among other things, putting the interests of another above those of your
own. This same moral ethic defines the fiduciary duty.
Of course, it wasnft always that way. One of the key elements of trust
law—from which we derive our definition of fiduciary duty— comes from two
provisions of the Magna Carta. When he signed the Magna Carta in 1215, King John
agreed estates would be managed only for the benefit of the beneficiaries. This
eliminated both outright theft as well as the more sneaky kind of theft known as
gself-dealingh transactions.
The definition of fiduciary duty has been finely tuned in the last eight
centuries. Since 1940, with an acceleration beginning around 1970, one of the
most important fiduciary duties—that of providing investment advice—has shifted
from stodgy bank trust departments to ggo-goh investment advisers registered
with the Securities and Exchange Commission. The Investment Advisers Act of 1940
requires all registered investment advisers to act with the same fiduciary duty
as a trustee, even though they are not named as trustees.
Over the last generation, other financial service providers discovered how
much more lucrative the investment advisery business was compared to their
brokerage or insurance businesses. They began calling themselves gadvisorsh
(notice the gorh ending, as only as SEC registered investment advisers can use
the gerh ending).
The distinction goes far beyond the need to irritate English teachers across
the nation. Advisers, as fiduciaries, have a legal mandate to place client
interests first. Advisors, on the other hand, must only provide gsuitableh
investments to clients while placing their firmfs interests first. This means a
lot of those gself-dealingh types of transactions. Remember, self-dealing
transactions are so illegal for trustees, not even disclosure can surmount their
prohibition. For a non-fiduciary, however, not only are self-dealing
transactions allowed, their inherent conflict of interest often does not have to
be disclosed.
In the retail investment market, caveat emptor rules. The same
cannot be said of the retirement plan market. This distinction can significantly
impact the fiduciary liability of plan sponsors. A 2010 academic study suggests
legal self-dealing transactions can actually harm investors. If a plan sponsor
fails to hire a fiduciary to provide investment advice, the liability insinuated
by this study accrues solely to the plan sponsor who is, by definition, a
fiduciary. Even if the plan sponsor hires a fiduciary, the nature of the
relationship may or may not limit the liability of the plan sponsor.
There are two types of fiduciary relationships. A non-discretionary (ERISA
3(21)(a)) adviser only makes recommendations and the plan sponsor must make the
actual investment decision. In this relationship, the plan sponsor retains
nearly all the fiduciary liability. On the other hand, a discretionary (ERISA
3(38)) adviser makes investment decisions and, given the Uniform Prudent
Investor Act, assumes most of the fiduciary liability from the plan sponsor.
And you thought love was complicated.