Checklists: A Critical Tool for the Investment Fiduciary

Under most scenarios, a checklist is a good idea as part of a financial advisor's investment management process.  If you are serving as an investment fiduciary, a checklist is critical.  (And, if you are an investment advisor, you are a fiduciary.)  It may not be much of a stretch to say the investment advisor cannot fulfill fiduciary responsibilities without one.

Whether the fiduciary duty has been fulfilled cannot be evaluated by the outcome.  Markets do unpredictable things.  A good process can yield poor results if the market moves against you.  A competent fiduciary, then, must be evaluated on process.

Whether an investment advisor fulfilled those duties can only be confirmed by reviewing policies and verifying procedures.  Are the rules by which the investments are selected prudent and appropriate for the client?  If so, do the corresponding procedures effectively carry out those policies?  Then - and this is key - can you confirm the procedures were carried out?  A checklist can prove it.

Critical points of client assessment or steps in the process can be marked or initialed, documenting performance.  Not only will this assure that a financial advisor doesn't miss any critical steps, it can also serve as proof if it is later claimed that the fiduciary breached his duty.

One good example I have seen frequently, especially since the end of 2008, is a failure to update an Investment Policy Statement when there is a change in client circumstances.  When the market got volatile, many clients reconsidered their tolerance for risk.  Investment advisors responded by changing their portfolios to accommodate the new circumstances.  Reviews we conducted, however, revealed that many had failed to update the Investment Policy Statement, making it appear as though the portfolios were not invested appropriately.  Big deal?  Well, sort of.  If the client demanded a vastly more conservative portfolio, only to watch their accounts be left behind when the market subsequently rocketed back up 70% or so, they might complain their financial advisor caused them to miss a significant recovery.  The opposite would be much worse:  If the client was persuaded to gradually increase the risk in their portfolio as the market went up 70%, triggering a change in asset allocation, and we later experience another October 2008 - March 2009, the liability would be significantly greater.

A simple list "What to do when changing a client risk profile" could include items like a follow up letter for discussions of risk and the reminder to update and get signed a new IPS.

Much of the industry is moving toward a fiduciary standard.  Updating your client procedures with the judicious use of the right checklists will help make sure your practice keeps current.