Westminster Consulting Brochure Defined Contribution & Defined Benefit | Page 18

Improper Roles for Advisors
By Gabriel Potter AIFA

®

Senior Investment Research Associate at Westminster Consulting

White Paper

“There are known knowns. There are things we know that we know.
There are known unknowns. That is to say, there are things that we know we don’t know.
But there are also unknown unknowns. There are things we do not know we don’t know.”
US Secretary of Defense, Donald Rumsfield

A Frightening Trend: Improper
Duties for Advisors
At Westminster Consulting, we typically select topics where we
can offer some unique insights while being entertaining or, at
least, informative. Still, there are times when our consultants have
noticed widespread errors so egregious that we feel compelled to
provide a universal warning. It is our hope that employers and
institutions recognize and correct these mistakes before lasting
damage is done.

A casual and trusting relationship with a client can even result in
inappropriate investment advice, subject to fiduciary principles &
liabilities, being given by the non-fiduciary advisor with serious
consequences for the client and the advisor. The advisor, without
malice, continues business as usual. The client thinks: “My advisor
has assured me we are following the rules so I’m protected.” In
reality, the client is often not protected because neither they, nor
their advisor, have fully understood their duties. In other words,
“they don’t know what they don’t know.”

The mistake we see far too often is this: employers have tasked
non-fiduciary advisors with fiduciary duties and vice-versa.

How This Happens: A Typical Scenario
The laws that govern institutional investing are constantly in
flux. The Employee Retirement Income Security Act (ERISA),
having started in 1974, is relatively mature but the application and
expansion of these legal constructs are ongoing. For example,
Uniform Prudent Management of Institutional Funds Act
(UPMIFA) and the Pension Protection Act (PPA) circulated in a
wave of reform in 2006 through 2007.
On the other hand, institutional relationships with advisors and
brokers may not change for decades. A complacent relationship can
easily develop over the years between a plan sponsor and advisor.
Over time, an institution’s assets may grow beyond the level of
expertise and sophistication of the advisor. Eventually, prices
become uncompetitive and, ultimately, abusive to the client’s trust
and loyalty. Without pressure, the service level may devolve and
the plan