The Fiduciary Advantage

Transcription

1 Webcast Script The Fiduciary Advantage Q21010 Speakers: John Zarchen, National Manager, Wells Fargo Wealth Management Dave Coffaro, Chief Fiduciary Officer, Wells Fargo Private Bank Making a decision on the who and how of managing your assets can be a daunting task. Today s marketplace offers up a rich variety of options. Moreover, the Internet has enabled investors to tap into a vast range of opinions that can, at times, be both contradictory and overwhelming. Today we turn to Dave Coffaro, Chief Fiduciary Officer for Wells Fargo Private Bank, for help in understanding a little known subject the role of the fiduciary. He will talk about the potential advantages fiduciaries can offer their clients and why these are so valuable to investors in today s marketplace. Dave, thanks for joining us. Perhaps you can start off by explaining what a fiduciary is. Glad to be here, John. According to Barron s Finance and Investment Handbook, a fiduciary is a person, company or association that holds assets in trust for a beneficiary. 1 Under this arrangement, the fiduciary has discretion over how to manage the beneficiary s assets much like other asset management firms. What makes the fiduciary different from other asset managers? Fiduciaries are held to a higher standard, based on a set of very stringent legal standards applied specifically to assets that are managed within a trust, or under a fiduciary agreement. These laws are in place so that assets are invested wisely and in the best interests of the beneficiary or the investor. 1 Barron s Finance and Investment Handbook, second edition, John Downes and Jordan Elliot Goodman, 1987 p.261 1

2 When people think about managing trust assets, they think of an exclusive service available only to the wealthiest investors. So how exclusive is this fiduciary advantage compared to other asset management choices? Well, John, in its earliest form, the Fiduciary Advantage was accessible only to very wealthy families who held all of their assets in trusts. The investor generally hired a corporate trustee to manage assets per the terms of their trust in a prudent manner. Over time, the Fiduciary Standard has become more accessible to a broader range of investors, particularly with the implementation of the Prudent Investor Rule in the early 1990 s. So, Dave, how would you sum up the overall fiduciary advantage? The fiduciary wealth manager can offer three potential advantages that many other asset managers are now seeking to replicate: One: Adherence to the Prudent Investor Rule that is investing assets as a "prudent investor" would invest his own assets all things considered Two: A core emphasis on risk management And Three: Loyalty to the client putting the interests of the client first These potential advantages tend to be so little understood that even the folks who can benefit from them may not know they exist. Let s use a real world example to explain how these potential advantages may work in an investor s favor. Everyone is well aware of the 2008/2009 market correction and its aftermath. What mistakes, in your opinion, Dave, did many investors make and how could a fiduciary have avoided making many similar mistakes? Well, John, recent surveys show that investors who were primarily focused on performance may have seen some of the greatest losses during the market correction. They did not consider the consequences of a fall in market valuations for their investment portfolio or how it would impact the potential for them to meet their long-term goals. 2

3 As a result, in a mode of panic many sold into a falling market and suffered significant drops in asset values. At that point, they were too afraid to reinvest their assets. Fast forward to the present, and even though the S&P 500 Index has risen by more than 70 percent, a recent poll commissioned by Bloomberg Finance found that only three in ten investors report an increase in investment portfolio value since the market low in March So investors who focused on performance before and after the market correction took the opposite approach to fiduciaries, who must adhere to the Prudent Investor Rule. Dave, could you tell us more about how a fiduciary manager would have reacted differently? Under the Prudent Investor Rule, the fiduciary is obligated to look out for the best interests of the client rather than trying to out-smart the market. The fiduciary is obligated to look at the bigger picture - considering a client s investment objectives, time horizon, cashflow and income needs - and also conducting stringent due diligence on the assets in which they place their clients investments. You know, John, with investing comes risk. The prudent approach inherent in Modern Portfolio Theory says that there are three types of risk market, industry and firm. While market risk cannot be eliminated, industry and firm risk can be significantly reduced and mitigated through effective diversification. Sticking to an investment plan, using a well diversified multiple asset class portfolio, based on an agreed set of objectives, likely would have mitigated the impact of the market correction for the client while they still may have had losses, the approach would have allowed them to participate in the market recovery. This prudent approach helped fiduciary investment managers offer their clients a potential advantage over alternative approaches over the past couple of years of market turmoil. The second fiduciary benefit you mentioned was an emphasis on risk management. From an analytical perspective, the execution of risk management is clear. It means conducting thorough and rigorous due diligence on each investment product or security in a client s portfolio. But many investment firms perform due diligence, so how is the fiduciary approach different? 2 Americans say they missed the 73% surge in the S&P 500 as the economy surged, Bloomberg Finance, LLP, 03/23/10 3

