The (Illusory) Best Practices Standard in Fiduciary Litigation

In my practice serving as an expert witness on fiduciary (personal trust & estate) matters, I often encounter a particular tactic employed by plaintiffs’ counsel attempting to prove that the actions of a defendant fiduciary fell sufficiently below the applicable standard of conduct as to constitute breach of one or more fiduciary duties thus meriting removal, surcharge, or both.??That tactic usually involves identifying a hypothetical action or set of actions – intentionally different than the action or actions actually taken by the defendant fiduciary – and asking the expert witness whether they would be considered “best practice” in the fiduciary industry.??In every instance I have encountered, the hypothetical facts seem entirely logical and completely within the range of fiduciary behavior one would consider reasonable.??The temptation is to respond: “Well, of course, that is an example of best practice.”??But in doing so, the expert has potentially established a new standard in the mind of the trier of fact (judge or jury) against which to evaluate (unfavorably) the reasonableness of the action or actions actually taken by the defendant fiduciary.??And plaintiffs’ counsel will have in effect converted the defendant’s expert witness into its own.

In my 30-plus years of fiduciary experience, including leading the personal trust and estate management businesses of J.P. Morgan, Goldman Sachs and Citigroup and participation in multiple state and national industry groups, I have never encountered a universally accepted or agreed-upon set or list of “fiduciary best practices.”??A quick internet search will confirm that what individual commentators consider best practices range all over the place, from very basic and general suggestions to those highly specific to particular circumstances.??The reality – and a foundational principle of evaluating fiduciary conduct – is that the reasonableness of any instance of action or inaction on the part of a fiduciary must be judged based upon the individual facts and circumstances, and in the context of industry custom and practice,?applicable at the time.??A corollary to that principle is the general rule that if a fiduciary has acted reasonably in deciding to take or omit an action, it should not be held liable if the result ultimately is not what was intended (for example, if a reasonably chosen investment underperforms).??Simply put, it is not appropriate to judge a fiduciary with “20-20 hindsight.”

“Reasonableness” is a very broad term.??One way in which it can be conceptualized is as a wide highway with guard rails on either side.??Everything between the guard rails could be considered reasonable.??Anything beyond the left guardrail – for example, actions unlikely to achieve the intended outcome – could be considered unreasonable.??Similarly, anything beyond the right guard rail – for example, actions likely to achieve the intended outcome but at an unnecessarily high cost – could also be considered unreasonable.??The fiduciary’s job is to pursue fulfillment of the fiduciary account’s purpose and the best interests of its beneficiaries while staying “in the lane” of reasonableness.

As used in litigation, the concept of “best practice” seeks to rank or prioritize the relative reasonableness of actions falling within the proverbial guard rails, suggesting that some practices are “good,” others, “better” and still others “best.”??My practice is to reject those characterizations.??Permit me another analogy.

Imagine that your goal is to install a fence on your property.??You go to a large hardware store to buy a tool appropriate to the task.??In the gardening aisle, you find a selection of three shovels labeled Good, Better and Best.??The Good shovel has an appropriately curved plain steel blade/scoop with pointed tip and standard step, a wooden shaft and a plastic handle/grip.??The Better shovel is similar, but has a galvanized steel blade, a larger/broader step, an aluminum shaft and a more substantial metal-and-wood handle.??The Best shovel is similar to the Better shovel except that the blade is treated with Teflon to make digging easier and to aid in clean-up and includes embossed one-inch markings for easy depth measurement, the shaft is surrounded with insulated cushioning to make it easier to hold in cold weather, and the handle has a patented “comfort grip” feature.??As one would expect, the cost of each shovel varies, increasing according to its respective “rank.”

Now, just as you are about to make your choice, you notice a gas-powered auger/post hole digger in the power equipment aisle which would allow you to complete your task much more easily and quickly.??However, the cost of that piece of equipment to rent, and especially to buy, is significantly greater than the cost of even the Best shovel.

My personal view is that, if you were making that decision in a fiduciary capacity, you would be justified in choosing any one of the shovels because each one would be capable of accomplishing the task at hand.??In making the choice among them, you would of course need to balance the value of their respective functionalities against their respective costs, in each case with respect to the specific assets, goals and needs of the fiduciary account.??So long as your evaluative process was logical and appropriate, the relative designated “ranking” of your choice would be irrelevant to the reasonableness of your decision.??The choice of any one would fall “in the lane” of reasonableness.

By contrast, choosing the gas-powered auger might fall “beyond the right guard rail” if the cost thereof unreasonably exceeded its benefit?to the fiduciary account.??

At this point, I can almost hear plaintiffs’ counsel asking me indignantly, “Mr. FitzPatrick, are you saying that it is acceptable for a fiduciary to do only the bare minimum???That anything other than an F grade, say a D-, is OK?”??To which I would respond:

“The fiduciary’s job is a difficult one.??He, she or it is charged with the responsibility of making discretionary decisions, sometimes very difficult ones, based upon the facts and circumstances at the time those decisions are to be made.??There are rarely any hard and fast rules to guide them; in fact, the need for flexibility and judgment in the face of an unknown and unknowable future is often exactly the reason the fiduciary has been appointed.??It is therefore critical to the proper functioning of the role that the fiduciary be given considerable latitude to act in the best interests of the account and its beneficiaries, subject always to the requirement of acting in good faith.??To suggest that the fiduciary’s actions be subject to relative grading, whether against subjective notions of “best practices” or otherwise, could potentially chill the free exercise of discretion or even discourage qualified fiduciaries from taking on the role.??Either consequence would constitute a serious disservice to grantors and testators who need trusted, independent decisionmakers to effectuate their long-term wealth planning.??There?is?a behavioral threshold below which fiduciaries must not fall, and that is the reasonableness of their behavior as judged against the particular facts and circumstances with which they are presented and within the context of the custom and practice then pertaining within the fiduciary industry.??That standard is both necessary and sufficient for the proper functioning of the fiduciary industry.”

At which point I would expect plaintiffs’ counsel to say, “Well, Mr. FitzPatrick, can you give me an example, just one, any example at all, of a decision that under your description and understanding of the fiduciary standard, would fall below that standard, or in your words ‘outside the left guard rail’?”

“Yes.??Choosing a spoon instead of a shovel to dig a fence post.”

Daniel M. (Dan) FitzPatrick is an attorney and long-time wealth management professional who led global personal trust and estate businesses for industry leaders including JP Morgan, Goldman Sachs and Citigroup. He currently serves as President of Northway Wealth Advisors, LLC, an independent boutique providing objective, expert fiduciary advice and assistance to wealthy individuals, families and their related charitable entities, as well as mediation and expert witness services in support of fiduciary-related dispute resolution. Many of his prior writings can be found at www.danielmfitzpatrick.com.