FIDUCIARY RESPONSIBILITY

In the handling of money and when one acts as a corporate or individual trustee, there is a fiduciary responsibility owed to the principal party. It is defined as a relationship imposed by law where someone has voluntarily agreed to act in the capacity of a "caretaker" of another's rights, assets and/or well being. The fiduciary owes an obligation to carry out the responsibilities with the utmost degree of "good faith, honesty, integrity, loyalty and undivided service of the beneficiaries interest." The good faith has been interpreted to impose an obligation to act reasonably in order to avoid negligent handling of the beneficiary's interests as well the duty not to favor ANYONE ELSE'S INTEREST (INCLUDING THE TRUSTEES OWN INTEREST) over that of the beneficiary. Further, if the agent should find him/herself in a position of conflicting interests, the agent must disclose the dual agency (acting for two parties at the same time) or risk being accused of constructive fraud in regards to both or either principals.

The principal is sound but has limited exposure to the fields of financial planning, real estate, securities or life insurance since it is rarely taught in any pre-licensing courses and very rarely as part of continuing education courses as well (though I do). Even ethics codes from major organizations have avoided the fiduciary issue since membership did not want to commit to the apparent extra legal exposure.

FIDUCIARY: In real estate, securities and, I submit, in insurance as well, your agent owes you a fiduciary obligation in performing their duties for you. The duties include:

1. Utmost Care- The agent is bound to the higher standard of a professional in the field which extends the standard of duty to investigate within the means of the profession, to ensure the maximum protection and information be provided the principal.

2. Integrity- Defined as the soundness of moral principle and character. It means the agent must act with fidelity and honesty

3. "Honesty and Duty of Full Disclosure" of all material facts, either known, within the knowledge of or reasonably discoverable by the agent which could influence in any way the principal's decisions, actions or willingness to enter into a transaction

4. Loyalty- An obligation to refrain from acquiring any interest adverse to that of a principal without full and complete disclosure of all material facts and obtaining the principal's informed consent. This precludes the agent from personally benefiting from secret profits, competing with the principal or obtaining an advantage from the agency for personal benefit of any kind.

5. Duty of Good Faith- includes total truthfulness, absolute integrity and total fidelity to the principal's interest. The duty of good faith prohibits any advantage over the principal obtained by the slightest misrepresentation, concealment, threat or adverse pressure of any kind.

LEGAL LIABILITY: A financial planner has an obligation to provide a standard of care for/to his clients. In ordinary cases the standard of care is whether or not the accused behaved as an ordinary, reasonable prudent person would have behaved under the circumstances. When acting as a professional however, the required standard of care changes. Such individual is required to use any special knowledge he may have obtained through education, training or experience. Therefore, if a person offers professional services to the general public, it is presumed that the person possesses some degree of special skill or knowledge. A professional negligence case imposes a certain level of skill and knowledge on the accused whether or not he actually possesses that skill or knowledge. This is a standard of minimum professionally acceptable conduct. Though the standards have not been applied until most recently to financial planners, it would appear that the essence- for them as well as brokers at least- is that the adviser put the clients interest first and acts with the best interest of the client in mind. (Note that that is NOT the case with insurance agents. The supposed duty is owed first to the insurance company.). Trust officers are also held to a higher level of responsibility, but some trust companies attempt to reduce exposure by putting in an exculpatory clause- where they hold themselves only to what a prudent, but inexperienced man, would do. However, that still does not exclude them from acting recklessly, in bad faith, or willfully breaching their fiduciary duty to the trust beneficiaries.

After all said and done, let me ask you, does your planer have the skills and knowledge in the first place? And has he or she put your interest first- or was it the commissions.

SECURITIES/BROKERAGE

The question initially asked is whether or not a broker acts in a fiduciary capacity in dealing with regular retail customers. In view of the fact that the SRO's (Self Regulating Organizations) impose a requirement upon brokers to provide only suitable investments, it would appear that a broker unquestionably has a fiduciary responsibility (at least quasi- fiduciary since most brokers are not acting with full discretionary authority) to their clients whether they want to accept the responsibility or not. The underlying NYSE Rule 450 of "know thy client" along with the NASD's requirement to brokers for suitable investments demands that brokers hold out their customers first in any transaction. This is true even where the investor suggests- or even demands- a product that would be unsuitable for their purposes. (The only time a broker could sell an "unsuitable" product might exist when an investor makes an initial suggestion for an investment and where the broker subsequently informed the investor both verbally and IN WRITING PRIOR to the sale that the investment did NOT fit the suitability standards for the particular investor.)

Security arbitration panels should therefore impute a fiduciary responsibility on the part of brokers in dealing with a customer's money. Investors "trust" brokers based upon a real or perceived level of honesty, good faith, judgment and responsibility in looking after the money entrusted to him/her. The broker, in accepting this money, assumes and accepts a responsibility to serve the best interests of the investor. The broker MUST determine if an investment fits within the customers risk profile, income, age, objectives (assuming correct), etc. and is also within the guidelines for proper diversification.

