The New Fiduciary Standard: The 27 Prudent Investment Practices for Financial Advisers, Trustees, and Plan Sponsors

240 Pages·2005·3.38 MB·English

by  Tim Hatton

PRAISE FOR
The New Fiduciary Standard
BY TIM HATTON, CFP, CIMA, AIF
“ Tim Hatton tells fi duciaries exactly what they need to know and does so
with clarity and care.”
— BURTON G. MALKIEL
Author, A Random Walk Down Wall Street
“ Tim Hatton has captured the essential essence of the fundamental require-
ments of fi duciary responsibility. His practical case-study approach to the
application of the 27 Practices identifi ed by the Foundation for Fiduciary
Studies, in an easy-to-understand style, is a must-read for anyone having
responsibility for ‘other people’s money.’ His explanation of the history and
evolution of the current body of knowledge applicable to what has become
the ‘Fiduciary Standard’ is useful for both the novice and experienced pro-
fessional at every level of advice giving.”
— CLARK M. BLACKMAN II, CPA/PFS, CFA, CIMA, CFP/AAMS
Partner and Chief Investment Officer, Investec Advisory Group, L.P.
(Houston, Texas)
“ At last! A book that actually helps fi duciaries apply prudent fi duciary invest-
ment standards in a practical way. I strongly recommend that all those who
have an interest in modern prudent fi duciary investing—trustees of 401(k)
plans, charitable nonprofi ts, private family trusts, and public employee
retirement plans—pick up a copy of Tim Hatton’s excellent book, The New
Fiduciary Standard, and employ its teachings.”
— W. SCOTT SIMON, JD, CFP, AIFA
Author, The Prudent Investor Act: A Guide to Understanding
“ If you could recommend only one book to a fi nancial adviser, it would be
Tim Hatton’s The New Fiduciary Standard. It will change the reader for-
ever. Pandora’s box has been opened, never to be closed again.”
— STEPHEN C. WINKS
Founder, The Society of Fiduciary Advisors
Founder, Senior Consultant (www.SrConsultant.com)
“ For those of us who are benefi ciaries or trustees, or who advise them,
Tim Hatton’s The New Fiduciary Standard offers us a way to exercise our
fi duciary investment responsibilities, or to advise on them, with excellence.
We have long needed such a repository of investment practices to help us
make the promises of the Prudent Investor Rule come true. Now we have
it with Hatton as our guide!”
— JAMES E. HUGHES JR., ESQ.
Author, Family Wealth—Keeping It in the Family
A Note to the Reader from the AICPA
A RECENT SURVEY conducted by the investment advice firm
Financial Engines found that 73 percent of plan sponsors
believe their fi duciary responsibilities and liabilities have in-
creased over the past twelve to twenty-four months.1 And only
48 percent of those plan sponsors surveyed believe they have a
clear understanding of their role as a fi duciary.2 Plan sponsors—
particularly small and medium-sized employers—frequently lack
the expertise or resources necessary to address the diffi cult ques-
tions posed by fi duciary responsibility.3
Investment fi duciaries need help understanding the practical
application of their duties. They need materials that will serve
as a foundation for prudent investment fi duciary practices and
provide investment fi duciaries with an organized process for
making informed and consistent decisions.
The AICPA and the Foundation for Fiduciary Studies in 2003
published a defi nitive guide for investment fi duciaries entitled
Prudent Investment Practices: A Handbook for Investment Fidu-
ciaries (Handbook). It outlines twenty-seven practices that should
be followed by an investment fi duciary to ensure compliance with
the various directives provided by ERISA, Department of Labor,
SEC, and case law that have evolved in this area over the past
thirty years. Every fi duciary today needs to ensure that their
responsibilities are being met.
Similarly, this new work, The New Fiduciary Standard: The
27 Prudent Investment Practices for Financial Advisers, Trustees,
and Plan Sponsors, provides practical application of the Hand-
1. Department of Labor Overview of Fiduciary Responsibility Issue; Press Conference
on May 18, 2004, Combs, Ann L. (Assistant Secretary of Labor).
2. Id.
3. Id.
book’s practices. The New Fiduciary Standard helps fi duciaries
understand the practical application of their duties, provides a
range of reference materials, encourages fi duciaries to adhere
to a higher standard, and breeds a high expectation for achieve-
ment for both the fi duciary and the client. The text helps the
practitioner visualize how to implement the prudent investment
