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Harrison Fiduciary Group — Our Pledge

As anticipated, the SEC issued it’s report, Study on Investment Advisers and Broker-Dealers, and recommends a new Unified Fiduciary Standard for broker/dealers and investment advisors.  Uniformity can be applauded, as well as a higher standard applicable to broker/dealers ….but, let’s not kid ourselves, as I discussed in my prior Post, it is a diluted fiduciary standard allowing for the payment of commissions, the sale of proprietary products and other accommodations to Wall Street.

At Harrison Fiduciary Group we will always rise above the morals of the market place and we pledge as follows:

  1. We will not receive commission income;
  2. No conflicts will be tolerated;
  3. We will not promote proprietary products; and
  4. All actions that we take, and decisions which we make, will be solely in the interests of participants and beneficiaries.

Regulators and Congress may be compromised by political interests, but at HFG we are not subject to these pressures.  Instead, we are guided by our core corporate values which shall remain undiluted.  Our responsibility is to put the interests of plan participants ahead of our own.

Our flat fee schedule goes to the heart of our business model, and reflects our core fiduciary values.  For each assignment we will be paid a flat fee and not a basis point fee on the size of assets under management.  The “basis point” model has become endemic to the pension industrial complex.  Many service providers attempt to hitch their revenue streams to the ever growing pool of pension assets –investment managers, custodians, record-keepers and consultants.  We aim to break this link.

As a fiduciary we will be paid a fee in exchange for our fiduciary services.  This fee will reflect the fiduciary risk we assume, the complexity of an engagement and the amount of resources which will need to be devoted to the engagement.

Overseeing and managing the hard earned retirement assets of plan participants is a position of trust.  At Harrison Fiduciary Group we will earn and safeguard that trust zealously.

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Honest Talk about Fiduciaries

Next week, January 21, 2011, the SEC is due to deliver its report to Congress, as required by the Dodd-Frank Act, on the standards of conduct applicable to registered advisors and broker/dealers.  There is little doubt that this report will recommend a uniform standard — ostensibly, a fiduciary duty.  My greatest concern is that they will in fact adopt a unified standard and that they will trumpet fiduciary principles, but in reality it will amount to nothing more than a diluted version of fiduciary principles.

The lobbying by Wall Street has been intense.  Once the recommendations are made, the lobbying will get even more intense.  Wall Street’s business model is at stake.  This guarantees a watered down result.

In fact, the directives given by Congress to the SEC effectively preordained a diluted notion of fiduciary duty.  On the one hand Congress raises the prospect of a unified fiduciary standard, but on the other, also makes provisions for brokers to continue to sell propriety products provided there is sufficient disclosure of compesantion arrangements and conflicts of interest.   This is disappointing.

Simply put: commissions and disclosure are not consistent with fiduciary principles.

Fiduciaries are subject to a duty of loyalty.  This duty requires that a fiduciary put  client interests first, not engage in acts of self-dealing nor involving conflicts of interest.  Earning commission income from the sale of proprietary products clearly raises the potential of acts of self-dealing and conflicts of interest.  A fiduciary’s actions should never be clouded by acts of self-dealing.

Congress believes that disclosure will serve as the bulwark against acts of self-dealing.  In other words, if a broker discloses potential commissions, as well as how the commissions might impact his compensation, then the broker is “off the hook” from a fiduciary perspective.

Here, Congress is simply mistaken.  While disclosure is the corner stone of the securities laws, it does not hold the same weight as far as traditional fiduciary principles.   Under the securities laws, whether it is corporations or mutual funds, the underlying theory is that material facts need to be disclosed and investors can then exercise their own judgment based upon the facts.

For a fiduciary, however, the prohibition is fairly straight forward.  No acts of self-dealing.  A fiduciary cannot use its fiduciary discretion to engage in acts of self-dealing.   And, a fiduciary cannot disclose the potential self-dealing and obtain the client’s consent.

I focus on commissions and disclosure because it serves as a perfect example of how fiduciary principles will be watered down.  For those of us who believe that fiduciaries have a critical role to play in our financial system, this is a disappointment.  The marketing machine of Wall Street has the potential to dilute our commitment to longstanding principles.

At Harrison Fiduciary Group, we categorically reject efforts to masquerade self-dealing and conflicts of interest.  Our business model is structured on a fee for service basis.  Our fiduciary judgment will not be clouded by the potential to earn additional compensation.

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See No Evil, Hear No Evil, Speak No Evil

The Massachusetts Supreme Judicial Court handed trustee banks a disappointing decision on Friday; Massachusetts Ruling on Foreclosures Is A Warning to Banks.  Gretchen Morgenson of the NYTimes has been a prescient observer of, and commentator on, the subprime frenzy, subsequent collapse and its aftermath.  In today’s paper, she reports on the  court’s ruling that U.S. Bancorp and Wells Fargo did not have proper title to mortgages when they instituted foreclosure proceedings.

Yes, everywhere along the way in the securitization process, people and institutions were sloppy.  Why pay attention to detail when there was so much money to be made?

