The Uniform Prudent Investor Act versus Fiduciary Accountability

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A Primer and Review for Financial Advisors

By Dr. David Edward Marcinko MBA, CMP™

www.CertifiedMedicalPlanner.org

More than a decade ago Charles L. Stanley, CFP™ gave an overview of the legislation and highlights areas of change for financial advisors and planners and to the financial services industry. To date, the Uniform Prudent Investor Act (UPIA) has been enacted in most states. Essentially, the act changed the legal criteria for “prudent investing” for trusts. All assets owned by a trust are considered “investments” for purposes of the Uniform Prudent Investor Act. Consequently, if a trust owns a life insurance policy or an annuity, it is considered an “investment” for purposes of the UPIA. Trustees and their advisors are subject to the act.

Background Review

The UPIA (California Probate Code Article 2.5) was adopted by the Uniform Conference of Commissioners on Uniform State Laws in 1994. When determining whether or not certain investing is “prudent,” the standard is applied to the whole portfolio rather than to individual investments.

The UPIA radically changes the analysis of risk. The UPIA considers that risk is unavoidable. For example, fixed income instruments carry the risk of loss of purchasing power, even though the principal may not be reduced in terms of real numbers. Risk is often desirable so long as it is sufficiently compensated. The UPIA seeks to compel the trustees to analyze the trade-offs between risks and returns, taking into consideration the needs and objectives of the trust.

Restrictions Reduced

The restrictions on what type of investments can be held in trust have been eliminated. The trustee can invest in anything that plays an appropriate role in achieving the risk/return objectives of the trust and that meets the other requirements of prudent investment. The trustee’s duty to diversify trust assets is codified in the UPIA. It is now recognized that proper effective diversification may enhance returns and/or reduce risk at the same time.

The UPIA rejected the traditional trust rule that generally prohibited “delegation of duty” by trustees, especially the duty of investment of trust assets. Delegation is now permitted, subject to safeguards. Agents are now made liable if they do not follow the new law.

What Must a Trustee Do to Comply with the Act?

According to Stanley, to comply with the UPIA, trustees must review trust assets and make and implement decisions to either keep or discard assets in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust:

  • The trustee must diversify the assets of the trust unless it is prudent not to do so (16048). For example, it would not be acceptable for the trust to hold all municipal bonds.
  • The trustee must either comply with the Act in full or have the trust amended to restrict the requirements to diversify trust assets.
  • The trustee must delegate if he or she believes that he or she doesn’t the expertise to perform certain functions, this is particularly anticipated in the area of investment management. The trustee is expected to document all of the above to be available for review either by beneficiaries and/or courts should they become involved. This includes a written Investment Policy Statement. The act doesn’t specifically require this, but how would one prove they had been acting as a prudent trustee without documentation?
  • The trustee must periodically review the circumstances, assets and any professional delegates whom he or she has retained to assist him or her. The portfolio must be periodically rebalanced to maintain the established risk/reward characteristics identified in the Investment Policy Statement. This is not specifically stated, but is implied in ¤16047(b) and is a part of proper portfolio management under Modern Portfolio Theory. The act requires the costs of management to be “reasonable.”
  • The trustee must deal impartially with beneficiaries when there are two or more beneficiaries and must invest impartially, taking into account the differing interests of the beneficiaries.

Note: In most states, trust language can draft the trustee out of any and all requirements of the Uniform Prudent Investor Act. Many attorneys are doing this. So check trust language carefully.

Assessment

This essay is not a “final answer” in regard to compliance with the Uniform Prudent Investor Act. Financial advisors should consult with a competent attorney if you have any questions about a specific application with a specific physician investor or other client.

http://www.amazon.com/Financial-Planning-Handbook-Physicians-Advisors/dp/0763745790/ref=sr_1_1?ie=UTF8&s=books&qid=1276795609&sr=1-1

Conclusion

And so, your thoughts and comments on this ME-P are appreciated. How has the fiduciary standard altered the above Act; or the current Dodd-Frank Act [Wall Street Reform and Consumer Protection Act]? Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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16 Responses

  1. Duties of a Fiduciary

    Financial planners and financial advisors must make complete and fair disclosure of all material facts, and they must employ reasonable care to avoid misleading their clients. The SEC and many states have required investment advisors and planners, as fiduciaries, to disclose conflicts of interest in addition to compensation. This is particularly important where the planner is receiving fees for advice and commissions on sales.

