Fiduciary Primer Quiz Reveals Knowledge, Process Shortcomings

Pavilion Advisory Group has released the results of its “Fiduciary Primer Quiz,” highlighting a variety of shortfalls in institutional investing fiduciary awareness at a time when the demand for excellence is increasing.

According to Susan McDermott, chief investment officer at Pavilion, the goal of creating and circulating the quiz also included providing retirement industry professionals “with a bit of a refresher course on institutional investing.” As such the quiz is still available for those interested in testing their fiduciary knowledge.

McDermott says that so far the quiz has been taken more than 1,000 times since the initial release in 2016: “The results prove once again that institutional investing can be a tricky topic for even the most experienced investment committee members, as the average score for the online quiz now sits at 79%.”

This is not a terrible result on first glance, but McDermott reminds industry professionals of the exacting nature of the fiduciary standard and the requirement for constant prudence and loyalty. The mixed bag of quiz takers scored the highest on the “ethics and conflicts of interest” question, with a correct answer submitted by 93% of quiz takers, according to the data shared by Pavilion. On the other hand, respondents scored the lowest when asked about “best practices for outsourcing an investment decision,” with correct answers submitted by only 55%.

“Many respondents also struggled with a question regarding the proper process for replacing an investment manager, with less than two-thirds answering correctly,” McDermott says. “On average, participants took about six minutes to complete the eight-question, multiple choice quiz.”

Fiduciary best practices

The firm has also released a fiduciary primer guide that factors in the results of the quiz, along with the firm’s client service experience. In one particularly informative passage, Keith Mote, Pavilion managing director, offers some advice on how investment industry professionals and their clients can establish an environment where ethical behavior is valued—but also made easy and practical.

“The varied roles, backgrounds and interests of trustees, investment committee members, management and others involved with an institution’s investment pools result in unavoidable conflicts of interest—whether real or perceived,” Mote says. “Upfront discussion of ethics and values, and clear policies for defining and dealing with conflicts of interest, are necessary to encourage good stewardship of an institution’s investment assets.”

Mote says taking a proactive approach to discussing and disclosing conflicts “will do much to aid in protecting the organization from reputational risk, as well as subpar investment decisions. It also will provide a process for handling conflicts with integrity and in the best interests of the primary stakeholders whether they are the participants in a retirement plan, the organization in support of operations or the grantees in the case of foundations.”

In real life, the knowledge and connections of trustee and investment committee members can be both beneficial and controversial, Mote warns.

“Often trustees and investment committee members are selected for boards and committees because of their expertise—expertise that typically comes from long, successful careers in investment management, banking or law,” Mote notes. “These individuals can help guide investment decisions, provide for better and more effective decision-making, and garner access to funds/managers with very limited capacity. These same individuals, however, have loyalties related to their business interests and, sometimes, these loyalties can be conflicting.”

On Pavilion’s analysis, to improve the likelihood that investment decisions are made in the best interests of the institution being served, the following steps should be taken: “It is wise to have a conflict of interest policy requiring that trustees/committee members act in good faith, with due care, with undivided loyalty, and in the best interests of the institution or stakeholders served; business and professional affiliations be disclosed; affiliated individuals recuse themselves of decisions between their business and the institution for which they are serving in a trustee or committee member capacity; a range of investment options and competitive pricing be considered, especially when there is a potential conflict of interest; all due diligence be performed in a manner that maintains the utmost in integrity and objectivity, to protect the institution’s interests and reputation; the process to reach decisions and the decisions themselves are documented; and investment committee members annually declare that no conflicts of interest exist and potential conflicts of interest have been disclosed to the chairperson.”