Fiduciary Responsibilities in Asset Management

GPs owe fiduciary duties to their LPs, but what does that even mean? It means that by accepting third party money, you will be held to a higher legal standard. Even with a GP-friendly LPA, you still need to comply with the law. ⬛ Example: Warehoused Transfers Let's take the following example in the U.S. context: - As an emerging fund manager, you have three investments that you want to transfer into your fund at original cost basis. Each warehoused investment was purchased on a $100,000 SAFE, but now with different outcomes: #1) A well-performing startup with tier-1 VC backing #2) Struggling startup, raising money but not hitting goals #3) Startup in 'bad news' territory & is not expected to survive Q1: Can you unilaterally transfer all three SAFES into the fund, or only #1 & #2? Q2: Can you use these assets as part of your GP commitment or exchange them for cash? ⬛ Principal Transactions • You must fully disclose & obtain LP consent for warehoused investments BEFORE you transfer ANY of those assets into the fund • You must also disclose & obtain LP consent if using these assets as part of your GP capital commitment or if you receive the $300,000 in cash ⬛ Fiduciary Duties • Fiduciary duties vary by jurisdiction and contract, but generally, all advisers (including VCs / ERAs) have fiduciary duties. • That means you have a duty to act in good faith with the degree of care, skill, prudence and diligence under the circumstances that a prudent person acting in a fiduciary capacity would use, in providing investment advice and managing fund assets. If you transfer worthless assets into the fund (SAFE #3), you can fully expect to be in potential violation of your fiduciary duties. Q3: How can you meet your fiduciary duties? "Consult with your lawyer" and "follow the rules" are a given, but also: —Encourage LPs to consult with THEIR lawyers and tax professionals. For example, LPs may not be aware that warehoused investments may affect their QSBS tax benefits (generally, these assets are ineligible for QSBS) —Provide full and fair disclosure and seek informed consent on all conflicts. For example, with valuation concerns, get LPAC or majority LP consent —Create and enforce internal written policies and procedures to ensure compliance with legal obligations and standards. Review them annually. ⬛ Waivers and Hedge Clauses Q4: What if your LPA says LPs waive fiduciary duties and GPs can act to the maximum limits of the law? • GPs cannot waive their fiduciary duties! Hedge clauses don't work! Any LPA that purports to waive an adviser's fiduciary duties, such as (i) a statement that the adviser will not act as a fiduciary, (ii) a blanket waiver of conflicts of interest, or (iii) a "hedge clause" that tries to get around the law, may, by itself, be a violation of federal law, regardless of what actually happens. Careful with off-the-shelf LPAs! I'm out of time and space, but this is just scratching the surface. #venturecapital

A Watershed Moment for Fiduciary Standards in Wealth Management The Hong Kong High Court has delivered a landmark judgment on Christmas Eve that fundamentally redefines the fiduciary duties owed by wealth managers and trust administrators to their clients. This is essential reading for the financial services industry. The judgment establishes that wealth managers with discretionary mandates are active fiduciaries, not passive custodians. Specifically: ✓ Monitor material developments affecting underlying investments—business changes, financial deterioration, covenant breaches, payment defaults ✓ Maintain contemporaneous documentation demonstrating that monitoring, analysis, and decision-making actually occurred ✓ Actively consider exit strategies when circumstances deteriorate, particularly redemption options available under investment terms ✓ Respond proactively to client requests—don’t passively defer to the investee company; actively explore ways to achieve client objectives ✓ Inform clients promptly of material changes and their implications for the investment ✓ Conduct independent valuations rather than relying on third-party assessments ✓ Manage conflicts of interest transparently—multiple revenue streams (placing agent fees, asset management fees, employee commissions) demand active management and disclosure. The court found it “certainly not acceptable” for a company receiving substantial annual management fees to fail to demonstrate active management. Charging fees for management while failing to manage is no longer defensible. Fiduciary duties cannot be contracted away. Your exemption clauses provide less protection than you may assume. Absence of documentation is evidence of absence. Courts will draw adverse inferences from missing witnesses and records. If you are in Wealth Management or Professional Trusteeship, you should urgently review: • Your monitoring procedures and documentation practices • Your fee structures and potential conflicts of interest • Your pre-investment advice processes • Your team’s understanding of active management obligations If you have concerns about your firm’s compliance with these standards, or if you’re facing potential liability issues related to investment management, we encourage you to reach out. The full judgment can be found here: https://lnkd.in/guRpAbZE Our thanks to Rachel Lam SC Eva Leung and Jason Fee of Des Voeux Chambers for securing this landmark victory for our client. #WealthManagement #FiduciaryDuty #TrustAdministration #HongKongCourts #Compliance #FinancialServices #AssetManagement #RiskManagement #InvestmentLaw #ClientProtection

