Frank lectures on the ABCs of fiduciary law and practice standards

In the midst of the current global financial crisis and considerable losses incurred by numerous trust funds in the Marshall Islands, the College of the Marshall Islands Public Policy Institute invited Frank Armstrong of Investor Solutions, Inc., MISSA’s Investment Advisor, to facilitate a lecture about the role, practice standards and ethical values of fiduciaries.

What is a fiduciary? A fiduciary isan individual who is required to act for the benefit of another, and occupies a position of trust to that person.

What are fiduciary duties? Fiduciary duties are a combination of moral and ethical values (prudence and loyalty), rigid business practices (covered by rules, laws and regulations) and part of overall governance. A fiduciary can never delegate away fiduciary responsibility -however, duties can be shared with other "co-fiduciaries." The ultimate responsibility can not be given away. A fiduciary can reduce, if not nearly eliminate, liability by following certain prudent practices.

What is an Investment Fiduciary? An Investment Fiduciary  is someone who is managing the assets of another person or group of persons and stands in a special relationship of trust, confidence, and/or legal responsibility. It includes Investment Advisors, Trustees and Investment Committee Members of retirement plans, foundations and endowments. There are three categories of Investment Fiduciary:

The Board of Directors of MISSA is the prime steward of the Marshall Islands Retirement Fund and has the fiduciary duty to demonstrate that an Investment Advisor and Investment Custodian independent from the Investment Advisor have been prudently selected with diligence and constantly monitored.

An Investment Custodian is a professional who manages (i.e. trading) the investment portfolio based on the agreed asset class allocation and structure.

Best practice – step 1: Organize

MISSA’s search for a new Investment Advisor and Custodian was the outcome of the losses it suffered after the 9/11 tragedy. Out of a dozen interested parties who offered their services, the Board finally chose Investor Solutions, Inc. and Fidelity Investments IBG as its Investment Advisor and Custodian, respectively. Right then, an Investment Policy Statement (IPS) was drafted and presented to the Board Members. An IPS is a document drafted between a portfolio manager and a client that outlines general rules for the manager. It provides the general investment goals and objectives of a client and describes the strategies that the manager should employ to meet these objectives. Specific information on matters such as asset allocation, risk tolerance, and liquidity requirements would also be included in an IPS.

Best practice - step 2: Formalize

One of the most important steps toward an investment strategy is to identify a "hierarchy of decisions", from the most important to the least: What is the time horizon of the investment strategy?; What asset class will be considered?; What will be the mix among assets classes?; What sub-asset classes will be considered?; What will be the worst case scenario if something goes wrong?

Once the selected asset classes are considered consistent with the identified risk, return and time horizon, the details in the IPS are polished and procedures for controlling and monitoring are redefined, and ultimately finalized.

Best practice - step 3: Implement

This is the stage where the four basic investment principles are applied based on the agreed IPS: asset allocation, portfolio structure, stock selection, and continuous portfolio management.   

If necessary and with the approval of the Investment Steward, the allocation are adjusted at any time in order to rebalance the portfolio or to account for changes in investment goals as well as changes in market conditions.

In the case of MISSA, as the Investment Advisor and Investment Custodian are independent of each other, there is no conflict of interest. This creates a high level of transparency and professionalism.

Best practice - step 4: Monitor

While the MISSA Board gives the Investment Advisor and Custodian (who are considered "prudent experts) investment discretion, periodic (monthly, quarterly and annual) reports are required from them and these reports are presented by the Investment Advisor to the Board either thru a teleconference or personal visit. These reports highlight in detail the performance of each asset class which are compared against appropriate index, peer group, and due diligence procedures as defined in the IPS. The reports also show in detail all transactions in a given period, including dividends and interest earned, money transfers, bought and sold securities and management fees.