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    Why I'm a Fiduciary

    It's a mindset of wanting to personally protect investors from unreasonable costs and unnecessary risks.

    W. Scott Simon, 10/03/2013

    W. Scott Simon is a principal at Prudent Investor Advisors, a registered investment advisory firm. He also provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. Simon is the recipient of the 2012 Tamar Frankel Fiduciary of the Year Award.

    People sometimes ask me to define what a fiduciary is. My short answer is that a fiduciary is someone who protects those (with whom the fiduciary has a legal relationship) that are not in a position, for whatever reason, to protect themselves. Perhaps that doesn't comport exactly with the formal definition of a fiduciary, but that's the way I see it.

    My definition of a fiduciary inevitably leads to a discussion of why I'm a fiduciary. (A fiduciary, of course, need not personally want to protect people. It's always possible for a fiduciary to care not a whit for those it is legally required to protect. It's also possible that a non-fiduciary advisor can feel a moral duty toward its clients, even though it's not bound legally by any fiduciary standard.)

    Being a fiduciary--at least for me--requires a certain mindset. In my view, that is to protect people. My family lineage has spawned an inordinate amount of females who have lived long lives. So from an early age, I became unusually familiar with--not to put too fine a point on it--the lives of old ladies. Unsurprisingly, that familiarity included up-close views of declining health and mental acuity. The fact that people can grow old, weak, and helpless with time has had, I think, a large impact on me. Many of us have experienced sorrows in our own lives. In two such situations, I have had the great privilege to be in a position as a fiduciary to protect those who grew old and helpless, and who had no one else to look after them like I could.

    That kind of mindset has stood me in good stead in my career in the investment advisory profession. From the time that we first established our registered investment advisory (RIA) firm, my partners and I decided that our practice would focus exclusively on retirement plans and provide services to plan participants that would protect them from retirement plan service providers that see participants as nothing more than lambs just waiting to be led to the slaughter. That's why we chose to become a discretionary fiduciary investment manager pursuant to section 3(38) of the Employee Retirement Income Security Act of 1974 (ERISA) for all the retirement plans for which our firm selects, monitors, and (if necessary) replaces investment options.

    Assuming the fiduciary responsibilities and associated liabilities of being an ERISA-defined 3(38) investment manager produces, in my view, the biggest bang for the buck in bringing real fiduciary protection to participants (and their beneficiaries), which are, it should always be remembered, the center of the ERISA universe. (Many plan sponsors for whatever reason won't wish to give up their inherent fiduciary responsibility to select and manage their plan investment menu but may wish, in such cases, to retain a non-discretionary fiduciary investment advisor pursuant to ERISA section 3(21)(A)(ii).)

    ERISA section 3(38) reads in relevant part: "The term 'investment manager' means any fiduciary other than a trustee or a named fiduciary, as defined in [ERISA] § 402(a)(2) [29 USC § 1102(a)(2)]...(A) who has the power to manage, acquire, or dispose of any asset of the plan; (B) who (i) is registered as an investment adviser under the Investment Advisers Act of 1940...and (C) has acknowledged in writing that he is a fiduciary with respect to the plan." The kind of fiduciary referenced is described in U.S. Department of Labor Advisory Opinion 2011-08A: "Section 3(21)(A) of ERISA provides that a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets…"

    Taking on the fiduciary responsibilities and liabilities of an ERISA section 3(38) investment manager, then, requires a firm to be an RIA (or a bank or insurance company). This makes a 3(38) sort of a "double-barreled" fiduciary, subject to both the "best interest" fiduciary standard of the Investment Advisers Act of 1940 (as an RIA fiduciary) as well as the (higher) "sole interest" fiduciary standard of ERISA section 404(a)(1)(A) (as a discretionary fiduciary defined in ERISA section 3(21)(A)(i)).

    W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understandingis the definitive work on modern prudent fiduciary investing.

    Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

    For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

    The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.