ERISA fiduciaries are held to high standards—for good reason. They manage employees’ retirement and welfare benefits, making decisions that impact people’s financial and health futures. So, what exactly does being a fiduciary require? It comes down to duties. 1. Duty of Loyalty Act solely in the interest of plan participants and beneficiaries. That means no personal gain, no hidden agendas, and no conflicts of interest. 2. Duty of Care Exercise the “care, skill, prudence, and diligence” of a well-versed professional. If you don’t have the expertise, you’re responsible for finding the right people or resources who do. 3. Duty to Diversify Fiduciaries must diversify plan investments to minimize the risk of large losses. Putting all the eggs in one basket? Not an option. 4. Duty to Adhere to the Plan Document Fiduciaries must administer the plan according to its governing documents. If it’s written in the plan, it must be followed—no exceptions. 5. Duty to Avoid Prohibited Transactions ERISA strictly prohibits self-dealing and conflicts of interest. Fiduciaries can’t profit at the expense of plan participants—this safeguard is essential for maintaining trust. The bottom line? If you’re serving as a fiduciary, stay on top of the rules, seek qualified help when needed, and always act in the best interest of your plan participants. Which fiduciary responsibility do you think is most frequently overlooked?

Fiduciary Masterclass: Aligning Legacy with Sustainability Trustees are often asked to preserve capital. Increasingly, they are also being asked to preserve the planet. I have been. Environmental, Social, and Governance (ESG) concerns used to be the preserve of investment managers and philanthropy advisors. Not anymore. A new generation of Settlors and Beneficiaries is asking: What is this trust funding? What impact is it having? What do we stand for? And the old answer “we don’t choose companies, we choose returns” no longer works. Particularly when the wealth was built by someone who valued community, land, or long-term vision. The dissonance is clear: how can a trust preserve a legacy if it invests against the values that legacy was built on? This is where ESG enters fiduciary thinking. Let’s define what it is and what it isn’t: ESG is not just a box-ticking investment screen. It’s a framework for aligning capital with conscience. It involves identifying risks and opportunities that are material, not just financially, but also reputationally and socially. Trustees must tread carefully. Their core duties: prudence, impartiality, loyalty, of course remain. ESG can’t override these. But it can complement them when approached properly. Here are five guiding principles: Clarify the investment mandate: the trust deed may allow for ESG considerations. May. Either way, trustees should revisit or revise the Investment Policy Statement (IPS) to reflect modern objectives, including sustainability goals where appropriate. Understand beneficiary expectations: some beneficiaries may want fossil fuel exclusions. Others may favour thematic investing (e.g., clean energy, health equity). Trustees must listen, but not be captured by preference. Their role is to balance interests, not execute demands. Apply evidence, not fashion: ESG investing must still be rigorous. That means using credible data, avoiding greenwashing, and selecting managers who integrate ESG at the portfolio construction level, not just in marketing materials. Review and adapt: ESG priorities shift. A trust’s framework must be reviewed regularly, particularly where the next generation has influence or involvement. Document everything: this is a fiduciary shield. If ESG considerations are integrated into investment decisions, trustees must record how and why those decisions were made, just as they would for any other risk factor. At its best, ESG within a trust is not activism. It’s stewardship. It says: "We want this wealth to be a force for continuity, not contradiction." We must realise that legacy isn’t just what we leave; it’s what we enable. And increasingly, trustees are being asked to enable more than preservation. They’re being asked to reflect purpose. This is one of my Fiduciary Masterclass reflections. For a fuller picture of trusteeship, see my book “Trust: The Skill of Trusteeship in 16 Success Stories and 1 Failure”. Order it here: https://amzn.eu/d/bXp6aKz

