florida governmental financial officers association
TRANSCRIPT
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Florida Governmental Financial Officers Association
2006 Annual ConferenceJune 10 - 14, 2006
Scandals, SEC Investigations, Fiduciary Duty: What Should We Expect of Our Pension Consultant?
Brian Zeiler, CFA(770) 618-2153
Callan Associates Inc.300 Galleria Parkway, Suite 950
Atlanta, Georgia 30339(770) 618-2140www.callan.com
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Scandals, SEC Investigations, Fiduciary Duty: What Should We Expect of Our Pension Consultant?
Should our custodians, money managers and pension consultants be fiduciaries of the pension plan? What should we expect from our consultants in the form of disclosures, openness and fair dealing? What actions, relations and/or business dealings are not in the plan’s best interest?
Brian Zeiler, CFAVice PresidentCallan Associates Inc
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Who is a Fiduciary?
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Who is a Fiduciary?
ERISA Section 3(21)(A)
A public plan looks to ERISA for guideance. A fiduciary under ERISA is any person who:
Exercises any discretionary authority or control over the plan’s management;
Exercises any authority or control over the management or disposition of the plan’s assets (an “investment” fiduciary);
Renders investment advice for a fee or other compensation with respect to plan funds or property; or
Has any discretionary authority or responsibility in the plan’s administration.
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What is a Fiduciary’s Basic Duty?
• To act solely in the best interest of the plan’s participants and beneficiaries and for the exclusive purpose of– providing benefits for participants and their beneficiaries and
– defraying reasonable expenses of administering the plan
• To act prudently
• To diversify the investment of the plan’s assets
• To act in a manner consistent with the plan’s documents and instruments governing the plan
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A fiduciary is subject to the prudent person standardof care. Under ERISA Section 404(a)(1)(B),
“To Act Prudently” is to act:
(…with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person
acting in a like capacity and familiar with such matterswould use in the conduct of an enterprise
of a like character and with like aims)
What is the Applicable Standard of Care for a Fiduciary?
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Who’s a Fiduciary?
ServiceProviders
AttorneysBank Custodians
Investment Consultants
Actuaries
Accountants/Auditors
Insurance Agents Other Service Providers
Question:Are attorneys, accountants, actuaries, insurance agents, custodians, consultants, and others who provide services to a plan considered plan fiduciaries?
Answer:No. They are not considered plan fiduciaries solely because they render such services. Recent cases hold that attorneys, accountants, actuaries, and consultants do not possess or exert the necessary discretionary authority or control regarding management of the plan to cause them to be fiduciaries under ERISA.
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Service Providers
Question: If service providers are not considered plan fiduciaries,are they nonetheless responsible for the services they provide?
Answer: Yes. Although not plan fiduciaries, they may be liableto the plan or plan sponsor based upon traditional theories
of negligence, malpractice, or fraud.
More generally, “loyalty to the beneficiary” underCommon Law suggests that service providers have a
fiduciary responsibility for the specific servicesthat they contractually have agreed to provide.
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Selecting an Investment Consultant
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What is the consultant’s philosophy oninvestment performance and risk control?
• How does the consultant define successful investment performance? Is success defined in meeting your organization’s needs or in comparison to a universe of your peers?
• Does the consultant focus on understanding your long-term objectives and risk tolerances?
• How will the consultant work with you to establish an appropriate level of risk? How will the consultant measure this risk and control it?
• How does the consultant advise meeting your performance needs?
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Does the consultant have the breadth and depth of experience to guide your organization through complex, challenging market cycles?
• How long has the consulting firm been in business? How does the consultant bring its best thinking to your organization?
• How experienced are the firm’s consultants, research analysts, and client service professionals? What are their professional backgrounds?
• Has the consultant worked with organizations similar to yours, and if so, for how long?
• How does the firm and its people stay abreast of emerging investment trends and new products? How do they analyze and reach a decision on what is and isn’t appropriate?
• In the course of your interaction with the consultant, have their questions demonstrated an understanding of the specific issues faced by your organization, or are the questions generic? Did the consultant do their homework about you?
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What is the consultant’s business model?
• How would the consultant answer the questions recommended in mid-2005 by the SEC and the DOL?
• Where do the consultant’s potential conflicts of interest lie and how are those conflicts managed? What kind of disclosures do they routinely make to clients? What additional information can you obtain upon request?
• Does the firm have a written code of ethics? If so, how is it enforced?
• What is the consultant’s source of information on investment managers? Does the firm support a fully dedicated research operation? How much of the consultant’s research is proprietary, and how much is third-party?
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Does the consultant have the conviction to confront tough investment decisions, or will they tell you only what they think you want to hear?
