Investment Consultants

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?

A few months ago I was asked to complete a Request for Information ("RFI") by the sponsor of a large pension plan. Their goal was to hire an independent outside party to vet the investment management policies and procedures of its outsourced manager. I’ve long maintained that it is an excellent idea to have someone review operations and render a second opinion about how asset managers perform relative to a retirement plan’s objectives, how much risk is being taken to generate returns, the extent to which the asset manager is mitigating risks and much more.

While this type of "kick the tires" engagement is not as common as many think it should be, that could change quickly. The Outsourced Chief Investment Officer ("OCIO") business model (sometimes referred to as the Delegated Investment Management or Fiduciary Management approach) is rapidly growing at the same time that recent mandates such as the U.S. Department of Labor’s Fiduciary Rule, along with a flurry of lawsuits that allege breach, call more attention to how in-house plan fiduciaries hire and monitor their vendors.

Given the relative newness of this type of engagement and the fact that a review can mean different things to different people, I strongly recommend that the hiring party consider how much work they want done and what budget applies. In the case of the aforementioned invitation to submit a work plan and detailed budget, my colleagues and I were told by the plan sponsor they weren’t really sure what should be done. Our suggestion was to carry out a preliminary review of existing policies, procedures and operations, report the findings to the trustees and then discuss what could be done as a subsequent and more granular assessment, if needed. This would get the ball rolling in terms of identifying urgent concerns and avoid having to write a big check. Even with an opportunity to ask questions of the hiring plan, there were still many unknowns. For example, would the plan sponsor be willing to pay for a complete investigation of items such as vendor’s data security measures, adherence to its compliance manual, growth plans, risk management stance, employee personal trading safeguards, measures to avoid conflicts of interest, business strength, type of liability insurance in place and verification (if true) that back office cash management was separate from trading or instead have an examiner concentrate on a subset? When the plan sponsor said it wanted to have an outside reviewer look at historical investment performance numbers, was its goal to assess data frequently or over a longer period of time, relative to a selected benchmark, relative to an asset-liability management hurdle, based on risk per return units and so on?

Anyone who has reviewed bid documents from public and corporate plan sponsors will likely conclude that there is not much consistency, especially for due diligence and governance assignments. That’s not ideal. Yes, it’s true that facts and circumstances will differ but clarity in terms of what a hiring plan wants can be a plus for everyone. I think it would likewise be helpful for the bid document to state a budget number or "not to exceed" range and let the respondents suggest what work could be reasonably done for that fee. Both the buyer and seller would know at the outset whether it makes sense to proceed with discussions. Another way to go would have the plan sponsor hire someone to interview its in-house fiduciaries, identify and rank their major concerns and then use that information to create a structured Request for Information or Request for Proposal ("RFP") that would be distributed to potential review firms. This exercise would entail a short-run expense but could save money in the long-run by ensuring that the plan sponsor and the review team are in sync about expectations and deliverables.

The bidding process is often a tough one for both buyer and seller. In 2015, I interviewed the co-CEO of a company called InHub, Mr. Kent Costello. I have no economic connection with this company. I had asked for a demo after reading about the use of technology to help fiduciaries with their search and hiring of third parties. In answer to my question about the limitations of the existing RFP process for the buyer, Kent said "It can be difficult for investment committees to put together a list of questions that will help them to effectively compare firms and service offerings … Poorly crafted, irrelevant, or repetitive questions will lead to a weak due diligence process and leave the committee confused and frustrated. Worse yet, it could mean the selection of an inadequate vendor." Just as important, he pointed out that sellers could be reluctant to take the time and money to prepare a detailed proposal, "given the low likelihood of winning the business…" Click to read "Electronic RFP Process and Fiduciary Duty."

Process improvement is always a plus, whether applied to crafting a bid document, responding with a proposal or implementing the work, once hired.

According to an August 17 press release from Fidelity Investments, "fiduciary responsibility tops plan sponsors’ reasons for hiring advisors." What’s more, this poll of nearly 1,000 defined contribution plan decision-makers makes clear that knowledgeable third parties have an edge in being hired and retained, especially if they can offer input about plan design and investment selection. Cited areas of concern include the following:

  • Increasing employee participation;
  • Properly measuring investment performance; and
  • Making sure that investment risk goals are heeded.

A 2016 Mass Mutual survey reveals similar findings that plan sponsors want help with plan design, discharging fiduciary duties and investment selection. Moreover, about two-thirds of respondents said they want an advisor who works with companies like theirs. 

It’s no surprise then that educational initiatives continue to develop in response to changing regulations and an enhanced focus on fiduciary duties. As announced last month, the American Retirement Association has partnered with Morningstar "to develop a fiduciary education and best practices program for advisors."

April 2017 will be a busy month for many as they seek to comply with large chunks of the U.S. Department of Labor Fiduciary Rule.

