SEC Seal

A Summary of the 2005 SEC Study of Pension Consultants

SEC Seal

In 2005, the Securities and Exchange Commissions (SEC) published a study of investment consultants who are hired by pension plans to pick managers for them. The SEC conducted focused examinations of twenty-four pension consultants, representing a cross-section of the pension consultant industry.

The SEC’s first finding was that more than half of the pension consultants provided products and services to both pension plan advisory clients and fund managers on an ongoing basis. This can be considered a potential conflict of interest, as the consultants become more likely to steer a pension fund towards the fund managers from whom they receive revenue. A third of the consultants hosted complimentary conferences for their pension plan advisory clients, but as it turns out, the expenses were paid by the money managers who paid a fee to attend the conference. The SEC found that ten (or 42%) of the consultants enjoyed a healthy revenue stream from selling performance evaluation software to fund managers. Not coincidentally, the SEC found that certain fund managers bought virtually identical pieces of software from multiple consultants.

As if the cozy relationships with the fund managers wasn’t problematic enough, the SEC found that fourteen (or 58%) of the consultants had monetary relationships with broker-dealers, allowing them to “recapture” some of the commissions paid by their pension plan clients. Two of the consultants did not even bother to disclose this arrangement.  The broker-dealer relationships provide another vehicle for fund managers to funnel even more payments to the consultants. Compounding this problem, nine (or 38%) of the consultants employed advisory representatives that were also registered representatives (i.e., brokers) of a broker-dealer. Let’s see now—the pension consultant is paid directly in proportion to the volume of trading done by the pension plan—what could possibly go wrong with that?

The icing on the cake is the SEC’s statement that many pension consultants do not consider themselves to be fiduciaries to their clients. They believe that they have taken appropriate actions to insulate themselves from being considered a “fiduciary” under ERISA. The SEC report further clarifies, “As a result, it appears that many consultants believe they do not have any fiduciary relationships with their advisory clients and ignore or are not aware of their fiduciary obligations under the Advisers Act.” Clearly, the SEC takes a dim view of consultants who consider themselves exempt from acting as a fiduciary to their clients. Lastly, the SEC found that many consultants did not maintain policies and procedures to prevent, manage, or disclose conflicts of interest to their clients.

While some will argue that this study is almost a decade old and the pension consulting firms have likely addressed the issues raised by the SEC, we would challenge them to explain why we keep running into “pay-to-play” scandals such as this one in Rhode Island and this one in New York. If you would like to work with a company that understands and embraces the fiduciary duties that are owed to its clients (both individual and institutional), please call us at 888-643-3133.