Ten Commandments for Investors (Part 7)

Commandment 7 is famous: no adultery.

Adultery is another one of the universal prohibitions in human society. There are few if any cultures that sanction a married partner abandoning his or her spouse. Family life enjoys social, civil, and legal protection because in many ways, domestic life is a basic building block of society. If promises made in the family break down, other social institutions suffer.

In the same way, the fiduciary responsibilities that investors undertake are the basic building blocks of investment advice. At the heart of the fiduciary relationship is the duty of loyalty—to undertake investment advice and transactions as if the advisor were the client, and to act solely in the client’s best interest. This seems simple and basic, and indeed a lot of grey areas would be resolved if a strict fiduciary standard were applied.

For example, suppose a manager is having lunch in a public park and overhears two junior associates from a legal firm nearby discussing a pending merger. The merger hasn’t been announced, and the target company is trading at a significant discount to the deal price. What should he do?

Fiduciary standards indicate that such an inadvertent disclosure puts him in the position of a constructive insider. He didn’t figure out that a merger might happen through his own analysis—he was accidentally told. As such, he now has a duty to refrain from trading in the two stocks involved—just as if he were a principal in the law firm—until the news is made public. The legal associates made him an insider, and trading on that information would be insider trading.

Fiduciary duties matter. Loyalty matters. They allow us to trust in the integrity of the markets, and in one another.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net
By | 2017-07-17T12:34:54+00:00 July 2nd, 2012|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

Leave A Comment