Fiduciary Prologue to a Cross-Examination

By Neal Shikes, CRPC®

The litmus test for suitable behaviors and the products that result is woven from fiduciary responsibility. Breaches are born from a lack of methodology which materializes in behaviors and product selection. Perhaps these behaviors are best characterized in trust law which describes the prudence, commitment, and loyalty that the trustee has for the beneficiary of the asset.

According to Black's Law Dictionary, a trustee is:

"The person appointed, or required by law, to execute a trust; one in whom an estate, interest, or power is vested, under an express or implied agreement to administer or exercise it for the benefit or to the use of another."

In addition, fiduciary duty is:

"a duty to act for someone else's benefit, while subordinating one's personal interests to that of the other person. it is the highest standard of duty implied by law (e.g. trustee, guardian)."

The fulfillment of fiduciary duties becomes apparent where there is evidence of behaviors and methodology, in "content and oversight," that improve the likelihood that the beneficiary of the asset(s) achieve their goals.

When one is compelled to discover evidence of fiduciary behaviors, clues materialize in the products that were purchased, the timing of the purchases, how such products meshed and correlated with other assets, the level of compensation, and any compensation relationships if applicable. If these facts were not transparent to the inquirer then, chances are, they weren't to the beneficiary of the assets. Thus, the path of behavior and methodology discovery will extend and fork to include oversight.

Expert Witnesses and Subject Matter Experts

Even though there are many attorneys disciplined in ERISA and class actions, few have any experience in money management, financial technology, and applying the law to fiduciary matters. That is why attorneys need assistance from expert witnesses and subject matter experts before the case is filed.

Choosing the right experts can be a daunting task especially when the correct questions to ask are not known. Career consultants and business advisors are very good at methodology, modeling, and quantifying evidence. Many, however, have only "kept score from the stands" and have never "stepped into the batter's box." There is a clear difference between those who have applied their skill sets in different environments and those who quantify the opinions of people that do. In addition, it is probably best to seek assistance from someone who has been a fiduciary as opposed to someone who hasn't. This is also critical in the cross-examination.

Cross Examination

A person with portfolio management skills will immediately recognize what they are up against after reviewing briefs, statement of claims, and pleadings as it provides clues to how the cross-examination strategy should be formulated:

Substituting Solutions for "Benefit Definitions": Instead of justifying an action or behavior that is congruent with the client's objectives, benefit descriptions are offered and defined that have little to do with the client's objectives. Even so, these types of justifications are skewed in explanation and application as they favor the seller or seller's employer more than the asset beneficiary.
False Characterizations: Successfully executing fiduciary duties includes creating consistent objective characterizations within the client's risk skeleton. Oftentimes, the evidence shows that a separate household was created to cross reference a more volatile product to justify its sale even though it's outside this risk skeleton. An attorney cannot recognize this because of their unfamiliarity of the brokerage business and its operations. Aggressive objectives are usually defended by the suitability boxes that are "checked" often quantified by experience. The defendant's attorney will attempt to validate the investment advisor's behaviors and suggestions by these experience driven suitability boxes defending the product sale instead of justifying a methodology consistent with the client's risk tolerance relative to their goal. For an individual or firm committed to fiduciary practices, it would be quite difficult to defend highly speculative products in a methodology that was supposed to yield conservative results. Speculative products are more prevalent in active money management methodologies and solutions where higher compensation relationships exist. Nevertheless, the existence of speculative products with higher compensation does not provide proof that fiduciary breaches exist unless it is proven that the methodology utilized to determine the product does not correspond with the client's needs.
Outcome Theme: Outcome should not be thematic in the search for fiduciary methodology. Ironically, it is always a theme in briefs and pleadings that try to defend behaviors where the methodology is not evident. Impressive returns coexist with higher waves of volatility which may not be a prudent outcome when considering the client's comfort level. Defending a product solely by its outcome may be indicative of a self-serving solution with no viable methodology. Long-term self-serving solutions usually mute and, eventually, replace compliance and oversight.
Claims of Client Sophistication: Finally, "sophistication" is a highly-employed noun that is deployed to disguise a product sale. The sophistication of the client may be respective to their profession but has little to do with the comprehension of the terms and conditions of the product and financial planning in general. Why would an attorney, CPA, or currency trader have any expertise in understanding the interdependent performance caveats and nuances of a "sophisticated" financial product relative to their goals? Does an architect have the necessary portfolio construction skill sets used to assess and choose financial products that increase the likelihood that they reach their retirement objectives? They wouldn't but client sophistication defenses are often telltale signs that a product was sold for the wrong reason and without a methodology that is relevant to a client's objectives. If the product's performance and potential outcomes are dependent on too many variables, the chance is, neither the Investment Advisor nor the client understands them. Fiduciaries don't sell products and services that are difficult to understand. It is neither reasonable nor prudent and should be a point of contention in a cross-examination.

Fiduciary and ERISA law is trust law. it is not based on contracts and outcomes but the relationship between the investment advisor/employer sponsor of the retirement plan and the client/beneficiary of the asset dominated by the former's fiduciary duties to the latter. It is not evidenced by product benefits but by transparent behaviors and methodologies that can only be recognized by an experienced subject matter expert which is paramount in a cross-examination.

Neal Shikes has been a Registered Financial Services Industry professional for over 20 years and a Chartered Retirement Planning Counselor, CRPC®. He is also the "Willing Fiduciary" (http://willingfiduciary.com/) associated with Counsel Fiduciary LLC (http://counselfiduciary.com/) and a principal associate for Thornapple Associates a provider of Expert Witness Services (http://thornapple.net/).

Additional article by Neal Shikes, "Fiduciary Law Is Trust Law."

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