Fiduciary Duty

[shane]

I have seen fiduciary duty defined as loyalty and care in regard to responsibility of someone else's assets. After a closer look it implies that the fiduciary owes loyalty and care to the investor without regard to the investors role.

It is the money managers job to provide a service to your client, but the specific service would be chosen by the client. Ultimately, it is the responsibility of the client to find a money manager to fit their specific needs.

The idea of fiduciary duty seems to be a method of cowing money managers into guilt as opposed to supporting rational and purposeful investing.

[DavidOdden]

Is your argument that the concept of fiduciary duty is fine but that it has somehow gotten twisted into a requirement for fund managers to doing something that they wouldn't otherwise do? What are some concrete examples?

[shane]

Is your argument that the concept of fiduciary duty is fine but that it has somehow gotten twisted into a requirement for fund managers to doing something that they wouldn't otherwise do? What are some concrete examples?

No I wouldn't condone the use of the word, or the concept for that matter. A better term would simply be contractual obligations (if there was a contract) or fiduciary service. And I think many money managers (of which there are more than just fund managers) get tricked into thinking that managing money is not a personal desire but a selfless duty, or some vague combination of the two. To forgoe a conversation on duty I'll just define it as a unidentified moral imperative of some higher authority as opposed to a specific reason based concept.

I.E. A tech fund manager forgoes a truly good investment (a penny stock that will grow at 50 percent for the next three years) because his firm has labeled it risky (because they think penny stocks are risky) and therefore bad for his fund owners who have been identified as conservative investors. He thereby completes his fiduciary duty by putting the authority of his firm above his own.

[RationalBiker]

Would it not also be fair to say that a money manager who wishes to use more of his own judgement is responsible for finding a firm (or working on his own) that will allow him greater latitude in judgment?

You may wish to avoid a conversation on duty, but duty is something that can be chosen for specific reasons. It does not have to be as you described. The duty a money manager has chosen in working for a firm is to abide by their rules and/or guidelines. If he doesn't like those rules and/or guidelines, he should seek other employment.

[shane]

Would it not also be fair to say that a money manager who wishes to use more of his own judgement is responsible for finding a firm (or working on his own) that will allow him greater latitude in judgment?

I would consider it fair to say that. I also would say it is fair to say that the idea that a penny stock is risky is an industry wide held belief.

The duty a money manager has chosen in working for a firm is to abide by their rules and/or guidelines.

I don't consider it a duty, but a requirement.

[DavidOdden]

No I wouldn't condone the use of the word, or the concept for that matter. A better term would simply be contractual obligations (if there was a contract) or fiduciary service.

Okay -- we're still talking about the same concept, so it's a question of whether anyone ever has any "duty". I would object to "service" on the grounds that that is more appallingly altruistic, so I'd prefer "fiduciary obligations" (and that over "contractual obligations" because the former is a species of the latter).

I.E. A tech fund manager forgoes a truly good investment (a penny stock that will grow at 50 percent for the next three years) because his firm has labeled it risky (because they think penny stocks are risky) and therefore bad for his fund owners who have been identified as conservative investors. He thereby completes his fiduciary duty by putting the authority of his firm above his own.

In such a case, I don't see how guilt is relevant. If I were the boss of an investment firm and an employee of mine were caught putting risk-advers people's money in high-risk investments contrary to their orders, I would fire his ass instantly. OTOH if he were his own boss, they you have a straight case of contract violation, and the guy should be sued. If a manager cannot stand to do what a supervisor tells him to do (or to not do), he should remain self-employed.

[RationalBiker]

I don't consider it a duty, but a requirement.

And what is your distinction?

Each term represents an obligation to act or not act in a certain way once chosen.

[shane]

Okay -- we're still talking about the same concept, so it's a question of whether anyone ever has any "duty". I would object to "service" on the grounds that that is more appallingly altruistic, so I'd prefer "fiduciary obligations" (and that over "contractual obligations" because the former is a species of the latter).

Well put.

In such a case, I don't see how guilt is relevant. If I were the boss of an investment firm and an employee of mine were caught putting risk-advers people's money in high-risk investments contrary to their orders, I would fire his ass instantly. OTOH if he were his own boss, they you have a straight case of contract violation, and the guy should be sued.

Assumption in the case was that it really was a conservative investment even though his firm didn't think so, but I understand that he should fired and sued if he acted in a manner other than what his "fiduciary obligations" stated.

If a manager cannot stand to do what a supervisor tells him to do (or to not do), he should remain self-employed.

The reason I started this post is because fiduciary duty is used widely in our society. It is applied to everyone from CEO's to financial planners. But instead of it being a guiding concept to clarify a money managers style or purpose, it is being used to shift the risk from the individual investor to the sometimes very specific money managers, making them not more responsible or liable, but less productive and objective.

So I should have said "The idea of fiduciary duty seems to be a method of cowing money managers into guilt if they use their individual judgement as opposed to supporting rational and purposeful investing." Implied in the "duty" is that managers should put the clients interests before there own, and if they don't they are guilty of something if they don't. Investors need to seek selfish money managers with clear statements of purpose and proven track records, not fiduciary dutiful self-abnegating drones.

And what is your distinction?

