Becoming a Fiduciary

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Becoming a Fiduciary

These are the key considerations for financial professionals when developing and documenting a plan for your practice as you move forward as a fiduciary.

As a fiduciary, financial professionals are legally required to put their clients’ needs before their own and give advice that is solely in the best interests of clients. However, with the appropriate preparation, you will be able to optimize your practice, transition your current business successfully and position yourself for future growth.

Step

Organize Your Practice

This change will have a major impact on the entire financial industry. Preparing early will ensure you and your clients have a smooth transition. Educating your team, defining roles and responsibilities and identifying third-party partners is a good way to start.

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Define the roles and responsibilities of your team

The day-to-day approach to managing accounts will likely change in some ways. It is critical that you identify and put a process in place to best serve clients and ensure each of your team members is aware of the new process.

Create service agreements

The new environment means financial professionals will need to establish a service model for clients that supports their best interests. It spells out when and where contracts are and are not required. Each firm may choose to approach compliance in a different manner. Financial professionals who are part of a firm should work with their home offices to ensure the requirements are met.

Identify any third-party partners

Being a fiduciary requires a heightened level of due diligence. A financial professional’s decision to utilize third-party support, such as external portfolio managers, must be well thought out and documented. Vetting and establishing top-tier resources will be increasingly important to ensuring a client’s best interests are served.

Price your services appropriately

A number of factors play a role in determining what type of account is best for clients, including the investable assets they have under management and the active management needed for their investments. Regardless of the account type, the financial professional will be a fiduciary for his or her clients. The main difference in account relationship types is the manner in which the financial professional will be compensated.

Define your value to clients

Clearly defining, differentiating and communicating your value to clients on a regular basis is a key building block to a business that will be successful over the long term. Create a written statement to share with your clients that clearly articulates your core principles as a financial professional. Use our tools to create a powerful customized statement that underscores your commitment to superior outcomes.

Resources to use:

How to Create a Clear Value Proposition for Your Practice

Share Class Cost Comparison Calculator

Step

Formalize Your Process

Clear communication and documentation of each step of your relationship and investment process is even more important when acting as a fiduciary.

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Formalize your investment process

You may already have a process you follow but you should document it. This step ensures that you and your team are consistent in working with your clients in the best manner possible. Documenting your investment process can also help clients better understand the value you provide and ensure you are achieving the best results.

Document your Investment Policy Statement (IPS)

Clearly outlining the client’s investment objectives, including liquidity needs and risk tolerance, is a key component to being certain you are acting in the client’s best interest. The asset allocation used will be based on these factors. Many firms have a thorough process in place to help a financial professional establish a client’s IPS.

Establish your portfolio construction process

Determining the role you will play in managing a client’s investments is critical. Many firms have a clear set of parameters for what a financial professional is permitted to do, so it is important that you refer to your home office to determine your options. For example, some advisors have discretion over the investment decisions made for an account. If utilizing a discretionary platform, the financial professional is permitted to make trades in the account without obtaining approval from the client. This is just one of many choices to be made when determining the structure of a client’s portfolio.

Three Main Approaches to Managing a Client’s Investments

You Construct Model: The financial professional constructs the investment model and, if operating as the portfolio manager (PM), has discretion to make necessary trades for the client. If the financial professional is not operating as the PM, they build the model and then must obtain approval from the client before making the trades.
Firm Constructs Model: In this case, the home office sets the asset allocation models the financial professionals can use for their clients. These models are designed with specific risk tolerances and time objectives in mind. The financial professionals then select and adapt these models to meet the clients’ specific needs.
Manager Constructs Model: Often, financial professionals take advantage of models built by third-party investment managers, such as American Funds. In this instance, the investment manager offers a variety of models — or managed portfolios — targeting different investor objectives. Financial professionals may use these models as complete or core portfolios. They also may tailor a model to address specific client needs or goals.

Resources to use:

Build and Analyze Portfolios

Build and analyze your clients’ American Funds portfolios using our suite of portfolio construction tools, such as Custom Planner and Portfolio Analyzer®.

Test Investment Scenarios

Run hypotheticals to test portfolios and investment scenarios and generate illustrations that you can share with clients to support your recommendations.

Step

Work With Clients

Having conversations with your clients and prospects will be critical to determine the account type that is in their best interests and to construct comprehensive investment plans aligned with their specific goals. It also will provide you with the information you need to add scale to your practice so you can focus more time on clients and growing your business.

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Streamline and scale your practice with managed portfolios and other investments

If you are planning to transition to an advisory business model, you may find it difficult to manage the same number of households as you did previously. If you are in that position, there are several ways to successfully streamline and scale your business. For example, you may find that certain investments like objective-based managed portfolios can help you to optimize your practice.

Review the types of advisory relationships to find the best fit for each client

Advisory relationships differ from client to client. There is no one-size-fits-all approach that can be taken as a fiduciary. Determining the relationship that is in the best interests of your clients requires having a strong understanding of their needs and goals, and clearly defining the services they want you to provide. The main difference in account relationship types is the manner in which the financial professional will be compensated.

Identify investment managers who are in line with each client’s Investment Policy Statement (IPS)

Finding the best investment managers for clients has always been important. As a fiduciary, the bar is set even higher. Focusing on consistency and persistency of results is key. Once you’ve identified managers who are in line with the client’s IPS and fill the specific role needed within the asset allocation model, ask questions about their results and process (and if they are repeatable) to evaluate several key qualitative and quantitative data points.

Document the due diligence process you used and monitor the results of the managers

Document the due diligence process you used and the factors you evaluated that led you to make your investment manager selection. Monitor the results of the managers within your client’s portfolio and remove them if they are no longer meeting the client’s needs compared to the appropriate benchmark and their peer group.

Resources to use:

How to Choose an Investment Manager

Help Your Clients Understand Account Types and Compensation

Other Resources

- Practice Enhancements Resource Guide (PDF)
  Whether you are transitioning your business model or trying to enhance your practice, this guide will provide you the support you need as you prepare to become a fiduciary.
- Stay Ahead of the Industry
  Increase your productivity and enhance investor satisfaction with our advisor education programs. American Funds can help sharpen and supplement your efforts.

Related How-to-Guides

- Conduct a Portfolio Review
  Make your meetings both productive and meaningful with our step-by-step portfolio review guide, including tools and resources to help you prepare.

Supporting Products & Solutions

- Portfolio Construction
- American Funds Model Portfolios

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