If you missed the Strafford continuing legal education webinar on September 12, click here to download the slides about ERISA investment committee governance. The ninety minutes flew by, with each speaker having lots to say. Attorney Emily Seymour Costin addressed ways for companies to minimize the risks of being party to an ERISA lawsuit or, if sued, how best to mount a defense. Insurance executive Rhonda Prussack talked about ERISA fiduciary liability coverage. I gave an economist’s perspective about conflicts of interest, delegating to a third party such as an investment consultant, facts and circumstances considered by a testifying expert and fiduciary training.

I also broached the topic of benchmarking fiduciary actions as vital to good governance, something that deserves significant attention. Certainly policies, procedures and protocols can vary across ERISA plans. However, the importance of assessing whether committee members are doing a good job is universal, regardless of plan design.

One way to grade job performance is to create a matrix of relevant attributes and compare actual deeds to expectations of what a prudent investment fiduciary would do in similar circumstances. Although overly simplistic, the image above illustrates the general notion of ranking decisions from great to bad or somewhere in between. For a specific engagement, a scorecard would be much larger because there are dozens of categories to examine.

My recommendation to anyone with ERISA fiduciary responsibilities is to engage outside counsel for a fiduciary assessment and then have the law firm bring an investment expert on board to address economics, risk management and industry norms. By self-assessing, with the help of knowledgeable and experienced third parties, investment committee members have a golden opportunity to improve weaknesses and recognize areas of strength. When there are multiple solutions to a given problem, something that is more the norm than not, brainstorming with meaningful metrics can be invaluable.

Despite the billions of dollars being allocated to financial technology or “Fin Tech,” some believe automation will never trump personal interactions. As Carla Dearing, CEO of financial wellness company SUM180, puts it “… money is emotional and there are always intangibles to consider in deciding what to do next, which cannot be captured by robots …” (Read “Why Robo-Advisors Will Not Replace Human Financial Advisors,” The Street, February 28, 2017).

Last month, industry pundit Michael Kitces offered interesting insights in his “Why Broker-Dealers Launching Robo-Advisors Are Missing The #FinTech Point” article. He acknowledges the growth in automation but suggests it won’t be a cure-all to attracting Millennial heirs who expect to inherit their parents’ wealth. What makes more sense is to exploit the “tremendous operational efficiencies” for purposes of “onboarding clients and efficiently managing (model) portfolios” while allocating ample resources to “marketing and business development.”

Whatever your view about the next big thing involving a mobile interface or data analytics, a critical question remains. Will you or your financial advisor soon be made redundant by some version of R2D2 or C-3PO?

Drum roll please! If research by Oxford University academics accurately foretells the future, financial advisors can breathe a sigh of relief – sort of. In their 2013 paper, “The Future of Employment,” Carl Benedikt Frey and Michael A. Osborne quantify low probabilities of replacement for securities, commodities and financial services sales agents. Financial managers, financial examiners, financial analysts and financial specialists similarly fall into the “low probability” category. Personal financial advisors fall into the “medium probability” bucket with an estimated fifty-eight percent chance of being replaced by a computer. Of course, those who specialize in complex areas such as estate planning are logically more a fixture than any digital counterpart.

Like any career, the friction between technological progress and added-value by a particular individual is real. One solution is meaningful continuing education. Another approach is for investment professionals to actively empower their clients by providing them with solutions to specific problems. Consultative selling can be a time-intensive process and not one that is always supported by an organization’s business model. Some investment advisors or asset managers are rewarded for short-term and not longer-term performance. These decision points are seldom simple to parse but nevertheless vital to consider at both the micro and macro levels – for both service providers and their clients.

Attracting clients is hard work in the best of times. Increased competition adds to the challenge. One way to stand out is to make clear what product (or service) you offer and why an investor should consider your firm. In my experience, providing information in a straightforward manner is paramount. It’s easy for a saver to be overwhelmed by a seemingly endless assortment of products with different names, especially when many are already struggling to understand basic investment concepts. The American College of Financial Services gives Americans a grade of “F” in terms of understanding how to best prepare for retirement. In my experience, plenty of institutional fiduciaries likewise grapple with how to meaningfully compare two or more funds with overly complex structures and strange sounding or confusing names.

The importance of brand clarity hit home a few weeks ago when I excitedly showed my husband my toes, post-pedicure, decked out in a new color called Cranberry Kiss. He drily replied: “They look red to me.” A smart man with a PhD in finance, he does not follow beauty trends. He’s not alone. Others might simply look at the overall color and ignore attributes such as brand name or bottle design of competing items such as Big Apple Red, Sophisticated or Forever Yummy.

