The Accredited Investment Fiduciary (AIF®) Designation is a professional certification that demonstrates an advisor or other person serving as an investment fiduciary has met certain requirements to earn and maintain the credential.
This article provides a high-level overview of the standard that Fi360 is certifying an AIF Designee to and the requirements that anyone holding the designation has demonstrated compliance with.
Scope: The purpose of the Accredited Investment Fiduciary (AIF) Designation is to assure that those responsible for managing or advising on investor assets have a fundamental understanding of the principles of fiduciary duty, the standards of conduct for acting as a fiduciary, and a process for carrying out fiduciary responsibility.
AIF Candidate Handbook: For the full details about the requirements for becoming an AIF Designee, please review the AIF Candidate Handbook.
Prudent Investment Practices:
Fi360’s Prudent Investment Practices cover four Steps (domains), twenty-one Practices (tasks), and seventy-nine Criteria that an investment fiduciary is expected to be able to perform.
The Four Steps
- Organize. Fiduciary Roles and Responsibilities Are Clearly Documented and Defined
- Formalize. The Investment Policy is Consistent with Objectives for the Portfolio and Risk and Return Assumptions
- Implement. Decisions Regarding Investments and Services are Implemented in Accordance with the Duties of Loyalty and Care
- Monitor. The Portfolio is Monitored Regularly to Ensure Consistency with Benchmarks and Overall Objectives
The Twenty-One Practices
Step One: Organize
Practice 1.1 – Demonstrate an awareness of fiduciary duties and responsibilities.
1.1.1 The Investment Advisor complies with all laws and rules that apply to the services the Advisor is providing.
1.1.2 The Investment Advisor complies with all applicable Practices and Procedures defined in this Prudent Practices handbook.
1.1.3 The Investment Advisor adheres to all applicable standards of conduct and code(s) of ethics required by law, regulation, employers, and professional organizations.
Practice 1.2 – Provide investments and investment services consistent with governing documents.
1.2.1 Investments are managed, and investment services are provided, in accordance with governing documents, including documents establishing the terms of an account or client engagement and the investment policy statement.
1.2.2 Documents pertaining to the investment management process, including records of decisions made by fiduciaries and clients, are secure and readily and reliably accessible by authorized persons.
Practice 1.3 – Document the roles and responsibilities of all involved parties, whether fiduciaries or non-fiduciaries.
1.3.1 All involved parties have acknowledged their roles and responsibilities and fiduciary or non-fiduciary status in writing.
1.3.2 Each investment committee formed, controlled, or required by the Investment Advisor has a defined set of by-laws or operating procedures to which the committee adheres.
Practice 1.4 – Identify, then avoid or manage, material conflicts of interest in a manner consistent with the duty of loyalty.
1.4.1 Policies and procedures for overseeing and managing conflicts of interest, including to avoid self-dealing and making false or misleading statements, are defined and followed.
1.4.2 Conflicts of interest are avoided when prohibited by law and/or governing documents.
1.4.3 Conflicts of interest that are not avoided must be managed in the client’s best interest.
1.4.4 Conflicts of interest that are not avoided must be disclosed to the client and informed client consent must be obtained.
Practice 1.5 – Execute written agreements that are consistent with fiduciary obligations.
1.5.1 The Investment Advisor fully discloses in writing all compensation arrangements and affiliations associated with the service agreement.
1.5.2 If the Investment Advisor is responsible for oversight of other service providers, the advisor must evaluate all material compensation, affiliations, and the fiduciary status of each service provider.
1.5.3 Agreements are periodically reviewed to ensure consistency with the needs of the client.
1.5.4 Comparative reviews of service agreements for which the Investment Advisor is responsible are conducted and documented approximately every three years.
Practice 1.6 – Prudently protect sensitive personal identifying information and assets of clients from theft, embezzlement, business disruption, and cybersecurity risks.
1.6.1 The Investment Advisor has a reasonable basis to believe assets are within the jurisdiction of a viable judicial system.
1.6.2 Appropriate procedures are in place to secure and prudently protect the privacy of client or plan data.
1.6.3 Appropriate procedures are in place to assure that sensitive personal identifying information and assets of clients are prudently protected from physical, operational and other material risks associated with business disruptions.
