The Big Four of certification and assessment

Courts and regulators will evaluate your effectiveness as an investment adviser against a process standard — as opposed to a performance standard. It is not about whether you made money for your clients; it is about whether you can demonstrate the fiduciary process that you followed to manage your client’s investment decisions prudently. As a practical matter, a comprehensive framework is needed to ensure that all of your fiduciary practices are fully and effectively addressed on a continuing basis. A planned approach to conduct periodic assessments provides such a framework. The financial services industry is one of the few remaining industries/professions that have not defined formal requirements and procedures to evaluate the effectiveness of an organization’s policies and procedures. However, there is a trend in the regulatory community toward requiring such a process, such as the 2006 Pension Protection Act’s requirement that the arrangement between a “fiduciary adviser” and a plan sponsor be audited annually by an independent third party.
I must admit to being a relative newcomer to the certification and assessment community, having been exposed to certification procedures only some two years ago. I also must disclose that our firm Fiduciary360 is one of the founding members of a new global certifying body — the Toronto-based Centre for Fiduciary Excellence LLC — and that I am a director on its board. From what I have seen, there appear to be at least four different assessment procedures in use by a sizable segment of the financial services industry: ISO, SAS 70, Six Sigma and CEFEX. The sidebar illustration summarizes each assessment process, the areas assessed, the sponsoring organization and those parties authorized to conduct the assessment. The largest and most recognized standards organization in the world is the International Organization for Standardization, known as ISO (iso.org). Based in Geneva, it oversees 15,000 global standards and has more than 156 member countries, including the United States. The most prominent ISO standards that affect the financial services industry are: • ISO 9000: Defines a standard for an organization’s quality-control and customer satisfaction procedures. • ISO 19011: Defines a global standard for conducting process or systems audits. It is used to establish conformity to practices specified in other standards, such as ISO 9000. • ISO 17799: Defines a standard for a firm’s information processing and technology. • ISO 22222: Defines a standard of care for financial planners. SAS 70 is an internationally recognized auditing standard developed by the American Institute of Certified Public Accountants in New York which tests and reviews the effectiveness of an organization’s internal controls over information technology, particularly the protection of sensitive client data. Sarbanes-Oxley now requires publicly traded companies and their outside vendors that provide IT, application service provider services and back-office support to demonstrate implementation of their quality-control procedures — the SAS 70 audit report has emerged as the best attestation of such requirements. Leading third-party administrators, record keepers and administrators in the 401(k) industry; trust companies and banks that provide custodial services; and the back offices of major money management organizations all have begun to conduct SAS 70 audits voluntarily. Six Sigma is best known in manufacturing circles, the process being refined and popularized by Motorola Inc. of Schaumburg, Ill., and General Electric Co. of Fairfield, Conn. Six Sigma attempts to identify the causes for defects (customer dissatisfaction) and prescribes the steps that should be taken to correct the defects. Six Sigma has been used in the financial services industry to improve the performance of call centers and by the insurance industry to improve underwriting and policyholder procedures. CEFEX is the new kid on the block but traces its lineage to ISO roots. It has adopted the ISO 19011 global auditing standard as the basis for its assessment process, and several of the CEFEX founding firms are some of the largest ISO registrars (organizations that award ISO certifications). CEFEX is focused exclusively on investment fiduciaries and the global practices that define a fiduciary’s standard of excellence. One set of practices has been defined for investment stewards (trustees and investment committee members), another for investment advisers (investment consultants, wealth managers, financial advisers and broker consultants) and a third for investment managers (professional money managers). Shared attributes All four assessment procedures share certain attributes: There is a prescribed, systematic and documented process for obtaining information which is objectively evaluated to determine the extent to which an organization conforms with its own policies or procedures, or with defined industry practices. There is a defined remediation process to identify “gaps,” and prescribed steps to correct deficiencies. Investment advisers and/or their clients that undergo one or more of these assessment procedures experience certain benefits: A certification provides prospects and clients with an independent verification (internal verification in the case of Six Sigma) that the adviser is in conformance with defined fiduciary practices. When a certification process is used with the investment adviser’s fiduciary clients (investment committees of retirement plans, foundations and endowments), the process enables trustees to benchmark their current status, prioritize work and measure progress. Certification helps investment advisers and investment managers to demonstrate their leadership within the industry, improve their marketability and increase their potential for national and worldwide recognition. The certification process can serve as a practicum and help to improve internal communications with the investment adviser’s clients, employees and vendors. Certifications provide investment advisers with a rigorous and disciplined approach to evaluating the effectiveness of the adviser’s investment decision-making process. But even an informal self-assessment by the investment adviser can go a long way in discovering procedural omissions and shortfalls. With either approach, the aim is to gain knowledge on how the adviser can make dramatic and measurable improvements to their practice. Donald B. Trone is president of the Center for Fiduciary Studies and chief executive of Fiduciary360 LP, both in Sewickley, Pa.