Customer indifference is not new. I’ve talked to investors who throw up their hands in despair when presented with too many choices. One lady recently told me that she did not want the headache of having to vet multiple funds so she picked the one with the name that seemed to describe the underlying portfolio strategy. Consumer research supports the notion that a buyer can have “too many” choices. From a service provider’s perspective, having your product lumped together with others is not ideal. On the other hand, having a name that seems “exotic” or is not self-explanatory can likewise lead to lost sales.

Understanding how to name a product is vital for a fund company, bank or insurance firm. While it may be tempting to rely on performance numbers alone to build assets, smart marketers and sales professionals know the power of keeping things simple, having a memorable and obvious product name and doing whatever they can to differentiate their product as a “must have.”

According to the authors of “A Nurturing Campaign” (Financial Advisor Magazine, August 1, 2017), other investment industry professionals are key to securing leads for your business. Savvy advisors, consultants and money managers know the importance of cultivating relationships with peers, positioning one’s self as a competent technician and being ready to reciprocate as appropriate.

I agree that effective networking is the way to go. Besides the prospect of adding clients, investment professionals benefit when others are willing to candidly exchange information about ways to improve best practices and avoid mistakes.

Not everyone is a believer. It takes time and money to market your skill set to potential clients. Some posit that leaves little time for outreach to others, especially for those whose “to do” lists seem to aggressively expand each day. This kind of thinking is unfortunate. The world is a small place and today’s competitor could be a close ally later on.

To those who do seek referrals (and hopefully give them when you can), I applaud your initiative but would like to respectfully remind you that your request is only a beginning. Be clear with what you want, when you need an introduction and what you expect. Help others help you build your book of business by recognizing their busy schedules and any limitations they might have about being able to provide effusive praise. (Company policy or regulations could prohibit lengthy or detailed referrals.) By asking someone to do the heavy lifting you should be doing, you risk criticism for taking that individual for granted, coming off as impolite or turning a positive connection into one tainted with a hint of annoyance. I know this from firsthand experience.

Just last week, I received two separate requests for recommendations, both of which ended costing time and frustrating everyone involved. The first person asked me to write a recommendation letter and have it sent one day later. Ordinarily I would have said no because of the short turnaround but I like the high-integrity work this person does and his client focus. So I stayed late at work to write something, only to discover that the directions provided to me were incomplete. The net result was that I used up several hours of time and he could not meet the cutoff. Another individual gave me ample time to write a recommendation letter but told me, after I had already spent about ninety minutes drafting text and reviewing her service materials, that I should revise my letter to include passages of her numerous research papers. Of course I would have to take time to read them in depth as it had been awhile since I looked at them. We mutually agreed that she would ask another colleague – someone with the schedule flexibility to review her impressive portfolio of thought leadership items.

A few of my takeaways from these recent experiences are as follows:

  • It’s gratifying to be able to recommend high integrity, knowledgeable colleagues but important to set boundaries in terms of time and realistic expectations.
  • Arrange for a call to ask for a recommendation or referral. Email seems impersonal to me for this purpose and increases the likelihood that the referral source will waste time because instructions were unclear or incomplete or both.
  • During the call, catch someone up on what you’ve been doing and your professional value-add so everyone is clear on your achievements, business philosophy and goals. Let the recommending party ask you questions. Be specific about how the referral will be used and by whom.
  • Afterwards, send a handwritten note to acknowledge that person’s gift to you of their time, energy and belief in the positive way you handle clients.

Small courtesies can grow into large payoffs. It’s hard enough to stand out from the competition. Why not shine by demonstrating courtesy and respect for other people’s time?

Economist Dr. Susan Mangiero is pleased to announce that she will be speaking during an upcoming Strafford Live webinar on September 12, 2017 from 1:00 pm to 2:30 pm EST. The Continuing Legal Education (“CLE”) webinar is entitled “ERISA Plan Investment Committee Governance: Avoiding Breach of Fiduciary Duty Claims.”

She will be joined by a prominent ERISA attorney and a senior-level ERISA fiduciary liability insurance executive to discuss risk mitigation approaches that have the potential to help lower the likelihood of breach of fiduciary duty allegations. This program will also address effective litigation strategies, the importance of fiduciary liability insurance and the role of the economic expert in the event of litigation, arbitration, mediation and/or regulatory enforcement actions. Court cases including the recently adjudicated Tibble v. Edison matter will be discussed as part of the program.

Please join the distinguished faculty for what should be a relevant, timely and important conversation about suggested protocols and bad practices to avoid. For more information or to register, visit the Strafford website or call 1-800-926-7926, extension 10. Mention code ZDFCT to qualify for a fifty (50) percent discount. If you have questions you would like answered, please let Strafford know in advance or on the day of the live event.