1.6.4 The Investment Advisor has a reasonable basis to believe assets are protected by appropriate insurance, bonding, internal controls, and security measures taken by fiduciaries and other service providers, including the Investment Advisor’s own firm.
1.6.5 The Investment Advisor has procedures in place to manage situations where the advisor reasonably believes that a client’s assets are at risk due to suspicious behavior by service providers, the client, or others with access to or influence over the client’s assets.
1.6.6 The Investment Advisor has documented a succession plan and a business continuity plan that is reviewed and tested periodically.
Step Two: Formalize
Practice 2.1 – Identify an investment time horizon for each investment objective of the client.
2.1.1 Sources, timing, distribution, and uses of cash flows are documented.
2.1.2 In the case of a retail investor, an appropriate needs-based analysis has been factored into the time horizon.
2.1.3 In the case of a defined benefit retirement plan, an appropriate asset/liability study has been factored into the time horizon.
2.1.4 In the case of a defined contribution retirement plan, the investment options provide for a reasonable range of participant time horizons.
2.1.5 In the case of a foundation or endowment, a schedule of expected receipts and disbursements of gifts and grants has been factored into the time horizon to the extent possible and an estimated equilibrium spending rate has been established.
Practice 2.2 – Identify an appropriate risk level for the portfolio.
2.2.1 The expected volatility of the portfolio is understood by the Investment Advisor and communicated to the client, and the quantitative and qualitative factors that were considered are documented.
2.2.2 “Large loss” scenarios have been identified and considered in establishing the portfolio’s risk tolerance level.
2.2.3 Expected disbursement obligations and contingency plans have been considered when establishing liquidity requirements for the portfolio and assessing the capacity to assume portfolio risk.
2.2.4 In the case of a defined contribution retirement plan, the investment options provide for a reasonable range of participant risk tolerance levels.
Practice 2.3 – Evaluate the distribution of projected portfolio returns in the context of the client’s risk and return objectives.
2.3.1 The projected portfolio return is consistent with the client’s tolerance and capacity to assume risk and investment goals and objectives.
2.3.2 Projected return assumptions for each asset class are based on reasonable risk premium assumptions.
2.3.3 For defined benefit plans, the projected return values used for modeling are reasonable and are also used for actuarial calculations.
2.3.4 For defined contribution plans, the projected returns for pre-diversified options, such as target date funds or model portfolios, are based on reasonable risk premium assumptions.
2.3.5 For endowments and foundations, the projected return values used for modeling are reasonable and are consistent with distribution requirements or the projected equilibrium spending rate.
Practice 2.4 – Ensure that selected asset classes are consistent with the time horizon and risk and return objectives for the portfolio.
2.4.1 Assets are appropriately diversified to conform to the portfolio's specified time horizon and risk/return profile and to reduce uncompensated risk.
2.4.2 For participant-directed plans, selected asset classes provide each participant the ability to diversify their portfolio appropriately given their time horizon and risk/return profile.
2.4.3 The methodology and tools used to establish appropriate portfolio diversification are prudent and consistently applied.
Practices 2.5 – Ensure that selected asset classes are consistent with implementation and monitoring constraints.
2.5.1 The Investment Advisor has the time, resources, knowledge, and skills to implement and monitor all selected asset classes.
2.5.2 The process and tools used to implement and monitor investments in the selected asset classes are appropriate.
2.5.3 Appropriate investment products are accessible within each selected asset class.
Practice 2.6 – Confirm that the investment policy statement contains sufficient detail to define, implement, and monitor the portfolio’s investment and distribution strategies.
2.6.1 The investment policy statement identifies the bodies of law governing the portfolio.
2.6.2 The investment policy statement defines the duties and responsibilities of all parties involved.
2.6.3 The investment policy statement specifies risk, return, and time horizon parameters.
2.6.4 The investment policy statement defines diversification and rebalancing guidelines consistent with risk, return, and time horizon parameters.
2.6.5 The investment policy statement defines due diligence criteria for selecting investment options.
2.6.6 The investment policy statement defines procedures for controlling and accounting for investment expenses.
2.6.7 The investment policy statement defines monitoring criteria.
Practice 2.7 – Apply environmental, social, and governance (ESG) factors to investment due diligence in conformity to law, regulations, governing documents and the fiduciary obligations of investment decision-makers.
