Employer plan sponsors often ask me which investment adviser credentials are most important to look for when hiring a 401k investment adviser. As a 401k investment adviser, I have observed a number of plan sponsors hiring the wrong advisers because they aren’t looking at the right investment adviser credentials and are using an incorrect set of criteria to judge who is best.
Following are some universal, common sense criteria that plan sponsors can apply when hiring a 401k investment adviser along with important investment adviser credentials to evaluate. The information is divided into what I would consider the three major categories plan sponsors should evaluate: Fiduciary Responsibility, Firm and Background.
Investment adviser credentials: AIF
A big part of your job is to ensure that your 401k plan is always in fiduciary compliance. There are plenty of 401k investment advisers to choose from who are fiduciary compliance specialists. Look for the Accredited Investment Fiduciary (AIF) designation as an indicator of who is capable and qualified in this area. This is one of the more important investment adviser credentials to check.
Fiduciary liability insurance
The 401k investment adviser you are thinking of hiring should be able to produce a certificate of insurance showing fiduciary liability coverage. Don’t accept assurance from the lead sales professional that coverage exists. Many of my competitors “self-insure” when it comes to fiduciary liability insurance (which means they don’t have any).
Written fiduciary promise
Many investment advisers are not excited about putting their fiduciary responsibilities to your plan in writing. Print off an unsigned version of a fiduciary pledge and ask them to sign it. If an adviser is unwilling to put these sort of common sense promises in writing, drop them from your search.
Work for an investment advisory firm
This may seem logical, however, there are a lot of plan sponsors that hire accounting firms or banks to provide 401k investment advisory services to their plans. Hire a professional who works for a firm whose core business is providing investment advice. There is a major difference in the quality of advice you will receive.
Work for an RIA
I admit that I am biased since my firm is a Registered Investment Advisory (RIA) firm. RIAs are different from brokers. A RIA is required to put a client’s best interests first and act as a fiduciary with regard to any recommendations shared. Brokers work for their brokerage firms, not their clients. In addition, the DoL’s final fiduciary regulations provide loopholes for brokers to escape their fiduciary responsibility. Simplify the issue so you don’t have to worry about loopholes. Hire a RIA.
No conflicts of interest
Many employers use investment advisers who are required to recommend proprietary products or who aren’t able to work with the entire universe of investment options (there are more than 30,000 investment options!). Investment advisers who work for brokerage firms or mutual fund companies fall into these categories. They are conflicted. Hire an adviser who has no conflicts of interest and will make the best recommendations for your plan and participants.
Don’t hire an investment adviser that is also an asset manager or recordkeeper. For example, many employers use mutual fund companies as their investment adviser as well as asset manager and/or recordkeeper. No surprise, these investment advisers tend to overuse the investment funds their mutual fund family offers. These types of advisers have a conflict of interest which compromises their objectivity. As a result, following their recommendations may be a breach of your fiduciary duty.
Hire the best consultant
Check each prospective investment adviser’s background. You should find academic degrees in economics, finance and/or investments. Although English and music majors are smart too, they really don’t have the right academic credentials for this business. Move on to continuing education in the form of professional certifications. There are many investment adviser credentials and professional certifications that are relevant and nearly all have some sort of continuing education requirement. Finally, check and see if the adviser has a deep history of working with 401k plans your size. Ten years is not enough. A strong 401k plan adviser needs to have experienced a number of significant up and down markets — not just one.
Check investment adviser credentials on BrokerCheck
Studies have shown that investment advisers who have been sued in the past are likely to be sued again in the future. You shouldn’t work with problem advisers. Check the background of the advisers you are thinking of hiring using BrokerCheck. BrokerCheck is a free service provided by the Financial Industry Regulatory Authority (FINRA), a financial industry regulatory agency under the direction of the Securities and Exchange Commission (SEC). Any violation you find on the BrokerCheck website should cause you to drop an adviser from the list of advisers you are thinking of hiring.
Avoid hiring the best sales team
This is the most common mistake I see plan sponsors make. But how do you avoid it? Some investment advisers are really good sales professionals! Try to identify if the sales professional is actually going to be working on your business if you hire them. Most investment advisers that are sales professionals first and consultants second typically do not enjoy servicing the business they sell. They leave the servicing function to others.
Since your ongoing relationship is going to be with the consultants servicing your business, make sure you spend the majority of your time during the sales process talking with them, not the sales professionals. Many times the service team (which you are about to become assigned to) is not of the same caliber as the sales team. The quality of the advice you will receive, reports you will review, and service you expect to experience, are often not the responsibility of the sales person trying to get your business.
Finally, the SEC has put together a nice list of questions that you may wish to consider asking a prospective investment adviser. Once you find a set of advisers that meet all these criteria, then it is just a matter of determining which one has the right cultural fit for your organization.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or email@example.com.
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or firstname.lastname@example.org or visit the firm’s website at: https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.