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Fiduciary Practices
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We define an Investment Fiduciary as a person or organization who is managing the assets of another person and stands in a special relationship of trust, confidence, and/or legal responsibility.
CEFEX uses the following terms:
Investment Steward
A person or organization which has the legal responsibility for managing investment
decisions (trustees and investment committee members).
Investment Advisor
A professional who is responsible for providing comprehensive and continuous investment
advice (including wealth managers, financial advisors, trust officers, financial
consultants, investment consultants, and financial planners).
Fiduciary Adviser
A person that renders investment advice for a fee or other compensation, direct or indirect, to IRA accounts or ERISA retirement plan participants (per the Pension Protection Act of 2006).
Investment Manager
A professional who makes investment decisions: selects the securities (eg. stocks
and bonds) to implement a specific investment mandate (eg. large cap growth).
Investment Support Services Provider
An organization providing support services to Investment Stewards or Advisors. The definition includes organizations providing services to ERISA plans (“parties in interest”) as well as those providing consulting, custodial, investment advisory, investment management, investment brokerage, or other similar services to investment fiduciaries.
Fiduciary Practices and Prudent Practices describe the requirements for a firm to maintain
an investor's trust. The Practices are the basis for a CEFEX Assessment
which may lead to registration
Investment Steward and Advisor Practices
Investment Stewards, generally with the assistance of Investment Advisors, have primary responsibility for effective management of the investment process:, including faithful adherence to investment fiduciary Practices. The Investment Steward is responsible for managing the overall investment strategy: deciding on the asset allocation, defining the details of the strategy, implementing the strategy with appropriate Investment Managers, and monitoring the strategy on an ongoing basis. An Investment Advisor may be called upon by the Steward to assist in this process, or to assume direct responsibility for certain fiduciary duties delegated to, and accepted by, the Advisor.
Each practice for Investment Stewards and Investment Advisors has been substantiated
by legislation, case law, and/or regulatory opinion letters from ERISA, UPIA, UPMIFA,
and MPERS. The substantiation can be viewed in a Legal Memoranda handbook, with
full citations listed in the respective handbooks.
The Practices
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Step 1: Organize
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Practice S-1.1
Investments are managed in accordance with applicable laws, trust documents, and
written investment policy statements (IPS).
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Practice S-1.2
The roles and responsibilities of all involved parties (fiduciaries and non-fiduciaries)
are defined, documented, and acknowledged.
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Practice S-1.3
Fiduciaries and parties in interest are not involved in self-dealing.
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Practice S-1.4
Service agreements and contracts are in writing, and do not contain provisions that
conflict with fiduciary standards of care.
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Practice S-1.5
Assets are within the jurisdiction of appropriate courts, and are protected from
theft and embezzlement.
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Step 2: Formalize
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Practice S-2.1
An investment time horizon has been identified.
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Practice S-2.2
A risk level has been identified.
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Practice S-2.3
An expected, modeled return to meet investment objectives has been identified.
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Practice S-2.4
Selected asset classes are consistent with the identified risk, return, and time
horizon.
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Practices S-2.5
Selected asset classes are consistent with implementation and monitoring constraints.
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Practice S-2.6
There is an IPS which contains the detail to define, implement, and manage a specific
investment strategy.
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Practice S-2.7
The IPS defines appropriately structured, socially responsible investment (SRI)
strategies (where applicable).
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Step 3: Implement
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Practice S-3.1
The investment strategy is implemented in compliance with the required level of
prudence.
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Practice S-3.2
Applicable “safe harbor” provisions are followed (when elected).
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Practice S-3.3
Investment vehicles are appropriate for the portfolio size.
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Practice S-3.4
A due diligence process is followed in selecting service providers, including the
custodian.
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Step 4: Monitor
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Practice S-4.1
Periodic reports compare investment performance against appropriate index, peer
group, and IPS objectives.
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Practice S-4.2
Periodic reviews are made of qualitative and/or organizational changes of investment
decision-makers.
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Practice S-4.3
Control procedures are in place to periodically review policies for best execution,
“soft dollars,” and proxy voting.
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Practice S-4.4
Fees for investment management are consistent with agreements and with all applicable
laws.
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Practice S-4.5
“Finder’s fees” or other forms of compensation that may have been paid for asset
placement are appropriately applied, utilized, and documented.
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Practice S-4.6
There is a process to periodically review the organization’s effectiveness in meeting
its fiduciary responsibilities.
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Please
click here to download Fiduciary Practices for Investment Stewards
Please
click here to download Fiduciary Practices for Investment Advisors
Investment Manager Practices
Currently, 24 Fiduciary Practices have been identified, which can decrease fiduciary
risk for Investment Managers. We define fiduciary risk as the risk of breaching
the investor's trust that an asset manager will meet an expected return on investment.
The CEFEX Fiduciary Practices are based on guidelines proposed by industry organizations
such as the CFA Institute, the European Fund Asset Management Association (EFAMA)
and the World Risk Standards Working Group. CEFEX believes that fiduciary excellence
contributes to improving performance by stabilising investment returns and securing
capital. While past performance cannot predict future returns, CEFEX believes an
asset management firm's adherence to fiduciary practices, correlated with its track
record, can anticipate future risk.
Each fiduciary practice has criteria to determine conformity to the practice. Since
asset managers will have varying implementations of fiduciary practices, the criteria
span a broad range. Each criteria is assessed using 'fiducials', or quantitative
measures of adherence to a practice. For example, Practices 3.5 and 4.2, best execution
in trading and trade monitoring, contain criteria from the broker selection and
trading process, to the monitoring and allocation policies. 'Fiducials' for these
criteria will include a query on failed trades over a set time period. Another example
is in Practice 1.5 where business continuity through reliable IT systems and risk
management is addressed. 'Fiducials' will query whether back-up facilities and recovery
programs are coordinated with the firm's reporting obligations.
Please
click here to download Fiduciary Practices for Investment Managers
Prudent Practices for Investment Support Services
The Prudent Practices for Investment Support Services align directly with the fiduciary responsibilities detailed in Prudent Practices for Investment Advisors and Prudent Practices for Investment Stewards.
Please click here to download Prudent Practices for Investment Support Services
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