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Looking To Hire an Investment Adviser – Ask The Lawyer by Carol Buckmann

Looking to Hire an Investment Advisor

Looking To Hire an Investment Adviser for a Retirement Plan by Carol Buckmann

I am frequently questioned concerning the mechanics of hiring an investment adviser for a Retirement Plan.  However, the question normally comes in the form of another question, such as, “Is this agreement OK?”  Although clients often ask me to review investment advisory agreements after they have conducted an RFP and selected a new adviser, they would benefit more by consulting ERISA counsel much earlier in the process.  Advisers are not fungible, and there are issues plan fiduciaries need to focus on in order to hire an investment adviser.   When winnowing down the list of investment adviser finalists to make the final choice consider the following items that should be on your checklist –

Will the Adviser Be a Fiduciary?   

If you read my columns regularly, you are not surprised to see this topic as the first item on my list. Without the proposed Fiduciary Rule in effect, not all advisers will be ERISA fiduciaries.  This makes a very big difference. ERISA fiduciaries are held to the highest legal standards, must make recommendations that are solely in the interest of plan participants, and can be personally liable for losses caused by a breach of their fiduciary responsibilities. Don’t consider any candidate who refuses to accept ERISA fiduciary status in writing. ERISA also prohibits arrangements in which an entity receives more favorable pricing or treatment on corporate services as a result of hiring a specific adviser to work with the plan.

What Are The Qualifications of the Adviser?  

Ideally, you want someone who has related education, such as a degree in finance, and who has been advising long enough to have experience in both bull and bear markets.  You will want to know about the adviser’s investment philosophy and methodology, as well as their firm’s performance record.  You will also want to know if past-performance numbers you receive are gross or net-of-fees. You can use the FINRA BrokerCheck service to look at licensing and employment history.

How Many ERISA Clients Do They Have?

Don’t just look at assets under management. ERISA plans are subject to many special rules, such as avoiding prohibited transactions, that doesn’t apply to other clients.  You want candidates who have sufficient experience for making recommendations for ERISA plans. Your adviser choice shouldn’t be learning the rules of ERISA on the job or be just someone’s relative or friend.

How Many ERISA Plans Have Replaced The Adviser and Why?

This can be a question for the RFP, as it is not a good sign if their ERISA clients don’t stick with them.

What is Their Disciplinary History?

This is also an area where you can use the FINRA BrokerCheck service to check on this. It will tell you not only whether complaints have been filed, but how they have been resolved.

Look at Form ADV

There is useful information on this form, which is the basic disclosure document for the investment firm, including how the adviser will be compensated, some disciplinary history, conflicts, and business affiliations.  

Have They Been Sued?

You can ask about this, and the resolution of the cases, as part of the RFP process. You can also search for information online.

Does The Adviser Have Insurance?

If a breach results in a loss to your plan, you want to be sure that that the plan is indemnified and that your adviser is covered by adequate fiduciary liability insurance.  (Your plan’s ERISA bond won’t provide recovery for losses caused by imprudent advice.)  Require the adviser to carry cybersecurity coverage as part of the adviser’s insurance obligations.

Will They Provide Investment Education and Advice to Participants?

You want to hire an investment adviser who will help your participants make better plan choices. Individual investment advice can be given by fiduciaries if Department of Labor guidance is followed.

Will The Adviser Attend Committee Meetings?

You want to hire an investment adviser who will make investment recommendations and is also willing to be available and answer questions about them.

Will The Adviser Provide Written Recommendations?

Because evidence of a prudent process is your best defense if you are sued over investments, you want someone who will provide written backup for the recommendations being made.

Get the Right Documentation.

The investment advisory agreement should address the issues listed here.  Ask to review the adviser’s standard contract for ERISA clients as part of any RFP process. The adviser agreement should be negotiable.  If the contract is too one-sided in favor of the adviser, determine the extent to which the agreement is negotiable.  This may help you determine whether the candidate is eliminated from consideration.  And remember, the hiring fiduciaries must receive the required ERISA disclosure of fees (called a 408b-2 disclosure) and determine that the fees are reasonable before going ahead.

Considering all of these items, it should be clear that when looking to hire an investment adviser, sending out an RFP should be the second step.  Your first step should always be, having a conversation with your trusted ERISA counsel.

Carol Buckmann is a founding partner at Cohen & Buckmann PC, and has practiced at major law firms specializing in the areas of employee benefits and executive compensation for over 30 years. Carol frequently blogs, writes articles and is quoted in the media about current employee benefit issues.


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