“Choosing a financial professional is an important decision,” says the Securities and Exchange Commission (SEC), in its recently updated Investor Bulletin “Top Tips for Selecting a Financial Professional.”[1] ERISA and the Department of Labor echo this sentiment, requiring that plan sponsors act with prudence when selecting and monitoring financial professionals for the retirement plan. Specifically, ERISA requires the selection of service providers to the plan be made in the best interest of the plan’s participants.
At Multnomah Group, we frequently speak with clients and prospects about how to monitor vendors[2]. But, what about how to select an advisor? What questions did the plan fiduciaries use to document your initial selection or ongoing monitoring of your advisor? Recently, the SEC provided guidance in the form of “tips” and associated questions to consider when choosing your advisor.[3]
The SEC suggests that you consider the following questions:
- Is the financial professional licensed? At Multnomah Group, for example, all consultants are licensed. To review the licensing of any of our consultants or that of another financial professional, click here.
- What products and services are offered? The SEC draws an analogy: “Just as a grocery store offers more products than a convenience store, some financial professionals offer a wide range of products or services, while others offer a more limited selection.” Specific to retirement plans, think about the needs of your participants and the level of expertise and proficiency within your internal resources.
For example, do you have a high level of proficiency with respect to investments and desire more autonomy as a retirement plan committee? If so, you may prefer an advisor that serves the retirement plan as a 3(21). If you (or your retirement plan committee) have a lower level of proficiency with respect to investments and you prefer to shift liability as much as possible away from your institution, then an advisor willing to be a 3(38) fiduciary to the plan may be a better service model. Accordingly, you would need a financial advisor willing to serve the plan in the appropriate capacity.
- In what way(s) is the financial professional compensated? As the SEC describes it, there are two parts to understand: (1) how you pay and (2) how is the advisor paid. At Multnomah Group, for example, we are entirely fee-for-service. We are not compensated by any commissions or other revenue generated by the plan, and our fees are all disclosed in the agreement with the plan. Given the rules under ERISA, it is critical to understand these questions as a retirement plan sponsor!
- What are the background, experience, and credentials of the financial professional? In addition to being licensed, financial professionals have a host of different educational backgrounds as well as credentials. Recently, one of my colleagues posted about why you should understand the differences between various credentials and the SEC encourages the same – that you should understand the credentials and designations of your financial advisor.
- Does the financial professional have any notable disciplinary history? Finally, make sure your financial professional isn’t a jail bird. Those are my words, not the words of the SEC. However, in demonstrating your prudent selection and monitoring of a financial professional, it is important to document that you have asked and/or reviewed documentation to demonstrate that your financial professional doesn’t have a criminal background. For example, many RFP questions ask whether the firm and any of its licensed persons are or have been subject to any criminal investigations, offenses, etc., which helps demonstrate a proper vetting process.
Keep in mind, there are many ways to obtain the information described in the SEC’s Alert and this post has only covered the high-level points raised by the SEC Investor Alert. One great way to obtain most of this information – as a starting point – is the Form ADV, Part 2. For those readers that are clients of Multnomah Group[4], this disclosure document was sent out recently to our clients' primary contacts and it contains the information described above. Be sure to review our Form ADV, Part 2 and document your review of the same.
For additional information about how to prudently select an advisor or for questions about how to demonstrate prudent monitoring of your existing advisor, please contact your Multnomah Group consultant.
Notes:
[1] SEC Investor Alerts and Bulletins, Updated Investor Bulletin: Top Tips for Selecting a Financial Professional, available at: https://www.sec.gov/oiea/investor-alerts-bulletins/ib_selectpro.html (April 3, 2018).
[2] Also known as recordkeepers or third party service providers.
[3] SEC Investor Alerts and Bulletins, Updated Investor Bulletin: Top Tips for Selecting a Financial Professional, available at: https://www.sec.gov/oiea/investor-alerts-bulletins/ib_selectpro.html (April 3, 2018).
[4] Multnomah Group’s Form ADV, Part 2 is also available online via the SEC’s website, available at https://www.adviserinfo.sec.gov/.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.
Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.