In the same way a trustee owes duties of care and loyalty to the beneficiaries of a trust, the investment managers also owe a particular standard of care to the trust itself. A prudent trustee will determine what standard of care is owed by the money managers to whom investment duties have been delegated.

Investment professionals can be divided into two types: those professionals for whom fiduciary duties exist and those for whom fiduciary duties to their clients do NOT exist.  Unfortunately, the distinction is sometimes hard to make.  Both call themselves “Advisor,” “Consultant,” or “Planner.” Though they may use a similar moniker their duties of care are not the same.

A Registered Investment Advisor (RIA) is bound by the SEC to apply a fiduciary standard to their advice and is obligated to act only in their client’s best interest.  A Registered Representative is required by FINRA to make investment recommendations that are merely “suitable” for the client’s situation.

A prudent trustee will seek to understand the difference between the “fiduciary standard” and the “suitability standard” and know which of these two the investment professional is bound by.

The fiduciary standard requires the RIA to make recommendations that are exclusively in the client’s best interest.  The suitability standard requires an advisor to make recommendations that are suitable, but may also be in the advisor’s best interest.  Another distinguishing factor between an RIA and a Registered Representative is that the RIA is paid for their investment advice. The advice provided by a Registered Representative is incidental to their primary business – selling investment products.

A trustee is allowed to delegate investment duties to any party – an RIA subject to fiduciary standards or a Registered Representative subject to a suitability standard –  so long as the delegation is made prudently and in good faith (UPIA §9).

At a minimum, the prudent trustee will know which standard of care the investment professional is bound by.  For those of you who serve in a fiduciary capacity and are not certain of the answer to this question, we suggest you ask and document your findings.

Below is a link to a Request For Proposal questionnaire with 24 key questions that a trustee should ask and the investment manager should answer.

Download: Sample Investment Manager Request for Proposal

 

Onward,

Josh Yager, Esq., CFP®, ChFC®
805-899-1245
jyager@anodosadvisors.com

 

Anodos helps trustees develop, maintain, and manage their own governance processes. Our support helps trustees save time, reduce their personal risk, and fulfill their duties of care. What makes us unique is that providing fiduciary governance support is all that we do. We don’t manage money, sell insurance, or accept revenue sharing fees. We don’t have a horse in the race.