4 John, risk management sometimes can mean helping clients to fight the human urge to ride investment waves, or chase performance. Instead, as fiduciaries it is our responsibility to change the perspective that there are winners and losers and re-focus our clients on their goals and objectives. At Wells Fargo we take risk management one step further. Most investment management firms still manage risk based on volatility the traditional measure of risk outlined in Modern Portfolio Theory. We categorize nine different types of risk. We then use a scoring system to determine how to spread risk across a diversified portfolio. We believe one of the ways we help prepare our clients for market uncertainty is by offering them guidance on aligning their risk budget with their goals and then on spending it wisely. Clearly, the risk management fiduciary advantage is part of a holistic approach to meeting client needs that is much broader than the concept of investment product suitability. In my view, investment managers should not look at the suitability of a product in isolation; instead they should consider its purpose in the context of a portfolio and a client s appetite for risk. Let s talk about the third fiduciary advantage you outlined: loyalty, or the idea of placing the client s interests first. Loyalty means that a fiduciary acts for the benefit of the client, not for their own benefit. This does not mean fiduciary-based wealth management services are performed probono. Rather, decisions made on behalf of a client are based on benefit to the client, not the advisor. That s right, John. In most cases, loyalty can be determined through objective measures things like avoiding conflicts of interest or best execution of security trades. This concept is fundamental to the role of the fiduciary. And when it comes to managing trust assets, this concept of loyalty translates into making sure that the intent of the grantor and the difference they wanted to make in the world is recognized and acted upon. This is how a fiduciary helps carry a person s vision and values beyond their lifetime. Clearly, investors and wealthy families need the Fiduciary Advantage today more than ever today. But many investors are not even aware of the fiduciary value proposition. As we wrap up this webcast, can you summarize the fiduciary advantage for us one more time, Dave? 4

5 Sure, the fiduciary advantage is clear, John. Fiduciaries are: One: Prudent. The standard of care is a holistic approach starting with understanding the client s needs, expectations, personal situation, and external conditions, and then providing advice and recommendations. Two: Focused on risk management. Risk management is where the fiduciary balances needs, expectations, and risk tolerances. And Three: Loyal. Loyalty is core to the fiduciary commitment, assuring clients that we place their needs before our own, and that we act exclusively for their benefit, not in self interest. Just remember: When the game gets rough, the ideas that help to clarify the game matter more than ever. Dave, this conversation has certainly been thought provoking. And thank you for sharing your useful perspective with us. As a reminder to our listeners, please consult with your professional advisors to determine how the ideas discussed in this webcast may apply to your individual circumstances. Thanks for listening. Disclosures Wells Fargo Wealth Management provides products and services through Wells Fargo Bank, N.A., Member FDIC, and its various subsidiaries and affiliates (including Wells Fargo Advisors which are non-bank affiliates of Wells Fargo & Company). The information and opinions in this webcast were prepared by Wells Fargo Wealth Management. Information and opinions have been obtained or derived from information we consider reliable, but we cannot guarantee their accuracy or completeness. Opinions represent Wells Fargo Wealth Management s opinion as of the date of this webcast and are for general information purposes only. Wells Fargo Wealth Management does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. This information is provided for education and illustration purposes only. Wells Fargo & Company and its affiliates do not provide legal advice. Please consult your tax or legal advisors to determine how this information may apply to your own situation. This webcast is not an offer to buy or sell, or a solicitation of an offer to buy or sell the strategies mentioned. The strategies discussed or recommended in the presentation may be unsuitable for some clients depending on their specific objectives and financial position Wells Fargo & Company. All Rights Reserved 5

6 Sources: 1 Barron s Finance and Investment Handbook, second edition, John Downes and Jordan Elliot Goodman, 1987 p Americans say they missed the 73% surge in the S&P 500 as the economy surged, Bloomberg Finance, LLP, 03/23/10. 6