Every client we work with has established committees that are responsible for providing oversight, governance, and ultimately making decisions that will impact the health and operation of the plan. For retirement plan sponsors, the merits of governance by committee are no longer in dispute.
- Receive input from individuals with different skills, perspectives, and backgrounds
- Shared workload
- Increased accountability
- Improved independence
Knowing these benefits, I remain surprised at the number of consulting firms that don’t utilize similar principles and controls in making recommendations to the committees they work with.
At Multnomah Group, we maintain three critical committees to ensure the continuity, consistency, and independence of the advice we provide clients. I’ll cover the work of these three committees over three blog posts in an attempt to articulate the benefits of the process.
There are well over 15,000 registered mutual funds in the marketplace today and thousands more products in the collective investment trust and separate account environments. While having earned my CFA designation, I fancy myself an above-average investment analyst, but no client should rely only on my unique perspective in making recommendations about investment structure and performance. The Investment Committee at our firm is staffed by two investment analysts without client facing responsibilities. They meet with investment management firms, ask difficult questions, analyze performance and attribution information, and develop firm narratives about the products our clients are either using or considering. The investment analysts then bring those positions to the full-committee and make a case as to why the firm should recommend, replace, or watch-list investment products. The committee probes the analysts on their recommendations, and the committee as a whole votes on the recommendations the firm will make. Additional investment sub-committees review pension and 3(38) portfolios where the firm has discretion and does similar work, including the development of asset allocation strategies.
The committee demonstrates the prudence, shared work, and accountability benefits above, but it also plays a significant role in maintaining our independence. Investment managers spend significantly on staffing talented wholesalers with the responsibility to communicate the merits of investment products managed by their firm. Wholesalers can be critically valuable in helping us better understand the workings of an investment strategy, but another material responsibility of most wholesalers is to develop rapport with the investment consultants and firms they service. Clearly in building rapport, investment management firms hope that they’ll be thought of first when new investment products are needed and perhaps, they’ll be given more latitude when the attributes of products we already use have deteriorated.
It’s human nature for me to prefer to buy my coffee from the local shop where they treat me well and ask about my family. I routinely pay $0.50 a cup more to go there despite the fact that their coffee is no better than the Starbucks on the corner. Those same personality and relationship pressures are exerted by investment managers and the wholesalers that represent them.
Most materially, we seek to reduce biases by accepting no gifts, travel, meals or other direct or indirect compensation from investment managers. We go further by not using the tools they offer to provide. Investment managers routinely purchase technology licenses allowing them to run sophisticated reports that can then be used by the consultants they work with. Smaller firms routinely use these tools rather than developing their own tools or licensing directly from the distributor to reduce expense. However, the reduction of expense to the investment consulting firm is made at the expense of their independence. An investment management firm that has developed a target date analysis tool which can be used by their consultants, is clearly making available a tool that would be favorable to the investment product they manage.
Last, by having wholesalers meet with analysts rather than the client facing consultants, we seek to eliminate the role of wholesaler personality that can play in product recommendation and utilization. Wholesalers meet with analysts, analysts must make the business case to the investment committee about product recommendations, and when product recommendations are made, those are implemented universally, not selectively from consultant to consultant.
Having worked in this industry my entire career, I’ve met wholesalers that I like, but who represent products that don’t meet the rigorous criteria established by our committee. I also know a number of wholesalers that rub me the wrong way, but who represent investment products used by my clients for over a decade.
Conflicts aren’t always as clear as a quid-pro-quo. Behavioral finance has explored the countless other more subtle mechanisms that may impact the independence of the advice you receive.