Thursday, April 7, 2016

All Fiduciaries Great and Small

All Fiduciaries Great and Small

Please read:  http://meditationonmoneymanagement.blogspot.com/2016/04/an-error-but-even-more-serious-concern.html after you read this post for an important correction.

Brushes down.  Two developments in the world of investments require commentary.  Whether you have a small retirement account, or you are a beneficiary of a large pension plan, you should be paying attention to these stories.  Last month North Carolina’s State Treasurer accepted positions as a director for Channel Advisor, a public company in the Raleigh area, and James River Capital, a fund-of-funds in Richmond, Virginia.[1]  I’m not talking about ex-Treasurer Janet Cowell.  She will be North Carolina’s Treasurer for the next nine months.  Among her many public duties, Treasurer Cowell is sole fiduciary of North Carolina’s public pension plan.  In my view, these private sector financial positions compromise her role as fiduciary for the pension plan and are a large step backward in the governance of its assets.


In brief, here’s the Treasurer’s case for accepting private sector opportunities while acting as sole fiduciary for the pension plan.  First, there’s precedent.  In ethically challenged North Carolina, our governor and commerce commissioners also maintained private sector board positions after becoming public servants.  Second and rather amazingly, the Treasurer’s private sector activities have the blessing of the State Ethics Commission.[2]   In other words, it has been done before, and it is ostensibly legal.

While Treasurer Cowell’s private sector appointments may be legal, they are wrong. As sole fiduciary of the state’s pension plan, the Treasurer has a duty to act in the best interest of the beneficiaries, state employees, and taxpayers who ultimately bear the risk of the state’s pension plan.  The standard of conduct is perhaps even higher than the conduct expected of her when she sits on the Council of State, Banking Commission, or Board of Public Instruction.  Moreover, recusing herself from decisions that might involve a conflict is hardly a remedy.  By accepting a board seat on public company and by advising a fund-of-fund company, the Treasurer has compromised her investment priorities. 

In 2014, the Treasurer commissioned a study to look at potential new fiduciary models for North Carolina’s pension plan and identify other deficiencies in the management of the plan.  While the Treasurer accepted and pushed for changes in staffing and employee compensation, she never acted on the new fiduciary models.  In my last column for the News & Observer, I wrote about the Treasurer’s failure either to propose a board of trustees for pension investments or to beef up the sole fiduciary model.[3]  By accepting private sector employment and not resigning as Treasurer, Treasurer Cowell has tipped the scales.  North Carolina needs to have a board of trustees for its pension plan, since it can’t count on its elected sole-fiduciary to devote her undivided attention to the investment requirements of the pension plan.


While Treasurer Cowell has taken a big step backwards when it comes to financial management, the US Department of Labor has taken a big step forward when it comes to the management of individual retirement accounts.[4]  The Department of Labor has enacted rules that subject brokers to a fiduciary standard of conduct when they make recommendations regarding retirement accounts such as 401(K)s and IRAs.   Many investors probably thought their brokers were already looking out for the best interest when they made recommendations to their clients.  However, the advisor only had to show that the investment was well suited or appropriate given the clients investment objective.  This lax standard of conduct, invited brokers to recommend all sorts of financial products that were good for the broker’s bottom line and not as good for the investors financial well-being.  I wrote about the proposed rule in my column for the News & Observer in February 2015.  Unfortunately, they’ve removed the column, so I have reposted it on my blog.

The financial services industry has been fighting this rule for years, and I’m sure that the fight will wind up in court.  The industry will claim that the new rule will result in costly litigation and will dissuade them from offering investors the widest possible array of financial products.     The number of lawsuits will tick up and the array of permissible products will shrink.  However, the investment industry will be the only one losing under the new rule because investors will gain greater transparency and less expensive products in their retirement portfolios. 

Now that the Department of Labor has acted, it’s time for the SEC to enact the same sort of rules for non-retirement accounts, so that brokers have to act as fiduciaries when they advise you on the rest of your retirement savings.

Fiduciaries are critical to anyone who can’t or doesn’t management their own money.   The standard well understood by money managers and trustees.  However, the fiduciary standard needs to apply to investments great and small.





[1] http://www.newsobserver.com/news/business/article63206927.html
[2] http://www.wral.com/asset/news/state/nccapitol/2016/03/17/15559807/233654-Cowell_opinion.pdf.  Disturbingly, the State Ethics Commission wasn’t a published opinion.  Rather it was in the form of a letter to the Treasurer’s counsel, and is entitled s a “Confidential Formal Advisory Opinion.”  While the Treasurer’s web-site has a whole section dedicated to open government, neither the Treasurer’s private sector appointments or the opinion are available in the site.
[3] http://www.newsobserver.com/news/business/article23891137.html
[4] http://www.nytimes.com/2016/04/07/your-money/new-rules-for-retirement-accounts-financial-advisers.html?src=me

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