Each term represents an obligation to act or not act in a certain way once chosen.

You use the term duty as if it were a reason based obligation to act, which it is not, or is not how it is used today. So I avoid it.

[softwareNerd]

Implied in the "duty" is that managers should put the clients interests before there own, and if they don't they are guilty of something if they don't. Investors need to seek selfish money managers with clear statements of purpose and proven track records, not fiduciary dutiful self-abnegating drones.

First and foremost an investor must avoid the shysters whose concept of selfishness is to take as large a chunk of investor's money as they can, without regard to what the investors get from the deal. Pointless, but nowhere as bad, are the scardy-cats who don't want to be accused of forsaking their duty; they might run mutual funds that do "okay" because they're index funds in disguise.

Ideal is the manager who knows that it is in his selfish interest for investors to do well in the long run. These are managers who are not focussed on their cut as the primary category in which action must be taken, even if they might recognize it as their primary goal. They see earning money for investors as the primary category for action and decision-making. Often, they invest alongside their investing clients.

Just as I'd want an archtect whose thinking and action is mainly focussed on building great buildings for his clinet, so I would want a money-manager who thinks of my money that way: as a means to be productive.

[RationalBiker]

You use the term duty as if it were a reason based obligation to act, which it is not, or is not how it is used today. So I avoid it.

Duty can be reasonably chosen regardless of how it is used today. Yes, duty can be blindly or unreasonably chosen, but it doesn't have to be that way.

I chose to take on the duties of a police officer because I value a society based on order and laws. I value my own individual rights, and as such I recognize the need for rational people enforcing the law. My duty requires me to act in certain situations which require risk to my well-being. However, the risk to my well-being would likely be substantially greater without the benefit of a law enforcement system and people to enforce those laws.

Now, I would guess that your aversion to the word "duty" comes from the following information:

The meaning of the term "duty" is: the moral necessity to perform certain actions for no reason other than obedience to some higher authority, without regard to any personal goal, motive, desire or interest.

The Objectivist—July 1970

Causality Versus Duty

By Ayn Rand

However, Ayn Rand also used the term "duty" in the following context;

To preserve the independence of his mind is man's first and highest moral duty.

The Journals of Ayn Rand

Part 3 - Transition Between Novels

8 - The Moral Basis Of Individualism

So it's clear that Ayn Rand, and I would further state Objectivism, recognized that there are proper contexts of duty as long as they serve an individual's rational self-interest.

The term "duty" is NOT acontextually evil.

Edited January 24, 2006 by RationalCop

[shane]

So it's clear that Ayn Rand, and I would further state Objectivism, recognizes that there are proper contexts of duty as long as they serve an individual's rational self-interest.

The term "duty" is NOT acontextually evil.

Kind of what I was avoiding when I first gave my definition of duty, but ironically and gladly educated.

This post was started with duty referring to the first anti-rational definition. I would further add that I'll still avoid it. I served my "duty" in the Army, and overall I would say it was not based on reason, but a selfless "social obligation," or at least that was how it was used 99% of the time. Not being an objectivist at the time I would say it is a highly effective weapon for guilting people into doing tasks or reupping when they might not want to, which is a losing proposition for both sides.

Tieing it back in with the subject, I would be very careful when choosing a dutiful money manager. Most money managers may not have such an imbittered view of duty as I do, but when making decisions managers may be reluctant to rely on their own good reasoning, which means taking specific calculated risks, because of fiduciary duty. I believe it to be getting worse as the SEC becomes more active in "dumbing down" the investment world for the sake of fiduciary duty.

Edited January 24, 2006 by shane

[DavidOdden]

But instead of it being a guiding concept to clarify a money managers style or purpose, it is being used to shift the risk from the individual investor to the sometimes very specific money managers, making them not more responsible or liable, but less productive and objective.

To put it another way, what is it an obligation to do? To not be wrong, and to always get permission from everyone before acting? That's how it seems to be used, often wrongly. When I allow that guy to make decisions and act on my behalf, I know that he may be wrong (he may not have correctly gauged the effect of rising oil prices and the expansion of the Chinese market), so if I lose money because he didn't forsee that whack-job taking over in Iran, that is not a failure to make good on his fiduciary duty. OTOH if he invests in Chi-com junk bonds, it is a violation of his fiduciary duty, because I told him not to do that.

[softwareNerd]

One problem with many explicit objective measures for things like "fiduciary obligation" is that they are more like heuristics than measures of the underlying factor that one is trying to measure. Also, such measures can be "gamed".

As you said, "small face value stock" is obviously not a measure of risk. However, as a heuristic, it might work because it is correlated to riskiness. Even the folk laying down the rules might understand that there are exceptions and that they might miss opportunities by drawing an artificial line. However, what they get from such rules is a list of objective measures that they can point to if they're asked to prove that they're thinking about risk.

This issue -- the abstractness vs. the concreteness of company rules -- is an important one. Software developers run into it all the time. Managers start with a correct concrete principle. They then formulate a specific rule that must be complied with. In a majority of cases, that works fine. Then, there are a few cases where one wants to break the rule, because -- in one's judgement -- it does not compromise the principle, while getting some other gain. What one can do in such cases varies from company to company.