However, there is a critically important sub-text here, which has far greater impact on our financial well being than simply paying attention to details.  The real issue is that the role of serving as a trustee has been dumbed down over time so that trustees claim, “not my job”  when it comes to assuming responsibilities for their actions.

The securitization process is a lengthy one with many parties participating.  However, at the end of the day, there is a trustee of a trust, and the trust holds certain assets.  In this case, notes and mortgages.

Scrape away all of the financial engineering and mumbo jumbo.  At a very minimum, a trustee must know what assets it holds and is responsible for the management and disposition of the assets.  This is not a new concept based upon fancy algorithms or computer models.  To the contrary, it is a basic principle of trust law dating back to the development of the common law in England.

And yet, in defending it’s actions, a spokeswoman for Wells Fargo, Vickee J. Adams states, “As trustee of a securitized pool of loans, Wells Fargo expects the entities who services these loans to abide by all applicable state laws, including those laws that govern foreclosure sales.”

There you go ….it’s the other guy’s fault!   Great legal defense.

Unfortunately, as a fiduciary, it is not that simple.  Yes, trustees are often authorized to hire service providers.  And, yes, trustees can make reasonable assumptions about the service providers.  But, trustees have an obligation to conduct due diligence on the service providers they hire and they have an obligation to monitor these service providers as they perform their duties.  They simply cannot hire someone and then walk away from this responsibility.

Serving as a Trustee requires the exercise of judgment and discretion.  The privilege of holding assets in trust, on behalf of another party, carries with it the obligation to act prudently. There is no way to get around this.

The problem is that the role of the institutional trustee has been dumbed down over the past decades.  The large trust banks sell their trust services as if they are simply record-keeping services.  Both the banks and their customers discount the obligations and responsibilities of serving as a Trustee.

In fact, with the blessing of ERISA, a whole new role has developed known as the “directed trustee”.  These are trustee’s whose roles are so limited  that they simply follow the directions of other fiduciaries.  It is this directed trustee role which has greatly diluted the concept of the discretionary trustee.

And so, we have ended up with a network of institutions who at one time proudly served as fiduciaries and exercised discretion on behalf of their clients, but now do everything to limit their roles.  Therefore it is now easy to point the finger of blame at someone else.

Our financial system is deeply in need of responsible individuals and institutions ready to assume fiduciary roles and discharge those responsibilities prudently.

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Values Matter, A Lot

Published on 02 January 2011 by Mitchell Shames in Uncategorized

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Golden Boy Steven Rattner Crossed the Line

He had it all: Brown, Partner at Lazard, started his own firm, Quadrangle Group, appointed Car Czar by President Obama, reported net worth of between $188 million and $608 million, and he regularly rubbed elbows with the likes of Bill and Hillary Clinton, Robert Rubin and Michael Bloomberg.

Wasn’t that enough?   What more did he want?  Another vacation house, a bigger bank account, more accolades?

On December 31st, when most of Wall Street either was sun worshipping in St. Barts, or dining on sushi at Nobu in Aspen, the NYTimes reported, New York Closes Pension Inquiry: Gets $10 Million.  So ends the drama surrounding Mr. Rattner, the Quadrangle Group, the SEC and Andrew Cuomo, the former Attorney General, and now Governor, of New York.   On probably one of the slowest news cycle days of the year, Mr. Rattner’s transgressions are practically swept under the rug.   Who is even paying attention?

I purposely characterized Mr. Rattner’s actions as transgressions rather than “alleged transgressions.”  No doubt Mr. Rattner vigorously denies any culpability.  However, from the perspective of a fiduciary, simply being involved in activities giving rise to ambiguous behavior is transgression enough.

For fiduciaries, there can be no ambiguity:  No conflicts of interest.  No acts of self-dealing. No questionable payments. No movie deals.

Mr. Rattner, and thousands of hedge fund, private equity, venture capital and investment managers, hold and manage assets that belong to other people — retirees who accumulate benefits over decades of employment.  They work “on behalf” of other people.  They are fiduciaries.

The investment stewards of pension funds must demand that all investment managers abide by fiduciary standards.  They must rebuff attempts by ERISA lawyers working on behalf of their investment management clients to eschew fiduciary responsibility .

Over a century ago, Justice Benjamin Cardozo eloquently wrote;

A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior… the level of conduct for fiduciaries [has] been kept at a level higher than that trodden by the crowd. (Meinhard v. Salmon)

Though the language is flowery, and some criticize it for being to0 vague, and therefore impractical,  the principle and spirit abides; fiduciaries are held to a higher standard.

Notwithstanding his education, prior business successes and stellar reputation, Mr. Rattner failed to conduct himself “at a level higher than that trodden by the crowd.”  That is a disappointment.  Let’s not gloss over this behavioral misstep.  Upon reflection, it may present a critical insight to the future of our financial system.

After the crisis of ’08-’09, academics, businessmen and legislators endlessly debate the pros and cons of the various proposals to shore up our financial institutions and markets.  However, the simplest, least costly and most effective remedy lies in a change of behavior.  We need leaders in the financial community to abide by principles “stricter than the morals of the marketplace.”

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