With the many competing demands on your time, apply fiduciary standards to your plan investment decisions likely is not numero uno. However, as an Investment Fiduciary you are managing the assets of another person and stand in a special relationship of trust, confidence, and/or legal responsibility. A fiduciary. As a company fiduciary, an Investment Stewards, you manage the overall investment decision-making process of the investment menu. Let’s examine prudent investment decision process through the standards for The Center for Fiduciary Studies Standards.
Standards of Care in Investment Decisions
The Center for Fiduciary Studies offers the following 7 Global Fiduciary Precepts. These are investment standards gleaned from investment laws such as the Employee Retirement Income Security Act.
- Know standards, laws, and trust provisions. Know the Limits and constraints of statutes, Investment goals, objectives, constraints and directives defined in the Investment Policy Statement, and Contracts of current service providers.
- Diversify assets to specific risk/return profile of client. In the case of a 401k plan, provide sufficient asset classes so that a participant can prudently diversify the portfolio.
- Prepare investment policy statement (IPS). The IPS should be viewed as the business plan and essential management tool for directing and communicating the activities of the portfolio. The IPS is a formal, long-range strategic plan that defines the management of the investment program in a logical and consistent framework.
- Use “prudent experts” and document due diligence.
- Control and account for all investment-related expenses.
- Monitor the activities of “prudent experts”. Trust but verify.
- Avoid conflicts of interest and prohibited transactions. The fundamental duty of every fiduciary is to manage investment decisions for the exclusive benefit of the end investor.
Asset Allocation Variables and Investment Decisions
You must understand the principles of asset allocation because, by law and regulation, a prudent expert is clearly expected to understand modern portfolio theory and apply generally accepted investment principles. The fiduciary must also prepare an Investment Policy Statement to guide the remainder of the investment process. And finally, at this stage consideration should be given to whether socially responsible investing will be used in constructing the portfolio.
Time horizon. In the case of a defined contribution retirement plan, the investment options must address the range of investment time horizons.
Estimated risk level and tolerance. Find a level of risk that is necessary and tolerable.
Expected return. The “expected” or “modeled” return assumptions for each asset class are based on risk-premium assumptions, as opposed to recent short-term performance.
Asset class selection. Select asset classes consistent with the identified risk, return, and time horizon. Choose the appropriate combination of assets that optimize risk and return objectives. The first criterion is broad and addresses the need to formalize an efficient allocation of assets based upon the specified time horizon and risk/return profile of the portfolio.
Asset class implementation and monitoring. Only select asset classes that can be implemented and monitored effectively.
- Do those responsible for implementation and monitoring have the time, inclination, and knowledge required for the job?
- Do they have the necessary resources and tools?
- Do they have access to suitable investment products within the selected asset classes?
Optional SRI screens. There is an increasing interest by employees to incorporate ethical, environmental, moral, religious and/or corporate governance criteria into their investment strategy. In those circumstance, it requires the investment policy statement to define the appropriately structured socially responsible investment strategies that are to be applied.
Investment policy statement guides investment decision monitoring
These five criteria serve as an outline of the minimum components of an IPS. They require the IPS to define:
- The duties and responsibilities of all parties,
- Diversification and rebalancing guidelines,
- Due diligence criteria to be used in selecting investments,
- Monitoring criteria for investment options and service vendors, and
- Procedures for controlling and accounting for investment expenses.
Need help? Locate an Accredited Investment Fiduciary® or Professional Plan Consultant™ who is versed in these principles. You can search for their designees on their website. Still no time? Call us.