By Kathleen M. McBride, AIFA®
When market volatility like the swings we’ve seen last quarter make clients uneasy, fiduciaries that have a framework of prudent fiduciary practices in place, can call on them to help ease clients’ fears and mitigate the risk of unhappy clients later.
As a CEFEX analyst, I get invited in to audit RIA firms’ investment fiduciary practices for certification by the Centre for Fiduciary Excellence. Elite RIA firms that earn peer-reviewed CEFEX Certification, achieve public recognition for their investment fiduciary excellence, a very important differentiator for clients. CEFEX Certified firms grow faster – nearly twice as fast as non-certified RIA firms.
Certification is also a chance for firms to see where they have opportunities for improvement, or uncover a gap – a risk that the firm can address now, before it causes a problem.
Here are a handful of the prudent practices I see at firms that have earned CEFEX Certification. The prudent practices are outlined in the handbook, “Prudent Practices for Investment Advisors,” available at www.fi360.com, and substantiated with discussions of regulation and law. The basic framework forms a four-part circle: Organize, Formalize, Implement and Monitor.
On days when clients need their advisers most, a few simple prudent practices can make all the difference for client and adviser.
Elite, certified firms make sure clients are set for both tranquil and challenging markets:
- They already have a written, signed agreement and Investment Policy Statement (IPS) for each client, that discusses the client’s time horizon, risk tolerance, objectives, appropriate asset allocation and monitoring and replacement criteria.
- They keep these in client’s files, along with implementation notes and monitoring reports with review notes.
- Their clients’ portfolios are diversified, according to each one’s signed IPS.
- The portfolios are implemented with appropriate asset allocation (and documented) expertise, skill and due diligence, according to their IPS.
- They conduct regular portfolio reviews, to monitor investment performance and costs against appropriate peers and indexes, rebalance on a regular basis according to their criteria, and replace when necessary.
In times of market stress, they can help clients keep calm and carry on:
- They stay in touch as many clients as possible via email, phone, or announcement. These can be very straightforward conversations, such as: “In accordance with your IPS, we’ve diversified your portfolio so that when some assets like equities are volatile, others will normally be more stable. You are appropriately allocated across asset types, in line with the IPS. This gives you your best chance for success over the long term. What is on your mind?”
- When speaking or emailing with individual clients, they make sure to document what they’ve discussed, when, any decisions or next steps, and why. Certified RIA firms keep brief notes, reports and other documentation in the client’s file so if there’s any question later they can refer to the time, place circumstances, recommendations and any next steps.
- These client notes can be short – but they are very important, especially if a client forgets what’s been discussed, recommended, and why:
- SW Sue Brown re her jt act w Ted, they have long time horizon; advised no change right now & will touch base on next steps in 1-2 weeks (sooner if necessary).
- SW Bob Jones, wanted to go to cash; discussed his IPS, noted he has some cash for immediate needs and we may want to make some rebalancing adjustments to his portfolio as the dust settles, but recommended not doing that today. He agreed to sit tight a few days. Advised I will check in next wk, and to call me if needs to speak sooner.
- Dr. Jo Boone noted that some of the individual stocks in her mad money account were a concern – that’s the account she directs on her own, which I reminded her. She wanted to trim there, but not necessarily in her other portfolios we manage. When I asked if she needed the cash from the self-directed account right away, she noted there’s an estimated tax pmt in 2 wks; I noted there’s a position she could harvest to offset some gains, and she wants to go ahead. Order sent to trading.
RIA firms that have prudent practices in place build trust with clients because they deserve that trust. When they make the effort to have an independent, third party come in and verify that for clients, it is very meaningful for clients and prospective clients. When an RIA firm has a well-thought-out, repeatable set of practices in place, clients are better served, the firm is better managed, and has more control over all operations, from client acquisition to investment management or manager selection, to compliance, back office and cyber security. When firms are well managed, they keep more revenue, and tend to have better client outcomes over the long term.
And when markets get challenging, they are set to help clients get through them.
Kate McBride, AIFA®, founder of FiduciaryPath, LLC is an Accredited Investment Fiduciary Analyst®; a CEFEX analyst with the Centre for Fiduciary Excellence, auditing fiduciary firms’ investment fiduciary practices for certification; and a consultant on fiduciary matters. Ms. McBride serves as chair of The Committee for the Fiduciary Standard. firstname.lastname@example.org.