W. Scott Simon
In 2005, the staffs of the Department of Labor and the Securities and Exchange Commission issued a set of questions titled “Selecting and Monitoring Pension Consultants–Tips for Plan Fiduciaries.” Fiduciaries of, say, 401(k) plans can consult these questions and use them as a guide to evaluate the objectivity of their investment advisors in making recommendations to them about their 401(k) plans.
However, there’s no reason why investment advisors to 401(k) plans–or even, for that matter, to individual investors (with certain modifications)–cannot answer these questions and shape that product into a marketing piece to advertise their fiduciary bona fides and promote their services.
Here’s one way to turn answers to these questions into a marketing piece that advisors may use in their 401(k) practices.
Background
The Employee Retirement Income Security Act of 1974, or ERISA, as amended requires that trustees and other fiduciaries of 401(k) plans administer and manage their plans prudently and in the sole interest of the plan’s participants (and their beneficiaries) for the exclusive purpose of providing them with retirement benefits.
To encourage the disclosure and review of more and better information about potential conflicts of interest that investment professionals may have, the Labor Department and SEC developed the following set of questions to assist trustees and other fiduciaries of 401(k) plans in evaluating the objectivity of the recommendations provided, or to be provided, by the investment professionals that advise them.
Here’s how a hypothetical company, Wise Old Owl Investment Advisors, or Wise Owl, would answer those questions. Wise Owl’s answers illustrate that the firm has no allegiance to any entity except its clients: the participants (and their beneficiaries) in the 401(k) plan. You can use this as a guide for your own practice
1) Are you registered with the SEC or a state securities regulator as an investment advisor? If so, have you provided me with all the disclosures required under those laws (including Part II of Form ADV)?
Wise Owl is a Registered Investment Advisor regulated by the SEC. You can access our firm’s ADV by going to the Investment Adviser Public Disclosure site and then entering “Wise Old Owl Investment Advisors” in the “Firm” box and clicking “Search.”
2) Do you or a related company have relationships with money managers that you recommend, consider for recommendation, or otherwise mention to the plan? If so, describe those relationships.
Wise Owl is an independent investment advisory firm under the Investment Advisers Act of 1940 with no material conflicts of interest. This means that we have no alliances or financial or other relationships with any outside money management firms, mutual fund companies, broker/dealer firms, or insurance companies. Because we remain independent from any outside parties, we can retain complete objectivity in rendering advice to you.
3) Do you or a related company receive any payments from money managers you recommend, consider for recommendation, or otherwise mention to the plan for our consideration? If so, what is the extent of these payments in relation to your other income (revenue)?
Wise Owl does not receive payments from outside money management firms or any other third parties, thereby ensuring that we have no material conflicts of interest. This also ensures that we don’t have potential conflicts of interest since we receive 100% of our compensation directly from the fiduciaries of your 401(k) plan or from the accounts of plan participants in a transparent manner with full disclosure to such participants. A plan sponsor has the sole authority to decide, as a business decision, which source–the plan sponsor or plan participants–will pay Wise Owl, which has no authority to make any such decision. Wise Owl will receive the same amount of compensation under either payment option.
4) Do you have any policies or procedures to address conflicts of interest or to prevent these payments or relationships from being a factor when you provide advice to your clients?
This question is not applicable to Wise Owl since we do not receive payments from any outside third parties. One hundred percent of the compensation that we receive comes from fees collected directly from the fiduciaries of your 401(k) plan or from the accounts of plan participants in a transparent manner with full disclosure to participants. A plan sponsor has the sole authority to decide, as a business decision, which source–the plan sponsor or plan participants–will pay Wise Owl, which has no authority to make any such decision. To reiterate, Wise Owl will receive the same amount of compensation under either payment option.
5) If you allow plans to pay your consulting fees using the plan’s brokerage commissions, do you monitor the amount of commissions paid and alert plans when consulting fees have been paid in full? If not, how can a plan make sure it does not overpay its consulting fees?
This question is not applicable to Wise Owl since we do not allow plans to pay our consulting fees using a plan’s brokerage commissions. Indeed, we do not accept commissions of any kind.
6) If you allow plans to pay your consulting fees using the plan’s brokerage commissions, what steps do you take to ensure that the plan receives best execution for its securities trades?
This question is not applicable to Wise Owl since we do not allow plans to pay our consulting fees using a plan’s brokerage commissions. To reiterate, we do not accept commissions of any kind.
7) Do you have any arrangements with broker/dealers under which you or a related company will benefit if money managers place trades for their clients with such broker/dealers?
Neither Wise Owl nor any related companies (of which Wise Owl has none) have any arrangements with broker/dealers under which we or any such companies will benefit if money managers place trades for their clients with such broker/dealers. As a result, we have no current, or potential, conflicts of interest with any broker/dealer.
8) If you are hired, will you acknowledge in writing that you have a fiduciary obligation as an investment advisor to the plan while providing the consulting services we are seeking?
Wise Owl acknowledges its fiduciary obligations to the participants (and their beneficiaries) in all the retirement plans it advises under ERISA. This acknowledgment is provided in writing through execution of an investment advisory agreement with the appropriate fiduciaries that acknowledges our status as an “investment manager” in accordance with ERISA section 3(38) and as an “independent fiduciary” in accordance with ERISA section 405(d)(1). Our acknowledgment makes Wise Owl legally and solely responsible for selecting, monitoring, and replacing the investment options offered in your 401(k) plan. In addition, Wise Owl acknowledges its fiduciary obligations as an investment advisor under the Investment Advisers Act of 1940.
9) Do you consider yourself a fiduciary under ERISA with respect to the recommendations you provide the plan?
Wise Owl is an ERISA-defined fiduciary as described in Question 8. In addition, because we receive no fees from third parties as a result of our recommendations, no ERISA-defined prohibited transactions occur.
10) What percentage of your plan clients utilize money managers, investment funds, brokerage services, or other service providers from whom you receive fees?
Zero percent. Wise Owl accepts no such fees from any money managers, investment funds, brokerage services, or other service providers.
W. Scott Simon is an expert on the Uniform Prudent Investor Act, Restatement (Third) of Trusts and Title I of ERISA. He provides services as a consultant and expert witness on fiduciary investment issues in depositions, arbitrations and trials as well as in written opinions. Simon is the author of two books including The Prudent Investor Act: A Guide to Understanding. He is a member of the State Bar of California, a Certified Financial Planner® and an Accredited Investment Fiduciary Analyst™. Simon received the 2012 Tamar Frankel Fiduciary of the Year Award for his “contributions to advancing the vital role of the fiduciary standard to investors, capital markets and to society.” The author’s views expressed in this article do not necessarily reflect the views of Morningstar.