While on vacation at Canyon Ranch in Tucson, I had an opportunity to take a workshop about joy. It’s a little word for such a big concept. Without that je ne sais quoi that puts a smile on one’s face and pep in each step, life can become a series of “must do” items instead of “let’s go” moments. That’s not an ideal outcome for individuals or their friends and families. Companies have a stake in the happiness game as well.

Motivated and satisfied employees can add to the bottom line through productivity gains. Employees on the other end of the spectrum can add to health care costs and reduced output due to excessive absences. According to the Global Wellness Institute website, “The world’s 3.2 billion workers are increasingly unwell.” This explains why companies around the globe spend upwards of $40 billion on wellness programs.

A few years ago, the Rand Institute carried out a large-scale survey of nearly 600,000 individuals who participated in wellness programs offered by seven companies. What they found may surprise some. While the lion’s share of wellness budgets was spent on improving lifestyle skills such as smoking cessation or losing weight, return on investment (“ROI”) was significantly higher for disease management efforts. The take away is that employers are not allocating monies wisely and need to modify accordingly.

If true that organizations should budget mostly on addressing existing illnesses or preventing new realizations, there could be a heightened demand for psychological or behavioral specialists. Those individuals who can afford to seek outside help will clamor to understand their malaise and emotional deficit, even when their bosses look askance.

In his Forbes opinion piece, Dan Pontefract discusses the importance of sharing a vision that excites and empowers. He cites surveys that demonstrate a C-suite awareness of the purpose-profit connection even when these same executives do little to activate their team around a shared vision. Instead of rewarding people for short-term bottom line advances, this author and researcher urges companies to ratchet up their efforts to do well by doing good. Whether the metric is excellent client service or operating with better ethics than a peer, his take is that managers should address more than the quarterly bottom line.

Illustration depicting a green roadsign with a optimistic concept. White background.

Most of us are disciplined enough to put together a financial plan or seek the help of an advisor. While true that retirement planning is important, the future should not give way to living life in the present. If you agree that every day is a gift, check out a new movie called The Hero.

Starring Sam Elliott, the recipe is straightforward. Take one aging actor who learns he has a serious illness. Add a younger love interest, a friend with a questionable work ethic, a caring ex-wife and a disappointed daughter. The result is a tale of redemption and a story about hope. The audience sees a man who is sympathetic because he wants a second chance to make a difference in the lives of those around him.

The Hero is a quiet film and likely too slow-paced for some. However, for those who crave solid character development and a ride towards grace, grab some popcorn and head to the theater without delay. Your reward is a chance to watch someone grow by recognizing his limitations and then being willing to ask for help. Lucky for him, he gets it aplenty.

There are flashbacks to the hero’s glory days as a celluloid cowboy, motivating viewers to distinguish good deeds from bad ones and understand that reality and make-believe can collide.  The scenes of this lanky “everyman” eating, sleeping and appreciating the nearby ocean are far from mundane. They reflect the “extraordinary ordinary” moments, something I describe in my book The Big Squeeze.

Sam Elliott refers to this gem of a movie by Brett Haley as a career brass ring in his June 2017 interview with Variety. I concur. The film is an enjoyable wake-up call for anyone in the doldrums. We root for the main character to live a rich and fulfilling life among friends, family and business associates for whatever time he has left. May we all be so lucky to renew and refresh, even when it seems like life hands us more lemons than we can squeeze into sweet lemonade.

 

new edition, 3D rendering, triple flags

During the last several months, I’ve been working with the terrific team at Lex Blog to consolidate my two business blogs – Pension Risk Matters® and Good Risk Governance Pays®. Now I’m back, raring to post commentaries and research updates about investment risk governance and fiduciary practices. I’ll plan to toss in a few essays about living the good life along the way.

Eleven years ago, I created Pension Risk Matters® with the objective of providing insights and information about investment governance and fiduciary best practices as relates to the management of retirement plans. A few years later, I created Good Risk Governance Pays® to address investment risk governance issues for the broader industry. Traffic to both websites has been robust and always much appreciated. However, in the interest of time and because of continued content overlap, I decided to consolidate the two websites.

Join me as Pension Risk Matters® rebrands as Investment Best Practices® and Good Risk Governance Pays® is phased out. Suggestions and guest posts are welcome. Simply email contact@fiduciaryleadership.com. For a complimentary subscription, visit www.investmentbestpractices.com and type your email address in the “Subscribe” box in the upper right hand corner of the home page. You can also add this blog to your RSS feed via www.investmentbestpractices.com/feed/.

Let’s keep the conversation going! There is a lot to discuss.

