There is a potentially uncomfortable reality at the heart of professional fiduciary work: Fiduciaries are expected to put the interests of others ahead of their own, but professional fiduciaries also have businesses to run.
Law firms need to bill and collect fees. Corporate trustees need trust relationships to generate sufficient revenue to support the personnel and infrastructure required to administer them. Investment advisers are generally compensated based on the assets they manage. Accountants, wealth managers, and other financial professionals likewise operate businesses that must serve clients, control costs, compensate employees, and earn a profit.
None of these pursuits is inherently improper. Professional fiduciaries are not expected to work for free, and a profitable fiduciary business is not necessarily inconsistent with faithful service. Indeed, profitability can support good fiduciary practice by allowing an organization to hire talented people, maintain appropriate systems, obtain specialized expertise, and devote resources to difficult matters.
The harder question is what happens when legitimate business considerations begin to influence decisions that are supposed to be made according to fiduciary standards. The answer requires that a professional fiduciary acknowledge they have a “business ledger” but remain laser focused on the fiduciary side of the equation.
The business ledger asks whether a relationship is profitable. The fiduciary ledger asks a different set of questions: What duties do I owe? Whose interests am I required to consider? Am I exercising independent judgment? Is there a conflict between my interests and those of the person whose interests I am supposed to protect?
Both ledgers are legitimate. The danger arises when an entry from the business ledger is silently carried over to the fiduciary ledger.
A Fiduciary’s Duties
“Fiduciary” describes a category of relationships, not a single uniform set of legal obligations. But professional relationships involving fiduciary obligations share an important characteristic: There are circumstances in which the professional cannot make a decision solely because it is economically advantageous to the professional.
Consider a corporate trustee administering a $10 million trust. Its compensation is based in part on assets under management. A beneficiary requests a substantial discretionary distribution.
The trustee may have perfectly legitimate reasons to deny the request. The distribution might jeopardize the beneficiary’s long-term financial security, conflict with the settlor’s purposes, unfairly affect other beneficiaries, or simply fall outside the appropriate exercise of discretion under the trust instrument. But the distribution would also reduce the assets upon which the trustee earns fees. That fact does not disqualify the trustee from making the decision. It does mean the trustee should recognize the financial incentive sitting on the other side of the table.
Or consider an investment adviser evaluating whether a client should move assets into an investment strategy offered by an affiliate. The affiliated strategy may genuinely be an excellent choice. But the adviser cannot establish that simply by observing that the investment is suitable and performs well. The economic benefit to the adviser or its organization is part of the landscape and must be recognized and addressed as applicable law requires.
When potential problems emerge, they don’t usually arise from professionals consciously thinking, “I will choose the option that makes me more money.” The more subtle problem is that economic incentives can influence what professionals perceive as reasonable.
A Useful Thought Experiment: Remove the Financial Incentive
One practical discipline is for fiduciaries to ask themselves a deceptively simple question:
Would I make the same decision if my compensation were unaffected by the outcome?
Suppose the trustee’s fee would remain exactly the same whether it approved or denied the distribution. Would the trustee reach the same conclusion?
Suppose the investment adviser received precisely the same compensation whether the client selected the affiliated investment or an unaffiliated alternative. Would the recommendation change?
Suppose the lawyer would receive no additional fees from litigating rather than settling. Would the advice remain the same?
The existence of a financial incentive does not establish that the underlying decision is wrong. Often the answer will be yes: The professional would make precisely the same decision.
But asking the question forces the professional to identify an influence that can otherwise remain invisible.
Several additional questions can serve the same purpose:
- Whose interests am I legally obligated to consider in making this particular decision?
- What business interest do I or my organization have in the outcome?
- Have I allowed that interest to affect my analysis?
- Have I adequately considered reasonable alternatives that are less economically advantageous to me?
- Have I documented the reasons for the decision independently of its economic consequences to my business?
- Could I comfortably explain both the decision and my financial interest in it to the person to whom I owe the duty—or, if necessary, to a judge?
The last question may be particularly useful. Decisions that seem entirely reasonable inside an organization sometimes look different when the financial incentive must be stated aloud.
Profit Is Not the Enemy
There is a temptation in discussing fiduciary duties to treat profit as something vaguely suspect, but there is another way to look at it.
Professional fiduciary services require expertise, infrastructure, judgment, and time. Those things do cost money. Institutions that charge appropriate fees can attract capable professionals, invest in technology and compliance, obtain outside expertise when needed, and devote resources to complicated problems.
A fiduciary business that cannot make money will eventually stop providing fiduciary services.
The goal, therefore, is keeping profit in its place, not eliminating it. A good professional fiduciary should know when a decision is properly a business decision, when it is a fiduciary decision, and when it contains elements of both. When the professional’s financial interests are implicated, those interests should be identified rather than allowed to operate invisibly in the background.
