Duty to Investigate: Section 2(d) of the UPIA directs, “A trustee shall make a reasonable effort to verify facts relevant to the investment and management of trust assets.” In response to this duty, a prudent trustee will investigate whether any conflicts of interest exist between the trust, the investment advisor, and the investment products or process the advisor has adopted.
Potential or Actual Conflicts of Interest: If an investment advisor has more than one interest in a particular relationship, a conflict of interest or potential conflict of interest may exist. The existence of these multiple interests may compromise or have the appearance of compromising the investment advice that is being offered. A prudent trustee will make an effort to understand if any conflicts of interest exist between themselves and the firm or individual to whom investment responsibilities have been delegated.
Systemic Conflicts: The existence of a conflict or potential conflict of interest is NOT prohibited by the UPIA. It could be argued that all commercial relationships between a consumer (trustee) and vendor (investment advisor) have some level of conflict between these parties’ interests. The vendor (investment advisor) has a legitimate objective to be paid more for a particular service or product. The consumer (trustee) has a legitimate contradictory interest to pay less for that same service or product. It is merely the trustee’s duty to take note of any areas of risk, including actual or potential conflicts of interest, and take reasonable steps to ameliorate those risks.
Common Risks: Following are the common areas of conflict that exist between the trustee and the agent who is providing investment services or products to the trustee:
- Compensation Model: If the advisor has differing compensation models for the trust that reward the adoption of one investment strategy or product over another then a conflict of interest exists.
- Proprietary Products: If the advisor recommends products be used in the portfolio that have been developed and distributed by the advisor’s employer or related company a conflict of interest exists.
- Standard of Care: If the standard of care the advisor is required to follow is a “suitability standard” rather than a “fiduciary standard” a conflict of interest may exist.
- Soft Dollars (Pay-to-Play): If the advisor implements the portfolio strategy using separate account managers and those managers pay revenue to the advisor’s employer for services or products (research, CPE, technology, etc.) a conflict of interest exists.
- Independent Review and Key Performance Indicators: If the trustee relies upon the advisor’s evaluation of their own effectiveness a conflict of interest exists.
Compliance Library: A prudent trustee will develop a record that demonstrates they have investigated potential and actual conflicts of interest between the advisors to whom investment duties have been delegated and the products the investment advisors use to build the portfolio. (Link to a Sample Engagement Letter for the Anodos Fiduciary Governance Service.)
Give me a call: If you or your clients serve as a trustee and a further discussion would be helpful regarding this duty to create a contingency plan, I am available for a phone call to discuss the facts. Simply click here to book a 20-minute consultation.
Josh Yager, Esq., CFP®, ChFC®
Anodos helps individual trustees save time, reduce their personal risk, and fulfill their fiduciary duties. We do this by helping trustees develop and maintain a series of governance documents which demonstrates they have fulfilled each of their duties of care. We also will act as an expert witness to defend our clients’ findings in court. What makes us unique is that trustee governance support is all we do. We do not manage money, sell insurance, or accept referral fees. We don't have a horse in the race.
We help trustees save time, reduce risk, and fulfill their fiduciary duties. What makes us unique is that trustee governance support is all we do.