The Rules of Fair Practice set down by the NASD state that a broker has definitely breached his/her duty if a broker


1. recommends speculative securities without finding the customer's financial situation and being assured that the customer can bear the risk

2. does excessive trading (churning) in a customer's account (whether the account is discretionary or not)

3. does short term trading (and switching) of mutual funds

4. set up fictitious accounts to transact business that would otherwise be prohibited

5. makes unauthorized transactions or use of funds

6. recommends purchases that are inconsistent with the customer's ability to pay.

7. makes unauthorized transactions or use of funds

8. commits fraudulent acts (such as forgery and the omission or misstatement of material facts).

This obligation for fair dealing is not removed through the simple completion of a one page new account form required by brokerage firms. (Minimum information includes full name, address, phone number, employer, social security number, citizenship, acknowledgment that customer is of legal age, spouse's name and employer (if any) and investment objective.

Other information varies as to firm but might include bank and personal references, previous brokerage accounts, and if the account was solicited, referred, walk in, etc.)

Nor is the liability removed by sending the completed form to the client since clients do not and cannot be expected to know how a particular investment fits within individual and specific investment guidelines. It does however relieve the broker of mistakes entered on the form by either party that would be apparent to- and should have been corrected by- the client.

CALIFORNIA REGISTERED INVESTMENT ADVISER

FAIR, EQUITABLE AND ETHICAL: This section 260.238 of the Corporate Securities Law, by the California Department of Corporations, states that it is improper to "recommend to a client to whom investment supervisory, management or consulting services are provided the purchase, sale or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the client on the basis of information furnished by the clients after reasonable inquiry concerning the client's investment objectives, financial situation and needs and any other information known or acquired by the adviser after reasonable examination or such of the client's records as may be provided to the adviser". Though this degree of emphasis is not provided in any instruction for those getting a security license, it is the level of conduct that I use in evaluating brokers in formal arbitrations. The section also states that it is a DUTY of the adviser to inform the client "if lower fees for comparable services may be available from other sources."

In summary, you need to aware of the obligation owed to you as a client and make sure the agent and the firms live up to that responsibility.


Breach of Bank trustee fiduciary obligation to diversify. (2001) And excellent court case example of bank trustees to review a portfolio correctly. I have run into this scenario far too often but the assets were not large enough to justify a trial. But I would NEVER use a bank trustee- or literally anyone else for that matter without reading Who Can You Trust. Just because the bank is nice is absolutely no evidence of competency. Ask any trust office what diversification is. If you can't get the answer, either walk away or paint a target over you belly button Sooner or later you are going to get screwed to the wall. You need to sign in at http://www.pgdc.net

Here is how "financial planning" can go bad. (2001) It's a court case involving Charitable Remainder Trust, a planner, attorneys, University, vanishing premium insurance, breach of fiduciary duty and much more. Sign up at http://www.pgdc.net. Extremely interesting and sad. The whole thing could have been avoided by reading Who Can You Trust.

Prudent man??: (Barry Flagg 2006) Under Section 1 of the Act, the prudent investor rule is a “default rule,” which may be expanded, restricted or eliminated by the trust terms, but which must be followed if not overridden. Section 2 sets forth the trustee’s standard of care: a trustee “shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust.” In other words, a single investment approach for all trusts is inappropriate. Investments are judged, under Section 2(b), in the context of the trust portfolio as a whole and as a part of an overall strategy, after evaluating risk and return objectives. So, as the comments to that section point out, a trust “whose main purpose is to support an elderly widow of modest means will have a lower risk tolerance than a trust to accumulate for a young scion of great wealth.” Section 2(c) lists some circumstances a trustee take into account when developing an investment strategy: general economic conditions, inflation, expected tax consequences, the beneficiaries’ other resources, beneficiary needs for liquidity and an asset’s special relationship or special value, if any, to the trust purposes. Finally, Section 2(f) states that a trustee with special skills or expertise has a duty to use them.

Section 3 requires a trustee to diversify trust investments unless, because of special circumstances, the purposes of the trust are better served without diversifying, such as holding an undiversified block of low-basis securities with built-in gain or retaining a family business. Under Section 4, a trustee must, within a reasonable time after accepting the trusteeship, review the trust assets and decide whether they are appropriate investments in light of the factors just discussed. In other words, a trustee cannot simply rely on the fact that a predecessor held these assets, even if the predecessor was the grantor.

Sections 5 and 6 set out the trustee’s duties of loyalty to and impartiality among the beneficiaries. Section 7 states that a trustee may only incur costs in investing and managing trust assets that are appropriate and reasonable. Section 8 provides that compliance with the prudent investor rule “is determined in light of the facts and circumstances existing at the time of a trustee’s decision or action and not by hindsight.”

As the comments point out, “[t]rustees are not insurers. Not every investment or management decision will turn out in the light of hindsight to have been successful.

Hindsight is not the relevant standard.”

Section 9 provides that a trustee who properly delegates investment and management functions is not liable for the decisions or actions of the agent to whom the function was delegated. This section reverses the former trust law that imposed a rule of non-delegation, and “is designed to strike the appropriate balance between the advantages and the hazards of delegation.” Further, “the trustee must balance the projected benefits against the likely costs” of delegation, and “take costs into account.” So, for example, if a trustee’s regular compensation schedule assumes that the trustee will manage investments, “it should ordinarily follow that the trustee will lower its fee when delegating the investment function to an outside manager.”