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Fiduciary Practices
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We define an Investment Fiduciary as a person or organisation who is managing the
assets of another person and stands in a special relationship of trust, confidence,
and/or legal responsibility.
Practices
Fiduciary Practices describe the requirements for an Investment Fiduciary
to maintain an investor's trust. The Practices are the basis for a CEFEX Fiduciary
Assessment which may lead to registration. CEFEX uses a consultative approach to
develop and evolve the Practices, similar to that used by international standards
development organizations.
The Fiduciary can be further divided into three groups:
Investment Stewards
A person or organisation which has the legal responsibility for managing investment
decisions (trustees and investment committee members).
Investment Advisors
A professional who is responsible for managing comprehensive and continuous investment
decisions (including wealth managers, financial advisors, trust officers, financial
consultants, investment consultants, and financial planners).
Investment Managers
A professional who makes investment decisions: selects the securities (eg. stocks
and bonds) to implement a specific investment mandate (eg. large cap growth).
Investment Stewards
The practices that define a global fiduciary standard of excellence for Investment
Stewards are featured in Prudent Practices for Investment Stewards (U.S. Edition).
This standard of excellence can best be defined as a melding of a fiduciary standard
of care with industry best practices. By following the suggested practices below,
the Investment Steward can be confident that the critical components of managing
an investment strategy are being properly implemented. The handbook is intended
to be a reference guide for knowledgeable investors, as opposed to a "how to" manual
for those who are not familiar with basic investment management procedures.
Investment Stewards, along with their Investment Advisor if the Steward has retained
one, have the most important, yet most misunderstood, role in the investment process:
to manage the investment Practices (defined in this handbook), without which the
other components of the investment strategy cannot be defined, implemented, or evaluated.
The Investment Steward is responsible for managing the overall investment strategy:
deciding on the asset allocation, defining the details of the strategy, implementing
the strategy with appropriate Investment Managers, and monitoring the strategy on
an ongoing basis.
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Fiduciary Practices for Investment Stewards
Investment Advisors
The practices that define a global fiduciary standard of excellence for Investment
Advisors are featured in Prudent Practices for Investment Advisors
(U.S. Edition). This standard of excellence can best be defined as a melding of
a fiduciary standard of care with industry best practices. By following the suggested
practices below, the Investment Advisor can be confident that the critical components
of each client's investment strategy are being properly implemented. The handbook
is intended to be a reference guide for knowledgeable Investment Advisors, as opposed
to a "how to" manual for those who are not familiar with basic investment management
procedures.
In many instances, the Investment Advisor is serving in dual capacities: as an Investment
Advisor and as an Investment Manager. Our first recommendation is to decide to serve
as one or the other because it is difficult to be an expert in both. Furthermore,
separation of power helps to eliminate confusion as to the duties of each fiduciary.
Furthermore, we agree with the position taken by the SEC that a registered Investment
Advisor owes a fiduciary duty to each and every client. Therefore, for the purposes
of this handbook, the Investment Advisor is considered to always be serving as a
fiduciary.
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Fiduciary Practices for Investment Advisors
Investment Manager
Currently, 24 Fiduciary Practices have been identified, which can decrease fiduciary
risk for Investment Managers. We define fiduciary risk as the risk of breaching
the investor's trust that an asset manager will meet an expected return on investment.
The CEFEX Fiduciary Practices are based on guidelines proposed by industry organisations
such as the CFA Institute, the European Fund Asset Management Association (EFAMA)
and the World Risk Standards Working Group. CEFEX believes that fiduciary excellence
contributes to improving performance by stabilising investment returns and securing
capital. While past performance cannot predict future returns, CEFEX believes an
asset management firm's adherence to fiduciary practices, correlated with its track
record, can anticipate future risk.
Each fiduciary practice has criteria to determine conformity to the practice.
Since asset managers will have varying implementations of fiduciary practices, the
criteria span a broad range. Each criteria is assessed using 'fiducials', or quantitative
measures of adherence to a practice. For example, Practices 3.5 and 4.2, best execution
in trading and trade monitoring, contain criteria from the broker selection and
trading process, to the monitoring and allocation policies. 'Fiducials' for these
criteria will include a query on failed trades over a set time period. Another
example is in Practice 1.5 where business continuity through reliable IT systems
and risk management is addressed. 'Fiducials' will query whether back-up facilities
and recovery programs are coordinated with the firm's reporting obligations.
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Fiduciary Practices for Investment Managers
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