I am pleased to announce that I will be speaking as part of an upcoming Strafford live webinar, “Alternative Investments in ERISA Retirement Plans: Mitigating Liability Risks for Hedge and Private Equity Funds and Pension Plan Fiduciaries” scheduled for Wednesday, May 24, 1:00pm-2:30pm EDT. I am given ten (10) guest passes. If you are interested, please let me know.

Once the ten guest passes are gone, you can still attend the webinar. By referencing my name, you can receive a fifty percent discount. As long as you use the link shown below, the offer will be reflected automatically in your cart.

Our panel will provide ERISA and asset management counsel with a review of effective due diligence practices for institutional investors from both a legal and economic perspective. The panel will offer risk mitigation best practices at a time of increased government scrutiny and lawsuits by plan participants.

After our presentations, we will engage in a live question and answer session with participants so we can answer your questions about these important issues directly.

I hope you’ll join us.

For more information or to register >

Or call 1-800-926-7926 ext. 10
Ask for Alternative Investments in ERISA Retirement Plans on 5/24/2017
Mention code: ZDFCT

Sincerely,

Dr. Susan Mangiero, Managing Director
Fiduciary Leadership, LLC
Trumbull, Connecticut

 

This article entitled “Investment Fraud and the Role of Trust” by Dr. Susan Mangiero was originally published on April 19, 2017 in The Fraud Examiner, a publication of the Association of Certified Fraud Examiners that is distributed to some 65,000 fraud professionals.

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Investment fraud can happen to anyone, and unfortunately, there is no shortage of investment fraud possibilities. Affinity fraud, pyramid schemes, pump-and-dump security trading, high-return or risk-free investments, and pre-IPO scams are only a few of a long-list of schemes that could separate investors from their hard-earned money. 

Investors can find themselves the victims of fraud when they don’t do enough due diligence or put too much faith in the people selling or managing a fund. Investors around the world would be wise to grasp fundamentals of the financial services industry, especially since results from a 2016 survey conducted by the National Association of Retirement Plan Participants show that only one in 10 persons express confidence in financial institutions. Financial advisers are similarly viewed with doubt. This is problematic.

Due in part to these concerns, very few people are adequately saving for retirement and those with money frequently invest in riskier assets in hopes of high returns. Following the 2008 credit crisis, people are changing the kinds of assets allocated in their pension plans and foundation portfolios. Taking more risks isn’t necessarily bad as long as investors sufficiently understand what is being offered to them and have assurances that sufficient safeguards are in place. Moreover, savers urgently need reliable help. Fragile confidence in the intentions of financial service providers creates a friction that can discourage investors from getting the input they need.

But investment fraud isn’t just a problem for individuals. When it occurs, it taints the financial services industry and the professionals who operate with high integrity and put customers first. Low trust of an entire industry can invite additional regulation. The net effect can be unfair penalties that diligent investment stewards must pay for the trespasses of fraudsters.

Increasing Investor Confidence

Although there is no such thing as a risk-free investment, investors can take action to detect red flags and hopefully avoid problems. With the Madoff Ponzi scheme, there were some who seriously questioned whether the touted strategy was legitimate, let alone viable, and did not invest. Regarding Enron, some investors looked askance at the energy company’s reliance on a complex web of special purpose vehicles. One lesson learned from the Bayou hedge fund scandal is to verify whether auditors are independent and well respected.

In its guide for seniors, the U.S. Securities and Exchange Commission urges the use of publicly available databases to check the disciplinary history of brokers and advisors, warning that investors should “never judge a person’s integrity by how he or she sounds.” The guide also says to avoid those who use fear tactics and to thoroughly review documents. The Financial Industry Regulatory Authority cautions investors not to be pressured or to believe that a “once in a lifetime” opportunity will be lost without immediate action.

To help combat investment fraud, the North American Securities Administrators Association teamed up with the Canadian Securities Administrators to create an online quiz that anyone can take to enhance awareness of what to avoid.

Although there are organizations that formally grade companies on their trustworthiness, investors should not rely on a single metric alone. Instead they should study whether a financial service provider has a good reputation in the marketplace and what the company is doing to manage its economic and operational risks.

Financial service companies likewise have responsibilities to be trustworthy and ensure that adequate protections are put in place. Some of these critical action steps include:

  • Setting up controls to prevent rogue trading
  • Appropriately compensating salespersons to minimize conflicts
  • Providing existing and potential customers with clear and understandable investment documents
  • Regularly communicating what the organization does well to lower risks for its customers
  • Calling out questionable activities of its competitors and working with industry organizations to improve risk management and fraud prevention techniques.

Disclaimer: The information provided by this article should not be construed as financial or legal advice. The reader should consult with his or her own advisors.