    The utmost good faith is required in all their dealings. Fiduciaries must exhibit the highest forms of trust, fidelity, and confidence. The law regards the duty of a fiduciary as a very high one, higher than the negligence standards applicable to most of the planner’s other obligations, especially when the planner knows that the client has relied upon him or her almost exclusively for advice. The planner is expected to act in the best interests of their clients at all times. Here the distinction between a planner or investment advisor with a fiduciary interest and a salesperson is crucial. It is generally believed that a fiduciary performs his or her trade for reasons other than money and feels a sense of responsibility that goes beyond making a living.

    Many planners try to avoid becoming labeled as fiduciaries because they do not want the additional liability associated with it. Since the entire client relationship changes, the registered representative can no longer recommend just any investment so long as the trades are processed accurately. They must make sure that the trade is in the best interests of the client.

    For more information, please read “Accepting the Responsibilities of a Fiduciary” by Katherine Vessennes, Financial Advisory Practice, Warren, Gorham, & Lamont, New York, N.Y., March/April, pp. 7-11, 40, (800) 950-1216.

    Also see: Bennett Aikin AIF [ME-P Interview]
    https://medicalexecutivepost.com/2009/03/01/an-interview-with-bennett-aikin-aif%c2%ae/

    Ann Miller RN MHA
    [Managing Editor]

    Handbook: http://www.amazon.com/Financial-Planning-Handbook-Physicians-Advisors/dp/0763745790/ref=sr_1_1?ie=UTF8&s=books&qid=1276795609&sr=1-1

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  2. Dr. Marcinko

    In the financial industry, true fiduciaries are difficult to identify – unlike other professions (like law or accounting) where there is a required fiduciary relationship.

    Most financial advisors adhere to the “suitability” standard – meaning that they only have to document an explanation of why their investment advice was reasonably justified for you. With such a low burden of proof, a financial advisor operating under this standard could still win an incentive prize to Maui or a flat-screen TV for selling you a particular “suitable” investment.

    The line is blurred between functioning as a fiduciary and almost functioning in a fiduciary capacity. Lesson learned? Don’t expect financial gurus or salespeople to act in your best interest. Because they don’t function in a fiduciary capacity, by definition, they don’t act solely in your best financial interest. Ask your financial advisor to put in writing whether he or she upholds the fiduciary standard.

    Mike Davis JD, LLM CFP

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  3. ‘All-Public’ FINRA Arbitration Panels Approved by the SEC

    The clients that FAs face in arbitration hearings may now choose to have the panel comprised entirely of people with no recent ties to the securities industry. They could come from all walks of life. This is the effect of a ruling last month by the Securities and Exchange Commission. Normally, these three-person panels have two “public” arbitrators and one from the industry.

    The action, proposed by the Financial Industry Regulatory Authority (FINRA), follows a 27-month pilot program during which certain investors were given the choice of replacing the industry arbitrator with a “public” panelist.

    Many pundits – myself included – opine that “it’s about time.”

    http://www.amazon.com/Financial-Planning-Handbook-Physicians-Advisors/dp/0763745790/ref=sr_1_1?ie=UTF8&s=books&qid=1276795609&sr=1-1

    Dr. David Edward Marcinko MBA
    [Publisher-in-Chief]

    Like

  4. Fiduciary – Just Say No!

    Rep. Steve Garrett, R-N.J., chairman of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises, along with other Republican members of the committee, told Securities and Exchange Commission (SEC) chairman Mary Schapiro in a March 17 letter to not move forward with a fiduciary duty rule as “the Commission has not identified and defined clear problems that would justify a rulemaking and does not have a solid basis upon which to move forward.”

    Lamentable!

    Jack

    Like

  5. Why Winning Fiduciary Fight Would Increase – Not Decrease – Financial Planning Competition

    Certified Financial Planner Mike Kitces suggests that as financial planning continues its path towards profession, the next major hurdle appears to be the application of the fiduciary standard to the delivery of financial planning advice.

