The responsibility of managing other people’s money

By William H. Stewart
Special to the Saipan Tribune

One often hears or reads about fiduciary responsibility and whether reference is made to guardians, stock brokers, money managers, public trust accounts, credit unions or pension plans, the scope of the issue is wide ranging and complex. It is always about money and my dear ol’ granny once said, “Billy, people with 10 million dollars are no happier than those with nine million.”

Executives at Enron, Tyco, WorldCom, Disney and Health South are but a few recently in the news who are either already convicted or are in court for their alleged crimes, some of which involved the disregard of their fiduciary responsibilities.

Those readers who have followed any of the essays in this column might be interested in learning some of the fiduciary responsibilities of those entrusted with the management of other people’s money. A publication (below) is available to help educate important “stakeholders” about the fiduciary responsibilities of people who have the legal authority for exercising control over the funds of others. Several topics discussed include personal liability for fiduciaries, investment duties and case law. The handbook is a reference guide for trustees, members of investment committees and others.

In the handling of money—when one acts as a trustee—there is a fiduciary responsibility owed to the principal party. It is defined as a relationship imposed by law where someone has agreed to act in the capacity of a “caretaker” of another’s rights, assets and/or well-being. The fiduciary owes an obligation to carry out the responsibilities with the utmost degree of “good faith, honesty, integrity, loyalty and undivided service of the beneficiaries interest.”* Good faith has been interpreted to impose an obligation to act reasonably in order to avoid negligent handling of the beneficiary’s interests as well the duty not to favor anyone else’s interest (including the trustees’ own interest) over that of the beneficiary.

Further, if the agent should find him/herself in a position of conflicting interests, the agent must disclose the dual agency (acting for two parties at the same time) or risk being accused of constructive fraud in regards to both or either principals.

The legal and practical scrutiny a fiduciary undergoes is formidable, and it comes from multiple directions and for various reasons. Interestingly, fiduciary liability is not determined by investment performance, but rather on whether prudent investment practices were followed.

“Many fiduciaries just don’t understand what their responsibilities are. What’s more, managers are frequently unaware that they are, in fact, fiduciaries. This misunderstanding leads to most of the violations that can lead to lawsuits.”*

As pointed out in the handbook, a person is a plan fiduciary “to the extent that he or she exercises discretionary control or authority over plan management; or authority or control over management or disposition of plan assets; renders investment advice regarding plan assets; or has discretionary authority or responsibility in plan administration.” As such, a person can be a fiduciary whether or not he or she has been formally named as such.

The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must act prudently and must diversify the plan’s investments in order to minimize the risk of large losses. They also must avoid conflicts of interest. In other words, they may not engage in transactions on behalf of the plan that benefit parties related to the plan, such as other fiduciaries or service providers.

“Unfortunately, many organizations operate under the misconception that by outsourcing plan administration to third-party venders, they have ‘off-loaded fiduciary responsibility.’ Others think that by giving employees a slate of investment options, and letting employees self-direct those investments, they are also off the hook. Many organizations think, ‘We’ve given them these choices, that’s all we have to worry about.’ That can be deemed to show a lack of prudence.

“A fiduciary should be aware of others who serve as fiduciaries to the same plan, since all fiduciaries have potential liability for the actions of their co-fiduciaries. For example, if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary can be liable as well.”

*A Handbook for Investment Fiduciaries published by the Foundation for Fiduciary Studies (www.ffstudies.org.).

(William H. Stewart is an economist, historian, and military cartographer.)