• Does the consultant provide straight talk on the issues that count?
• Under what circumstances has the consultant recommended a manager termination?
• How has the consultant justified participation or non-participation in non-traditional asset classes?
• What was the consultant’s biggest mistake?
• What examples can the consultant give on how to recognize a problem and fix it?
• How does the consultant determine when change is warranted or when patience is the better course?
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How well does the consultant understand investment managers? How is the information shared with clients?
• What methods does the consultant use to learn about the competitive issues, strengths, weaknesses, innovations and business models used in investment management?
• How has the consultant acquired their investment manager information?
• Does the consultant have the experience and access to determine whether an investment manager’s results are truly a function of the process it says it follows?
• What is the consultant’s process for investment manager search? Does the firm use a pre-approved list or a customized list created specifically for your needs? Does their search process demonstrate insight into investment management businesses? How much does a firm’s qualitative knowledge enter into their manager search process?
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Is all research from all consultants equal?
• Is the consultant’s research proprietary? Or does it come largely from third-party sources, possibly for an additional fee?
• Will you be getting in-depth, practical analyses of investment and marketplace trends, investment product innovations, and the experiences of your peer group?
• Is the research focused on issues important to you?
• Does the firm offer research specialists in various asset classes? If so, what kind of access will you have to them?
• Are the researchers and analysts fully dedicated to that function, or do they have additional client service responsibilities?
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How reliable is the data on which you’ll be basing your decisions?
• From where does the consulting firm derive their data?
• What are the advantages and disadvantages of proprietary databases versus purchased databases?
• If the consultant develops and maintains proprietary databases, what is their methodology for collecting and validating data? How do they create and maintain valid peer groups?
• If databases are purchased, how does the consultant vet the accuracy, consistency and timeliness of the data?
• How does the consultant collect and record qualitative insights and share them with clients?
• Who is analyzing and interpreting the data for you? Does the consultant have the institutional memory to view the data in the context of long-term market cycles?
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What kind of educational services will the consultant provide?How will they keep you informed about industry issues?
• What are the consultant’s plans to keep you informed of industry trends and issues?
• Does the consultant offer formal educational opportunities such as forums about industry trends, investment outlooks, and practical research? If so, does the consultant bring in recognized experts from outside the firm or are the programs limited to internal resources only?
• Does the consultant provide an opportunity for you to meet to exchange ideas with representatives from organizations similar to yours and with investment managers?
• Does the consultant have the capability and resources to educate you about the primary issues and considerations relevant to help you effectively carry out your fiduciary responsibilities?
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How do you weigh cost versus value?
• Will the consultant provide relevant services, such as: assisting with developing investment policy statements; searches for investment managers, record keepers and/or custodians; evaluation of alternative investments programs; asset allocation/liability analyses; and/or manager investment structure services?
• Which consulting services are being included in the fee you’re being quoted?• Does the consultant prepare their own reports or do they outsource them to a
third party provider who charges a fee? If they outsource, what priority will your reports take versus others’?
• How frequently will you receive the reports, and how much help will you get in interpreting them? Can you expect in-person meetings to discuss the reports?
• What is the cost for a full service consulting retainer versus unbundling the services that focus on your priorities?
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How compatible are you with the consultant’s team?
• Is the consultant’s style conservative or aggressive? Does that fit with your organization?
• Does the consultant have experience and proven interest in serving accounts similar to yours?
• Are the consultants pitching your business the ones who will be servicing your account? Can you meet the entire team and/or visit the firm?
• How often will you have contact, and with whom? In addition to your primary consultant, will you have direct access to others who are doing the work, such as research specialists?
• Does the presentation team seem cohesive? Have they worked together on client challenges over a series of market cycles?
• Does the team consist of employees of the firm or owners with a stronger incentive to perform prudently on your behalf?
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Conclusion
• Manage your consultant - set priorities and objectives, approve work plans, stick with timetables for decision-making, and provide necessary feedback and critiques.
• Be open. Make the appropriate staff and decision-makers available to your consultant. Provide opportunities for strategizing and brainstorming.
• Consultants can’t make your decisions for you. You are the fiduciary. The consultant should provide you with guidance and the most current knowledge for making the right decisions.
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About Callan Associates, Inc.
• Callan is the largest organization dedicated exclusively to investment consulting
– Offices in San Francisco, Denver, Atlanta, New Jersey and Chicago
– 166 Employees , including 121 investment professionals supporting 29 Generalist Consultants
• Callan is an independent and stable organization– Established in 1973
– Owned entirely by 56 active employees
– Average tenure of consulting staff: 14 years
• Callan has a diverse and stable client base– 290 clients
– Average tenure of clients: 9 years