Can we talk for a moment about that sacred cow in philanthropy and wealth management, "fiduciary duty"? At its most basic, a fiduciary is a person or legal entity that is required to act in the best interests of the client, putting the client's interests ahead of their own. In philanthropic entities, the directors or trustees as well as key decisions makers like a CEO or Executive Director, would be fiduciaries. The IRS clarified years ago that the "client" in that case is the public - the duties of care, loyalty and obedience are owed to the charitable purpose of the foundation. For decades, philanthropic fiduciaries believed their duty of loyalty was to improving the balance sheet of the foundation, and made investment and spending decisions accordingly. (Many still do,) They argued that having the strongest returns is upholding their fiduciary duty, because it allows them to give more through their 5% annual distributions and that's where the mission is fulfilled. Back when impact investing was just getting started as a practice, many in the wealth management industry dissuaded clients from pursuing those ideas, arguing that it would violate their fiduciary duty if they didn't pursue maximum returns exclusively. But what if they way they earn those returns is in direct contradiction to the charitable purpose of the foundation? Are the choices of those overseeing the investment portfolio exempt from the requirement to do what is in the best interests of the charitable purpose or mission of the entity? In many cases, this IRS clarification about fiduciary duty being owed to the charitable mission is cited as a justification for some level of values-aligned or catalytic investing - you won't get in trouble even if assets underperform if they are selected for their mission alignment. What if we went a step further and suggested that failing to consider mission alignment when investing the full portfolio (AKA the industry standard approach) is actually the approach that is violating fiduciary duty? #philanthropy #privatefoundations #fiduciaryduty #wealthmanagement #impinv #impactinvesting

Why fiduciary duty must include ESG factors for real estate. Institutional real estate investors have an obligation 👉 Protect and grow capital through time. That’s fiduciary duty. To achieve this, we must understand that real estate assets don’t perform in a vacuum — they perform for people, within the planet. People pay the rent, insure the building, approve the planning application, fund the deal, choose to use it, and buy it. Without people, there is no income, liquidity, or value. People underpin asset value, through every stage of the investment cycle. And those very people then depend on an environment that keeps assets viable— affordable energy to power operations, water access to sustain use, air quality to protect health, and a climate predictable enough to preserve asset function. Without these, buildings must constantly adapt to remain resilient, operational — and in demand from people. So when we talk about fiduciary duty — the duty to protect value — it’s impossible to separate financials from the social and environmental systems that sustain that value. Yet globally, there’s a battle over whether ESG belongs inside fiduciary duty. (Ref. Spence V American Airlines lawsuit arguing the opposite.) Speaking for real estate investment, the case is closed: - Social factors determine demand — people decide to rent, to stay, to pay. - Environmental factors determine resilience — assets rely on energy, water, carbon, air, and regulation compliance. - Financial outcomes depend on both. There is no world where these factors aren’t financially material — and therefore no world where ESG isn’t part of fiduciary duty in real estate.

I never would have guessed rising lawsuits against Trustees would be a major force in Blue Herring’s growth this year. Maybe we're simply living in a more litigious society, or maybe the data tells the real story: According to a 2021 study, 29% of permanent insurance policies lapse within the first three years. Within 10 years, 57% have lapsed. New data from ITM shows the problem is accelerating. Among their 9,500 managed trusts, 46.5% of all policies are now projected to lapse prior to maturity. That's up from just 27.7% in 2022. But unlike other financial products, there's no courtesy letter saying "Hey, this will be a problem in five years." So beneficiaries are left without expected inheritances. When they learn the reality, they want trustees to face personal liability. The challenge we’ve seen is that some trustees used to operate under an "I don't want to flip over the rock" mentality. They avoided looking too closely at policy performance because they thought discovering problems created liability. (And even if they do review a statement, indications of major problems years into the future are not obvious to most people who don’t review these policies all the time.) But it turns out ignoring problems doesn't eliminate liability. It amplifies it. Corporate trustees recognize their fiduciary duties for insurance trust management include: 🐟 Active policy monitoring rather than passive premium payment 🐟 Regular performance reviews to identify potential problems early 🐟 Ongoing communication with beneficiaries about policy status 🐟 Professional evaluation of underperforming policies 🐟 Ensuring policies align with trust objectives over time So one of the fastest-growing parts of our business has become baseline insurance assessments for trustees that examine every policy in the trust and identify upcoming risks before they become problems. This approach reduces liability while sometimes creating substantial value. We've seen cases where early intervention saved clients millions compared to discovering problems years later. And I’d guess the trustees who get these assessments early sleep better at night.

