FASEA Code of Ethics

Best interest is a commonly used and misunderstood phrase interpreted differently in the law, media, legislature and throughout the investment chain, sometimes glibly. For investors, best interest has been confused with oft-misguided concepts of undivided loyalty to their economic interests.

These differing interpretations influence every financial advice relationship, including process. That process differs with varying statutory applications of best interest. For example, best interest in Australian investment decisions conflicts with modern portfolio theory. The law is complex, often uncertain, and lags comparative jurisdictions. The FASEA Code of Ethics creates new law that adds to that uncertainty. Financial advice is provided throughout the investment chain. Competency requires comprehension of the underlying best interest duties governing those financial assets. The courts will also need to have regard to these other contextual interpretations of best interest to resolve uncertainty. That includes the best interest heritage in equity.

Origin of the best interest duty

The heritage of the best interest duty lies in equity. This means a fiduciary duty to give undivided loyalty to the beneficiaries and trustees must do the best they can for the beneficiaries and not merely avoid harming them. Meaning ‘a combination of the established duties’ rather than ‘a distinct and separate duty….not an obligation to act in a way which the trustee honestly considered to be in their interests, but a positive obligation to act in what are, objectively, their interests’. The trustees’ duty of undivided loyalty is ‘the most fundamental duty of a trustee’. The duty of loyalty is, then, the fruit of the courts efforts to regulate the behaviour of trustees when their duties as trustees require them to act in ways that may or do conflict with their own personal interests’.

Hence, the best interests duty is an ‘umbrella’ duty which embraces a large number of individual, well recognised duties which is in addition to other trustee duties and includes ‘pursuit of the best possible authorised end or outcome for the trust as a whole but also the observance of proper procedures and processes in decision making’.

So, whilst a trustee may not actually achieve the best possible outcome for the beneficiaries, the trustee must act objectively, not just honestly, in striving to achieve that result.

 

Taken from an Abstract by David G Millhouse

Click here for full document