2.7.1 The client’s goals, objectives, and investment parameters are evaluated to determine whether ESG investing is necessary and/or desirable.
2.7.2 Provisions regarding ESG investing in governing documents are aligned with fiduciary obligations.
Step Three: Monitor
Practice 3.1 – Follow a prudent due diligence process to select each service provider and specific products and services.
3.1.1 Prudent criteria are identified for each due diligence process used to select service providers.
3.1.2 The due diligence process used to select each service provider is documented.
3.1.3 Each due diligence process used to select service providers is consistently applied.
Practice 3.2 – Implement statutory or regulatory investment safe harbors in compliance with the applicable provisions.
3.2.1 Available safe harbors are evaluated to determine if any advance the best interests of the investors and/or beneficiaries.
3.2.2 When elected, safe harbor provisions are implemented in compliance with requirements.
Practice 3.3 – Make and document decisions regarding investment strategies and types of investments in accordance with fiduciary obligations.
3.3.1 A prudent due diligence process is used to select investment strategies, Investment Managers, and investments.
3.3.2 Decisions regarding the selection of investments consider both qualitative and quantitative criteria.
3.3.3 The due diligence process used to select investment strategies, Investment Managers, and investments is documented and consistently applied.
3.3.4 Regulated investments are preferred over unregulated investments when all other characteristics are comparable.
3.3.5 Investments that are covered by readily available data sources are preferred over similar investments for which limited coverage is available when all other characteristics are comparable.
3.3.6 A prudent due diligence process is used to make decisions regarding the use of proprietary versus non-proprietary products, and separately managed versus commingled accounts.
3.3.7 Decisions regarding rollover advice are made in accordance with fiduciary duties of loyalty and care.
Step Four: Monitor
Practice 4.1 - Conduct periodic reviews of investment performance against appropriate market and peer group benchmarks, and overall objectives for the portfolio.
4.1.1 Investment performance of the overall portfolio is compared against an appropriate benchmark and evaluated in the context of portfolio objectives.
4.1.2 The performance of each investment option is periodically compared against an appropriate market and peer group benchmark and any other performance-related due diligence criteria defined in the investment policy statement.
4.1.3 Underperforming investments are monitored and decisions to retain or replace investments are documented.
4.1.4 Rebalancing procedures are reasonable, documented, and consistently applied.
4.1.5 Investment performance is periodically reported to the client.
Practice 4.2 – Conduct periodic reviews of qualitative and/or organizational changes of investment managers and other service providers.
4.2.1 Periodic evaluations of the qualitative factors that may impact the results or reliability of Investment Managers are performed.
4.2.2 Negative news and other material information regarding an Investment Manager or other service provider are considered and acted on in a timely manner.
4.2.3 Deliberations and decisions regarding the retention or dismissal of Investment Managers and other service providers are documented.
4.2.4 Qualitative factors that may impact service providers are considered in the contract review process.
Practice 4.3 – Conduct periodic reviews of policies for trading practices and proxy voting.
4.3.1 Procedures are in place to periodically review each Investment Manager’s policies for best execution.
4.3.2 Procedures are in place to periodically review each Investment Manager’s policies for special trading practices such as “soft dollars”, directed brokerage, and commission recapture.
4.3.3 Procedures are in place to periodically review each Investment Manager’s policies for proxy voting.
Practice 4.4 – Conduct periodic reviews to ensure that investment-related fees, compensation, and expenses are fair and reasonable for the services provided.
4.4.1 A summary of all parties being compensated from client portfolios or from plan or trust assets, and the amount of compensation, has been documented.
4.4.2 Fees, compensation, and expenses paid from client portfolios or from plan or trust assets are periodically reviewed to ensure consistency with all applicable laws, regulations, policies and procedures, and service agreements.
4.4.3 Procedures are in place to avoid or identify and appropriately address unreasonable fees.
Practice 4.5 – Conduct periodic reviews of the organization’s effectiveness in meeting its fiduciary responsibilities.
4.5.1 Fiduciary assessments are conducted at planned intervals to determine whether appropriate policies and procedures are in place to address all fiduciary obligations and that such policies and procedures are effectively implemented and maintained.
4.5.2 The investment policy statement is reviewed at least annually to ensure it is aligned with current facts and circumstances.