For those who missed the January 27 webinar entitled "ERISA Plan Investment Governance: Avoiding Breach of Fiduciary Duty Claims," click here to download the slides for this educational program. There were three presenters, each of us sharing a different perspective about this important topic. I spoke about economics and governance. Executive Rhonda Prussack (Berkshire Hathaway Specialty Insurance) provided information about ERISA fiduciary liability insurance. Attorney Richard Siegel (Alston & Bird) offered his takeaways for investment committee members as the result of recent litigation decisions.

As with most discussions about fiduciary considerations, there never seems to be enough time to address core concepts. So it was with this Strafford CLE event. Ninety minutes quickly came and went. Here are some of the highlights from my talk.

  • Expect more surveillance of ERISA investment committee decisions. A $25+ trillion retirement money pot and regulatory developments are two reasons. Just a few days ago, the Office of Compliance Inspections and Examinations ("OCIE") of the U.S. Securities and Exchange Commission ("SEC") emphasized conflicts of interest and disclosures as two components of its Retirement-Targeted Industry Reviews and Examinations Initiative.
  • It is a good idea to regularly review the Investment Policy Statement for each plan and either revise asset class limits or rebalance to reflect material changes such as rating downgrades of securities owned, changes in company ownership, large reported contingencies that could adversely impact cash flow or corporate recapitalization.
  • Consider crafting a companion Risk Management Policy Statement or beef up the risk sections in the Investment Policy Statement(s).
  • Document the process that dictates how new investment committee members are selected, whether they are trained (and by whom) and how they are reviewed, by whom and how often.
  • Consider installing a central figure or team to negotiate all vendor contracts and clarify exactly who does what. The goal is to avoid an expectation gap that arises when a contract is ambiguous or silent on tasks that an investment committee needs to have done but a service provider does not want to do or thinks it is not obliged to perform. 
  • Double check the compensation of investment committee members to minimize the risk of conflicts of interest. Suppose for example that a Chief Financial Officer ("CFO") sits on an ERISA plan investment committee at the same time that he is eligible for a bonus if he can cut costs.
  • Engage ERISA plan counsel to put together a "kick the tires" team of economists and attorneys who can render an objective assessment of existing internal controls, governance structure and investment policies and procedures and then recommend changes as needed. 

As with any exercise in good stewardship, taking (and documenting) relevant precautionary actions can be a good defense for an ERISA plan investment committee, especially at a time of heightened scrutiny.

As senior ERISA litigation attorney Steve Rosenberg points out in a recent blog post, a service provider with a wayward institutional client could end up in a lose-lose situation. Ignore questionable or illegal conduct and co-fiduciary liability might lead to allegations of breach and a costly fallout for the advisor. Inform authorities and one is likely to lose that client and accompanying revenue.

Referencing a Plan Adviser article entitled "Do Retirement Plan Advisers Have a Duty to ‘Rat?’," Attorney Rosenberg describes this dilemma as a real problem. I concur and offer that the growth in outsourcing arrangements could be a catalyst for further friction unless all parties understand how work is to be allocated and are equally committed to a high standard of care. With over $1.2 trillion categorized as "outsourced assets," there is a lot at stake.

In 2014, the ERISA Advisory Council had an entire forum on the topic of outsourcing of employee benefit plan services. On the topic of duties, law professor Colleen E. Medill testified that "… the courts have not provided much guidance on whether one fiduciary has the right to sue another fiduciary for equitable relief under ERISA.  She noted that this issue will be of increased importance as more employers and other named fiduciaries look to outsource fiduciary functions.  Likely, in a co-fiduciary situation, one fiduciary is more culpable than the other.  Thus, while both fiduciaries are jointly and severally liable under ERISA, the less culpable fiduciary may wish to sue the other fiduciary for damages in a contribution or similar action."

Based on my experience as an expert witness, service provider disputes can arise for a number of reasons, including, but not limited to, what I call an expectations gap wherein some task is left undone because it has not been formally assigned. In other situations, a conflict may exist that makes it hard for a third party to act independently on behalf of its institutional client. Of course, an investment committee member(s) may likewise have a conflict that impedes the advisor’s ability to do what he or she is supposed to do. A pay-to-play kickback that involves a trustee with authority to hire an advisor is one example.

As I’ve written about many times, vetting and overseeing service providers by an investment committee is critical. As Attorney Rosenberg reminds his Boston ERISA Law blog readers, knowing one’s customer is likewise important. After all, some lawsuits are brought by plan participants against both internal and outsourced fiduciaries. It is not unreasonable to conclude that working with a governance-focused client and vice versa redounds to the advantage of both buyer and seller.