practices in a fi rm of any size.
The New Fiduciary Standard, along with Prudent Invest-
ment Practices, provides fi duciaries with a knowledge base in
the extensive practice area of investment fi duciaries. Fiduciaries
must, however, exercise professional judgment when applying
the twenty-seven practices; they should consult legal counsel and
other authorities when appropriate.
The AICPA supports the establishment and maintenance
of the highest fi duciary standards. The processes addressed in
Prudent Investment Practices, along with the practical applica-
tions described in The New Fiduciary Standard, will help the
current fi duciary better understand his or her role and may
provide their clients with better investment performance.
The American Institute of Certifi ed Public Accountants is the ISO
9001-2000 certifi ed national professional organization of CPAs, with
approximately 350,000 members, including members serving in busi-
ness and industry, public practice, government, and education; student
affi liates; and international associates. It sets ethical standards for the
profession and U.S. private auditing standards. It also develops and
grades the Uniform CPA Examination. For more information about the
AICPA, please visit www.aicpa.org.
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The New Fiduciary Standard
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The New Fiduciary Standard
The 27 Prudent Investment
Practices for Financial Advisers,
Trustees, and Plan Sponsors
TIM HATTON, CFP, CIMA, AIF
IN COOPERATION WITH THE FOUNDATION FOR FIDUCIARY STUDIES
Legal review for ERISA provisions provided by Fred Reish, Esq.,
Managing Director at Reish Luftman Reicher & Cohen
BLOOMBERG PRESS
PRINCETON
© 2005 by Timothy M. Hatton. All rights reserved. Protected under the Berne Convention. Printed
in the United States of America. No part of this book may be reproduced, stored in a retrieval sys-
tem, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording,
or otherwise, without the prior written permission of the publisher except in the case of brief quota-
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For data used in the analysis for the table “Inconsistency of Return Premium” on page 57, grate-
ful acknowledgement is made to the Center for Research in Security Prices (CRSP®), Graduate
School of Business, The University of Chicago. © 2005 CRSP. Used with permission. All rights
reserved. www.crsp.uchicago.org
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This publication contains the author’s opinions and is designed to provide accurate and authoritative
information. It is sold with the understanding that the author, publisher, and Bloomberg L.P. are
not engaged in rendering legal, accounting, investment-planning, or other professional advice. The
reader should seek the services of a qualified professional for such advice; the author, publisher, and
Bloomberg L.P. cannot be held responsible for any loss incurred as a result of specific investments
or planning decisions made by the reader.
The investment fi duciary practices contained within The New Fiduciary Standard and Prudent
Investment Practices have not been approved, disapproved, or otherwise acted upon by any senior
technical committee of the American Institute of Certifi ed Public Accountants and have no offi cial
or authoritative status with respect to the AICPA.
CFP® and CERTIFIED FINANCIAL PLANNER™ are certification marks owned by Certified Financial
Planner Board of Standards Inc.
First edition published 2005
1 3 5 7 9 10 8 6 4 2
Library of Congress Cataloging-in-Publication Data
Hatton, Tim
The new fiduciary standard : the 27 prudent investment practices for financial advisers,
trustees, and plan sponsors / Tim Hatton, in cooperation with the Foundation for Fiduciary
Studies.--1st ed.
p. cm.
“Legal review for ERISA provisions provided by Fred Reish, Esq., managing director at
Reish, Luftman, Reicher & Cohen.”
Includes bibliographical references and index.
ISBN 1-57660-183-8 (alk. paper)
1. Investment advisors--Legal status, laws, etc.--United States. 2. Financial planners--Legal
status, laws, etc.--United States. 3. Trusts and trustees--United States. 4. Investments--Law
and legislation--United States. 5. Financial services industry--Law and legislation--United
States. I. Foundation for Fiduciary Studies. II. Title.
KF1072.H38 2005
332.6'0973--dc22
2005000707
Acquiring Editor: Jared Kieling
Copy Editor: Edward Mansour
To my parents,
Dr. Richard L. Hatton and Elaine M. Hatton
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