    For many planners, though, the push for fiduciary is not just about advancing the profession; it’s also about cleaning it up, and getting rid of all those people who say they do financial planning when they do not.

    In other words, it’s about carving out a protected space – as is done with most other professions – where only those who really do it can call themselves professionals, just as only licensed medical professionals can practice medicine, and it’s illegal to conduct an unauthorized practice of law.

    http://www.kitces.com/blog/archives/139-Why-Winning-Fiduciary-Fight-Would-Increase-Not-Decrease-Financial-Planning-Competition.html

    What do you think?

    Matthew

    Like

  6. Standards of Conduct
    [Clients Befuddled By Fiduciary / Suitability Standards]

    An overwhelming majority of full-service investment firm clients don’t know the difference between a suitability standard and a fiduciary standard, or have trouble defining them, a recent study shows.

    http://www.fa-mag.com/pw-mag/pw-online-extras/7818-pwinsider.html

    Dr. David Edward Marcinko MBA

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  7. Stock Brokers versus RIAs

    Registered investment advisors — firms that employ about 280,000 individual representatives nationwide — are billed as an alternative to traditional brokers because they are legally bound to a fiduciary duty to put their clients’ interests first, and typically charge fees instead of commissions.

    Stock Brokers, who number about 632,000, are held to a suitability standard that their advice meet clients’ needs at the time a product is sold.

    In practice, the lightly regulated RIA industry — where low barriers to entry helped swell membership by 39 percent in six years — may offer few protections for investors who wind up with incompetent advisors.

    Stuart

    Like

  8. On Fiduciary Matters

    This essay, by Kenneth Silber, came out earlier this year in Research magazine and the AdvisorOne.com platform. It discusses the ongoing regulatory debate about fiduciary accountability.

    Not only does the article cover the issues of the current debate (at least as of July when it was published), but more interestingly it delves into the history of fiduciary over the millennia, and gives some good insights about key turning points over the centuries.

    A nice read to keep some perspective on how old the fiduciary debate really is.

    http://www.advisorone.com/2011/07/01/fiduciary-matters

    Dr. David Edward Marcinko MBA CMP
    http://www.CertifiedMedicalPlanner.com

    Like

  9. SEC Crackdown Hits Advisors Hard
    [Actions Reach Record in 2011]

    The Securities and Exchange Commission just announced that the agency filed a record 735 enforcement actions in the fiscal year that ended on Sept. 30th, 2011.

    http://www.advisorone.com/2011/11/09/sec-crackdown-hits-advisors-hard-as-actions-reach

    Jeffrey

    Like

  10. Stockbrokers, Clients Thrive in Fiduciary States

    Dr. Marcinko – Critics of a fiduciary standard for stockbrokers beware.

    A recent study suggests that application of a fiduciary standard to the broker/dealer model wouldn’t have the terrible consequences that is often predicted.

    http://registeredrep.com/blog/copsandcrooks/stockbrokers_clients_thrive_in_four_states_that_already_impose_4412/?NL=09-RGRa&Issue=09-RGRa_20120406_09-RGRa_456&YM_RID=marcinkoadvisors%40msn.com&YM_MID=1303525

    Montomery

    Like

  11. Registered Investment Adviser vs. Registered Representative

    This conversation boils down to whether an investor should use a RIA (Registered Investment Adviser) or an RR (Registered Representative). The biggest difference between a Registered Representative and an Investment Adviser from a client’s perspective in general is the fiduciary/ suitability issue, as discussed here. The industry has currently focused on this issue specifically in the past few years with the creation of the Dodd Frank provisions. Yet most consumers still today do not understand or are aware of the differences between having a financial adviser that is regulated by a fiduciary duty and a financial adviser that is required to abide by a suitability duty.

    Fiduciary means that the client’s interests are always first. Suitability means that the client can only be sold those investments that are appropriate for the client when considering that client’s situation. Suitability does not take into consideration the fact that the client might be better off without the investment, or that there are better investments available in the marketplace (cheaper, better track record, higher rated by established rating/investment analysis firms)then the one investment being recommended by the adviser.

