Westminster Consulting Brochure Endowment & Foundation | Page 16

The Biggest Myth for Investment Consultants
By Gabriel Potter AIFA

®

Senior Investment Research Associate at Westminster Consulting

The Bad News
Many of our readers are fiduciary trustees for large pools of money:
pension funds, charitable foundations, employee welfare & retirement
plans, and so on. You, the fiduciaries, should be applauded for
adopting this burden, for it is often an under appreciated duty. As
fiduciaries, you are responsible for a great deal and the scope of your
responsibilities is ever increasing.
At Westminster Consulting, we sometimes are bearers of bad news. It
would be easier to tell investment committees all the ways that their
attention wasn’t required and how much more leisure time everyone
gets. In reality, we are obligated to explain where your fiduciary duties
lie.
Here’s where the bad news come in. We have spoken with trustees
working for a retirement plan or charity that have, in an effort to
offload fiduciary responsibility, hired a fiduciary consultant to help
manage their plan. Herein lays the Myth:
The Myth: “Our trustees hired an investment consultant with fiduciary
status. Our consultant has no conflict of interest because he is a
fiduciary! So, our plan is totally covered and we, the trustees, we are
no longer responsible for the plan.”
The Facts: This is wrong in two important ways.
Once you hire a consultant, even one that adopts a fiduciary standard,
plan fiduciaries cannot completely offload their fiduciary responsibility.
They may share responsibility with a consultant, but they cannot
offload it completely.
Most importantly, the plan fiduciaries will always be responsible for
overseeing the consultant. Why is this difficult? The sad reality is
that some consultants may claim to act as a fiduciary, but still have
major conflicts of interest.
The Perfect Example of Failure
As a reminder, what’s the difference between a broker and a
fiduciary? In summary, brokers are salesmen while fiduciaries are
legally obliged to act in your interests alone, without
conflict of interest or undivided loyalty.
Let’s consider the investment landscape for a
moment. For decades, investment consultants
and brokers working for wirehouses and
large brokerage firms were subject to a lesser
standard—the suitability standard—but now
the fiduciary standard is expanding to become
the new legal benchmark of behavior. The
salesman can compete by expanding their
business to include fiduciary lines of business,
but it is not clear when they are acting in their
own interest or for their clients.
Take a moment and watch this video. It
explains the difference between a broker and
fiduciary quite well.

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In the video, brokers are compared to neighborhood butchers selling
their wares, whereas fiduciary consultants are compared to dieticians,
trying to make the best recommendations for your overall health.
There’s nothing wrong with a knowledgeable butcher but—in the
end—they are salesman. Your butcher will never recommend going
next door to a competing fishmonger, or buying from the fruits and
vegetable store instead. So, it’s a simple solution: just hire a fiduciary
investment consultant and you are set, right? Not so fast!
Business Insider ran an exposé of a fiduciary investment consultant
(read the full article here). Business Insider discovered the fiduciary
firm had a significant conflict of interest because they were affiliated
with a broker-dealer. The firm had financial incentives to sell you their
own products. Or, as Business Insider put it, “the dieticians own a
butcher shop.”
How can fiduciary firms get away with this obvious conflict of interest?
The biggest reason is that brokers can dual-register as brokers and
fiduciaries. In other words, these fiduciaries can easily revert to act
like a salesman, subject only to a suitability standard, when selling
their products.
In reality, the biggest brokerage firms are filled with so-called fiduciary
advisors who wear multiple hats, selling on-platform products with
embedded fees whenever possible, despite the best interest of the
client.
In short, being a fiduciary won’t protect clients from conflicts of
interest.
Watch For These Red Flags
Get explicit documentation on your consultant’s total
sources of revenue. This information should be included
in the annual 408(b)(2) disclosure. If your consultant
accepts anything other than an explicit hard-dollar
fee for services, then there may be a conflict of
interest.
Does your consultant prefer to have custody
of assets? Do they use an investment
platform with specially vetted mutual funds,
separately managed accounts, or alternative
investments? These products typically have
special revenue and incentive arrangements, and
there may be a conflict of interest.
Look for a Series 7 License. If your consultant requires a
Series 7 license to practice, they may be dual-registered
with a broker/dealer and there may be a conflict of
interest.
How big is the disclosure? How complex? If the
disclosure is filled with pages of small print and
“Legalese”, it becomes easier for brokers to continue
business as usual without taking your best interests in
mind.