The new fiduciary legislationand ensuing regulations will, undoubtedly, be daunting, cumbersome and confusing, even to those advisors who are already familiar with fiduciary standards. The new rules will likely be prepared by people who have never been an investment advisor, financial planner or investment fiduciary. And they will probably bear little resemblance to established fiduciary standards. Sure, there will be a moderate level of chaos and confusion. But rest assured, a fiduciary standard can be practically applied and-once implemented-can improve the efficiency and effectiveness of your operations.

FOUNDING PRINCIPLES

To begin, we need to identify the dimensions of a principles-based decision-making process that is designed to fulfill a fiduciary standard. In a previous column, I defined the differences between a rules-based and a principles-based standard. Existing fiduciary standards codified by various laws, such as ERISA, are largely principles based. Likewise, the FPA's Client Standard of Care is based on principles, not rules:

* Put the client's best interests first.

* Act with due care and in utmost good faith.

* Do not mislead clients.

* Provide full and fair disclosure of all material facts.

* Disclose and fairly manage all material conflicts of interest.

With principles such as the FPA's serving as the foundation for a fiduciary standard, the next task in our process is to define the dimensions of a decision-making process that will sit upon that foundation. In constructing such a framework, we need to take into account industry best practices, comparable regulatory opinion letters and relevant case law.

PRUDENT ACTS

A primary responsibility of a fiduciary is to demonstrate procedural prudence-the details of the decision-making process. This is why you must identify the dimensions of your process, and then ensure that all your policies, procedures and technology support that process.

Take, for example, asset allocation software. Many software vendors provide the ability to change the capital markets assumptions used to develop a client's asset allocation. However, any changes to the original capital markets assumptions an advisor may make should be carefully recorded. You never know when you're going to be required by an auditor-or a litigator-to re- create an asset allocation you may have developed several years ago. It's not that you'd have to prove that you correctly forecast the returns of the various asset classes, but you would have to demonstrate the rationale for your decisions.

The decision-making process we're going to use in this series is based on a traditional five-step investment management process: Analyze, Strategize, Formalize, Implement and Monitor.

If you're a financial planner, you will see that this is similar to the six steps of the financial planning process-the additional step being to define the roles and responsibilities of the financial planner and the scope of the client engagement before any work is begun. It's unlikely that regulators will specify the number of steps that must make up the fiduciary's decision-making process-the number isn't important; the demonstration of a consistent process is critical.

REFINEMENTS

Once the steps are identified, the next requirement is to define the dimensions, or details, to each step:

Step 1: Analyze

* State goals and objectives;

* Define roles and responsibilities of decision makers; and

* Brief decision makers on objectives, standards, policies and regulations.

Step 2: Strategize (RATE)

* Identify sources and levels of Risk;

* Identify Assets;

* Identify Time horizons; and

* Identify Expected outcomes.

Step 3: Formalize

* Define the strategy that is consistent with RATE;

* Ensure the strategy is consistent with implementation and monitoring constraints; and

* Formalize the strategy in detail and communicate.

Step 4: Implement

* Define the process for selecting key personnel to implement the strategy;

* Define the process for selecting tools, methodologies and budgets to implement the strategy; and

* Ensure that service agreements and contracts do not contain provisions that conflict with objectives.

Step 5: Monitor

* Prepare periodic reports that compare performance with objectives;

* Prepare periodic reports that analyze costs, or ROI, with performance and objectives;

* Conduct periodic examinations to root out potential conflicts of interest, self-dealing or breaches of a code of conduct; and

* Prepare periodic qualitative or performance reviews of decision makers.

WHY LEADERSHIP COUNTS

Now we could stop here and say that we've adequately limned a decision-making process that can be used to demonstrate procedural prudence. But we're not going to. Taking a line from celebrity chef Emeril Lagasse, we're going to kick it up a notch. We're going to bake leadership behaviors into the decision-making process. The reason? To make you realize that the subject of fiduciary responsibility is a gourmet meal, not a frozen dinner!