Following the publication of "An Economist’s Perspective of Fiduciary Monitoring of Investments" by yours truly, Dr. Susan Mangiero (Pensions & Benefits Daily, May 26, 2015), I decided to write a second article on the topic as there is so much to say. This next article is co-authored with Dr. Lee Heavner (managing principal with the Analysis Group) and continues the discussion about investment monitoring from an economic viewpoint. Entitled "Economic Analysis in Fiduciary Monitoring Disputes Following the Supreme Court’s ‘Tibble’ Ruling" (Pensions & Benefits Daily, June 24, 2015), we address the case-specific nature of investment monitoring by fiduciaries and the complexities of quantifying possible harm "but for" alleged imprudent monitoring.

Noting the discussion of changed circumstances by the High Court as part of its Tibble v. Edison International decision, it is imperative to understand that investment monitoring involves multiple steps, each of which takes a certain number of days to complete. "In the world of dispute resolutions, every complaint, expert report, and decision by a trier of fact is specific to a date or period of time. Time is no less a crucial variable with regard to the creation and implementation of an adequate investment monitoring program." While "changed circumstances" are likely to vary across plans and plan sponsors, exogenous events can spur further monitoring. "The departure of a key executive, a large loss, or a government investigation for malfeasance are a few of the events that may lead plan fiduciaries to subject an investment to enhanced scrutiny."

The expense of monitoring is another issue altogether, one that is nuanced, important and necessary to quantify. We point out that (a) there are different types of costs (b) expenses occur at different points in time and (c) some costs may be difficult to assess right away. "For example, when monitoring leads to a change in vendor or investment that in turn results in participant confusion, blackout dates, account errors, or a lengthy delay in setting up a new reporting system, the true costs may not be known until well after the transition is completed."

There are no freebies. There is a cost to taking action as the result of monitoring. There can be a cost to inaction as well. Investment selection and investment monitoring are different activities. Categories of investment monitoring costs include: (a) use of third parties (b) search costs (c) change costs and (d) opportunity costs. Any or all of these categories may come to bear in a calculation of "but for" economic damages. As a result, "there may be substantial variation to when prudent fiduciaries would act let alone how long it would take an investment committee to complete each action." An assessment of economic damages – whether for discovery, mediation, settlement or trial purposes – requires care, consideration and an understanding of the complex investment monitoring process.

For further insights and to read about this timely topic, download our article by clicking here.

Seeking to accomplish a goal without having the right tools can result in frustration and possible failure. One solution is to get outside help when needed as long as the party being hired is knowledgeable and independent. Otherwise, what looks like a solution could quickly become a problem. Applied to ERISA plans, trouble might take the form of costly and time-consuming enforcement and/or litigation. Over the last few years, that reality has set in for more than a few employers.

Recognizing the importance of abiding by good governance principles, several of us agreed to speak as part of an educational webinar on April 8, 2015 about fiduciary tools, pitfalls and lessons learned. Sponsored by fi360 and entitled "ERISA Litigation and Enforcement: The Role of the Independent Fiduciary and Best Practices for Financial Advisors," this webinar joined Attorney Tom Clark (Counsel with the Wagner Law Group), Dr. Susan Mangiero (Managing Director with Fiduciary Leadership, LLC) and Mitchell Shames, Esquire (Partner with the Harrison Fiduciary Group) to address the (a) use of an independent fiduciary (b) clarifying what an outside vendor should be doing and (c) avoiding legal and economic landmines that have revealed themselves in prominent court cases and regulatory examinations.

If you missed the event, email contact@fiduciaryleadership.com for a copy of the slides. Click here to download the written transcript. Edited for clarity (and because the audio file is spotty in some places), this fourteen page document lays out cornerstone concepts and includes suggestions for plan sponsors and the advisers who serve them. These include, but are not limited to, the following:

  • The outsourced fiduciary market is growing in the United States and elsewhere.
  • When an outside party is hired by a plan sponsor, it is critical to specify responsibilities and contract accordingly. When an "expectations gap" exists, some critical tasks may be left wanting or not addressed at all.
  • When multiple fiduciaries are in place, a plan sponsor must ensure that a central person or team is adequately coordinating the efforts of all fiduciaries.
  • The newly proposed Conflict of Interest rule is predicted to materially change the landscape of fiduciary relationships between plan participants and retirement advisers.
  • A fiduciary status may exist due to either a contractual agreement or by virtue of the functions assumed by an individual or organization.
  • ERISA litigation is getting more attention these days, with a particular focus on fees, use of proprietary funds, revenue-sharing and disclosure of compensation paid to investment consultants, advisers and asset managers.
  • Demonstrating procedural prudence in part depends on what others in the industry are doing (or not doing as the case may be) and whether actions make sense for a given plan.
  • A renewed focus on disclosure and transparency is in the works according to comments made by the U.S. Department of Labor.
  • An independent fiduciary can be engaged for a singular transaction or for a task that continues over a long period of time.
  • An independent fiduciary can be engaged by either a defined contribution plan or defined benefit plan or both.
  • When there is a perception or reality of a conflict of interest, it may be prudent for an independent fiduciary to be engaged. The participants pay for said party because the independent fiduciary works on behalf of the participants.
  • The concept of co-fiduciary status is important and should be paid heed by any adviser who has an ERISA plan as a client.
  • Before delegating duties (to the extent allowed) to a third party, a plan sponsor should decide what financial issues should be vetted. Liquidity, the use of leverage by asset managers and asset allocation are a few of the many topics that a delegated fiduciary could be asked to measure, monitor and manage.
  • A fiduciary audit can be extremely helpful as a tool for identifying areas of improvement for an ERISA plan sponsor.