Protecting people and society is why people _should_ care about cybersecurity, but fiduciary duty is why organizational leaders _must_ care about it.   Fiduciary duty is the legal and ethical obligation to manage assets (a company) well on behalf of the owners (shareholders), which is often overseen by a board of directors.   Fiduciary duties ensure that the management team is act in their beneficiaries' interests (rather than serving their own interests at the expense of the owners). This is why the organization must manage cyber risk (or any risk) to those assets effectively.   The management team (and board) must be a trustworthy steward of the owner's assets, which means they must fulfill these 5 fiduciary duties: ◾ Duty of care: requires directors and officers of a corporation to make decisions that pursue the corporation’s interests with reasonable diligence and prudence. ◾ Duty of loyalty: all directors and officers of a corporation working in their capacities as corporate fiduciaries must act without personal economic conflict. ◾ Duty of Confidentiality: a corporation's directors and officers must keep corporate information confidential and not disclose it for their own benefit. ◾ Duty of Prudence: a trustee (board member) must administer a trust (board duties) with the degree of care, skill, and caution that a prudent trustee would exercise. ◾ Duty of Disclosure: the board of directors must act with “complete candor.” The board must disclose information to authorized entities as required by the law.   Part 2 of the Security Roles and Glossary standard describes the security-related obligations of each of these fiduciary duties. You can download it here for free - https://lnkd.in/eC3dZCHb   Note: Because legal systems and laws vary around the globe, consult with your legal counsel to interpret fiduciary duty correctly in the context of your organization and the jurisdictions you operate in. 

How can RIAs mitigate risks when clients want to chime in on their investments? As investment advisers, your clients may approach you with their own stock ideas, and they may insist that you include such investments in their portfolios. What should you do if you disagree with their ideas? You want to keep your clients happy, but the investment idea may detrimentally impact achievement of the client's goals. If you manage the client’s assets on a discretionary basis, you could potentially be held responsible if you comply with the client’s request and buy the investment for the client’s portfolio. Why? Because, if you are an SEC-registered investment adviser, you owe several important fiduciary duties to the client. One of those duties is called the duty of care, which includes, among other things (1) the duty to provide advice that is in the best interest of the client (including the duty to provide advice that is suitable for the client given the client’s objectives) and (2) the duty to provide advice and monitoring over the course of the relationship. As a result, an adviser that wishes to accommodate the client will need to evaluate the client’s investment idea and determine if it is suitable for the client. An adviser that either does not want to undertake responsibility for client-requested trades or feels uncomfortable about the client’s investment request should consider one of the following options. First, the adviser should explain to the client the concern with respect to including the investment in the client’s portfolio. If the adviser believes that the investment is unsuitable for the client, the adviser could explain how the adviser believes that such an investment would have a negative impact on the client’s portfolio and finances. Hopefully this would cause the client to reconsider the request. If the client still insists on moving forward with the request, an adviser could tell the client to purchase the investment in an account that is not managed by the adviser, such as a retail brokerage account. If the client insists that the investment be purchased in an adviser-managed account, an adviser could attempt to mitigate its risk by entering into a written agreement with the client clearly explaining that the adviser is not responsible for rendering advice on or managing the investment on an initial or ongoing basis and will therefore not be responsible for any losses resulting from the investment. To bolster this position, the adviser should refrain from charging the client advisory fees with respect to assets invested in such an investment. Also, the adviser would need to manage the other assets bearing in mind the existence of the investment in the portfolio. Reach out if you have any questions on how to deal with unsolicited trades from clients or any other regulatory matters. #wealthmanagement #financialadvisors #RIAs

I’ve served on boards across $200M CPG brands, public companies, and PE exits. And the more boardrooms I sit in, the clearer this becomes 👇 Fiduciary duty gets referenced constantly Yet it’s misunderstood just as often. Some directors think it means loyalty to management. Others think it means aligning with the room. Neither is right. Fiduciary duty is loyalty to the process that protects the company. 🛡️ What that actually looks like in practice: 1️⃣ Asking the uncomfortable question Not to be difficult, but to surface risk, trade-offs, and blind spots before they become expensive. 2️⃣ Testing assumptions before approving decisions Every decision teaches the organization what to optimize for. If short-term wins erode retention, pricing power, or trust, fiduciary duty is to call it out. 3️⃣ Anchoring decisions in long-term value Today’s incentives shape tomorrow’s behavior. If this quarter’s results are borrowed from future credibility, it needs to be named. 4️⃣ Holding the line between oversight and execution Boards own decisions and consequences. Management owns the how. Blur that line, and accountability breaks. Fiduciary duty isn’t about being agreeable. It’s about being accountable to the work, even when it creates tension. And accountable boards build resilient companies. 💪