    The word “fiduciary” has even been redefined lately. Because sales commissions are considered by most individuals as being a deterrent to what is “in the best interest” of the client, many in the industry believe that any adviser that is compensated in any way by a sales commission is not a fiduciary. Yet many advisers at major firms are at least partly compensated by sales commissions and yet feel that form of compensation does not disqualify them from acting in the best interest of their client. In fact, it is rare to meet a Registered Representative that does not believe he/she is also a fiduciary. Redefinition of “fiduciary” has become the new game in town.

    Of course, a fiduciary standard is better than a suitability standard. It must be mentioned that in real life however all things are not equal. It is possible that when considering two specific individuals, one an Investment Adviser, and the other a Registered Representative, it is possible that overall the Registered Representative will be the better adviser.

    As a past active FPA member, and as a practitioner who has been both a Registered Representative and currently an Investment Adviser, I have seen Investment Advisers that I would not wish on my worst enemies. I likewise have a few good friends that are Registered Representatives that I would hope my wife would utilize to guide her in her financial dealings if I were to beat her to the grave. I understand the wrath that Registered Representatives have towards us fee-only Investment Advisers as we tend to be a little self righteous in our fee-only fiduciary stance. The problem is that the issue can be more complicated than fiduciary fee-only vs. suitable commission. The following factors are critical attributes of a competent adviser, and yet none of these qualities is determined by whether an adviser is an IA or a RR:

    1. The training and knowledge of the adviser is a big factor.
    2. Experience is a very important
    3. The breadth of offerings available to the adviser affects the advice.
    4. The “bed side manner” of the adviser is important.

    Understanding the caveats mentioned, I would recommend the client consider first hiring an Investment Adviser due to the higher standard of fiduciary duty that the Investment Adviser must follow over the the Registered Representative’s suitability standard.

    David K. Luke MIM
    Physician Financial Advisor, CMP™ candidate
    http://www.CertifiedMedicalPlanner.org

    Like

  12. Going Granular

    For even deeper insight into this topic, please see:
    An Interview with Bennett Aikin AIF®:

    https://medicalexecutivepost.com/2009/03/01/an-interview-with-bennett-aikin-aif%c2%ae/

    Ann Miller RN MHA
    [Executive-Director]

    Like

  13. Advocates Step Up Campaign for Uniform Fiduciary Standard

    As efforts to apply stricter fiduciary and disclosure requirements on broker-dealers slow, the Institute for the Fiduciary Standard, a one-year-old think tank that advocates for uniformity, met with Mary Schapiro, the Chairman of the SEC, to make its case.

    http://www.financial-planning.com/news/Advocates-Step-Up-Campaign-for-Uniform-Fiduciary-Standard-2680834-1.html?ET=financialplanning:e11571:86235a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=FP_Weekend__091412

    Ann Miller RN MHA
    [Executive-Director]

    Like

  14. How All Financial Planning – Even Fiduciary – Is About Sales, Sales, Sales

    The reality is that at its’ purest level, financial planners are in the business of “selling”, persuasion, and convincing clients to: 1) pay the planner for services; 2) to engage in the financial planning process; and 3) to implement the advisor’s recommendations.

    http://kitces.com/blog/archives/475-How-All-Financial-Planning-Even-Fiduciary-Is-About-Sales,-Sales,-Sales.html

    As a result, according to Mike Kitces, if the financial planner doesn’t know how to “sell” clients on the value of services, the financial planning offered, and motivate clients to act on recommendations, then you simply can’t succeed as a financial planner.

    This is regardless of whether the sale of an insurance or investment product is even ever involved.

    Any thoughts FAs?

    Raymond

    Like

  15. SEC Panel OKs RIA Fee, Uniform Fiduciary Proposals

    An SEC advisory committee just recommended that the commission appeal to Congress for authority to collect user fees from advisors to enhance its oversight of the RIA sector and enact rules to tighten regulation of broker-dealers.

    http://www.financial-planning.com/news/sec-panel-approves-ria-fee-uniform-fiduciary-proposals-2687385-1.html?ET=financialplanning:e15736:86235a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=FP_Daily__112513

    Ann Miller RN MHA
    http://www.amazon.com/Comprehensive-Financial-Planning-Strategies-Advisors/dp/1482240289/ref=sr_1_1?ie=UTF8&qid=1418580820&sr=8-1&keywords=david+marcinko

    Like

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