It may be no surprise that over 500 people registered for this educational webinar about fiduciary foibles. After forty years since its inception, ERISA remains a force that cannot be ignored.

Mark your calendars to attend an educational webinar entitled "ERISA Litigation and Enforcement: The Role of the Independent Fiduciary and Best Practices for Financial Advisors." Sponsored by fi360 and eligible for continuing education credit, this April 8, 2015 event will take place between 3:00 pm and 4:00 pm EST and address important and timely issues for plan sponsors and their advisors. Details are provided below.

Description: ERISA litigation and enforcement increasingly involves allegations of conflicts of interest and imprudent decision-making on the part of advisors, consultants, banks and asset managers. In several recent matters, regulators and judges have made it clear that the use of an independent fiduciary would be interpreted as a reflection of procedural prudence and the absence of an independent fiduciary could hasten a decision of fiduciary breach.

Learning objectives:

  • Learn about relevant cases and regulatory actions that involve third parties such as financial advisors;
  • Hear a discussion about how advisors, consultants, banks and asset managers can work effectively to demonstrate procedural prudence; and
  • Better understand what state trust law and ERISA oversight activity means for advisors and consultants who work with non-ERISA trusts.

Speakers:

  • Thomas Clark, Esquire (Counsel – The Wagner Law Group)
  • Susan Mangiero, PhD, AIFA, CFA, FRM, PPC (Managing Director – Fiduciary Leadership, LLC)
  • Mitchell Shames, Esquire (Partner – Harrison Fiduciary Group) 

Please join as your schedule permits. Click here to register.

I try hard to avoid duplication when contributing to this retirement plan blog (www.pensionriskmatters.com) versus writing about investment compliance on a broader scale (www.goodriskgovernancepays.com). However, there are times when I believe a topic has equal appeal to both plan sponsors and their advisers, attorneys, asset managers and other types of vendors.

With that in mind, I invite you to read "Fiduciary Outsourcing Considerations." As I have said both in private conversations and in public speeches, my work as a forensic economist (and sometimes testifying expert witness) leads me to predict that disputes between institutional investors and service providers are unlikely to disappear any time soon. The good news is that those who take governance seriously have a wonderful opportunity to develop and maintain business with risk management focused pension funds, endowments, foundations and other types of buyers.

According to a September 8, 2014 press release, a survey of 359 UK pension professionals by Aon Hewitt suggests that investment complexity and a busy schedule are driving the increase in demand for outside help. Notably, researchers found that strategies such as liability-driven investing require a lot of analysis and that "trustees are spending less time dealing with these decisions, with 73% of trustees devoting no more than five hours each quarter to investment issues, up from 67% in 2013." Other highlights include an observation that larger plans may opt for some help whereas smaller plans, i.e. those with assets of 500 million GBP or less "are the most likely to opt for full fiduciary management." See "Aon Hewitt Fiduciary Management Survey 2014 finds the majority of schemes opting for tailored measurement of provider performance."

The issue of time and a long list of tasks that must be carried out is not unique to the UK. In "Beyond the Beauty Contest" (June 2014), Russell Investments describes its Outsourced Chief Investment Officer ("OCIO") solution for a Canadian defined benefit plan committee that was "spending most of their time hiring and firing managers."

Acknowledging that firms with third party service offerings have a vested interest in being hired by overloaded pension executives (many of whom have full-time jobs on top of committee work), the issue as to how persons with fiduciary responsibilities spend their time is an important one to discuss.

In "The Investment Committee: Pitfalls to Avoid," the Association of Governing Boards recommends that there not be "too many" members and to adhere to an agenda. Group think is discouraged as it "can result in bad decisions that reflect the prevailing consensus of what has worked recently…" Organizations with strong support staff enjoy the advantage of having a lot of time-consuming analyses done ahead of oversight and strategy meetings. Creating and then following documents such as a clear Investment Policy Statement and Committee Charter likewise has value.

There never seems to be enough time for any investment professional. When billions of dollars are at stake, effective scheduling and use of available resources is critical.