Recently, I was preparing an outline for a panel discussion on fiduciary responsibility. As I was reviewing some old files, it occurred to me that most financial advisors probably are not aware of the rich history behind the fiduciary movement. “Fiduciary responsibility” has left an indelible mark on the investment advisory industry, and no matter how the SEC or DOL responds to the current fiduciary debate, we’re not rolling back any of the best practices that have evolved from the movement.

Our current understanding of fiduciary responsibility has its start with the passage of Erisa in 1974. The act was significant for two new requirements it imposed on investment fiduciaries: (1) procedural prudence and (2) ethical discernment. Note that these two overlapping requirements are much broader in scope, meaning and application than the simple idea that fiduciaries must put clients first.

Leafing through my material, I came across a copy of my first book on fiduciary responsibility, Procedural Prudence, which I co-authored with Bill Allbright in 1989. To summarize, “procedural prudence” implies a prudent investment process that allows a fiduciary to demonstrate that he or she had judged wisely and objectively. Our second book, The Management of Investment Decisions, published in 1996, continued on the same theme, except now the focus was on the financial advisor as the manager responsible for overseeing the investment process. I want to emphasize that the focus of both books was on a prudent process and ethical discernment; we didn’t spend time writing about “the best interests of the client” because it was already implied.

Also critical to a historical understanding of the fiduciary movement is the convergence of products, services and technology in the decade from 1986 to 1996. There were three evolutionary changes during this time that together spawned the growth of investment advisory services as a cottage industry.

1. The proliferation of no-load investment products. Advisors were no longer tied to the proprietary and commissioned-based products of a bank, insurance company or broker-dealer.

2. The emergence of custodian platforms for independent advisors (Schwab, Fidelity, Pershing and TD Ameritrade to name the largest). Custodians provided the essential platforms whereby advisors could access no-load products and trade securities without being tethered to a broker-dealer.

3. The computer. Investment management applications that once required a mainframe computer (such as portfolio management software or mutual fund databases), could now be run on PCs. Advisors no longer needed to be tied to a major financial services firm to deliver institutional-type investment advisory services.

In addition, the very nature of the investment advisory industry changed because of the procedural prudence requirements mandated by Erisa. It was no longer sufficient for a plan sponsor to simply know what the total return was on its investment portfolio; the sponsor had to know the details behind the performance. It was no longer sufficient for a plan sponsor to give a financial services firm discretion to manage its portfolio; the sponsor had to demonstrate that it had prudently delegated investment decisions to experts. This seismic shift from a prudent person to a prudent expert standard was the catalyst for the growth for investment advisory services:

• Client relationship management software: This software must capture key client data such as clients’ goals and objectives and their tax stats. It must also be used to help the advisor determine whether a client is fully funded and who the key decision makers are in a household. And it must help advisors determine clients’ liquidity requirements, their sources and levels of risk, their assets and asset class preferences, their investment time horizons and their short-term performance expectations.

• Asset allocation and optimization modeling: Fiduciaries are now required to demonstrate that a particular asset mix has been chosen because it is the most likely to correspond to the client’s specific risk/return profile.

• Investment policy statements: Fiduciaries are now required to prepare a written document explaining the details behind their investment decisions.

• Peer group categories: Investment consultants have created these as a way to evaluate and conduct due diligence on the boutique firms that have flourished with their own investment styles.

• Manager due diligence: With peer groups, managers are compared in terms of their performance, relative performance and assets under management.

• Performance reporting: Fiduciaries must ask what has really contributed to an investment’s total return. Performance reports are designed to answer the following questions: What asset classes work and which ones don’t? Which money managers are meeting their goals and objectives and which ones aren’t? Is it time to rebalance a portfolio? How does each manager compare against its peers? How does a client’s plan compare to those of similar size? Performance reporting depends on technology and the quality of the custodian’s services. As each has improved, so has the quality, timeliness and accuracy of performance reports.

You can see that the fiduciary movement has had a significant impact on the financial services industry. It has not only been in the best interests of clients; it also has been in the best interests of financial advisors.

Last year, industry leaders conducted a “Fiduciary Impact Survey” (see the September 2012 issue of Financial Advisor) to help determine what advisors were doing when serving in a “fiduciary capacity.” Regrettably, the survey revealed that, on average, 60% of the advisors who are subject to a fiduciary standard or who say they are providing fiduciary services are not always acting like fiduciaries. Another reason it’s important to revisit the history of the fiduciary movement is to underscore the importance of procedural prudence and the practices that constitute a prudent process.

So the next time a fiduciary advocate states that the fiduciary movement is about putting the interests of the client first, remind the person that they’re only partially right: Advocates need to broaden the scope of the movement by including the value and importance of procedural prudence and ethical discernment.

Donald B. Trone, GFS, is the president of the newly constituted Leadership Center for Investment Stewards, and is the founder and CEO/Chief Ethos Officer of 3ethos. He is the former director of the Institute for Leadership at the U.S. Coast Guard Academy; founder of the Foundation for Fiduciary Studies; and the principal founder of fi360.