Five Questions to Ask your Investment or Pension Consultant

Many organization know they could benefit from the professional advice of an investment or pension consultant, but do not know where to find one that will be appropriate for their organization. Added to this is the fact that some consultants have embedded conflicts, or service models, that do not fit all plan sponsors' needs or budgets.

We’ve put together five important questions that plan sponsors should keep in mind when looking for consulting support. These questions, while by no means exhaustive, are a good place to start. If you are in the market for a consultant, or are currently working with one, you will want to ensure you are comfortable with their answers to each one of the following questions:

Topic: Expertise

1. What is your experience consulting to other similar institutional investors (both in terms of your firm and personal experience)? What specialized tools and research does your firm provide and how does this benefit your clients?

It is important to ensure that both the firm and the individual involved have the necessary skill and expertise to provide the services and advice you require. Both the firm and individual should be established in the industry and be committed to their consulting business.

Topic: Conflicts

2. What other services does your firm, or a related entity, provide? Where these services could create a conflict of interest (perceived or otherwise), how does your firm manage this to ensure that you are able to act in the best interest of the client?

As a fiduciary, you will want to ensure that there are no lines of business within the firm or alliances with other firms that could possibly create a conflict of interest or impair the consultant's ability to offer unbiased advice.

While having a plan to manage a potential conflict of interest is a must, consulting firms that have no ties or affiliations with investment management firms, or other financial institutions, and who do not offer services that could conflict with their consulting businesses, are the best positioned firms to provide a client with unbiased advice on investment issues.

Topic: Fees

3. How is your firm compensated by your clients (all sources monetary or otherwise)?

There are various ways a consulting firm can get paid (i.e. hourly fee, retainer, on a project basis, commissioned selling or directed trading commissions).

You will want to be able to monitor the total fees generated and ensure that they are appropriate based on the value added provided by the consultant and compared to industry norms.

Be aware of fee arrangements that may not be in your best interest. An example of this would be an arrangement that motivates a dishonest consultant to generate extra revenue by replacing a manager that is currently out of favour, for temporary reasons, to generate extra revenue. In a retail investment environment, this practice is known as ‘churning’.

Topic: Service Model

4. Can you describe your service model in terms of deliverables and the mechanism for delivery?

As a fiduciary, you will want to know what to expect from your consultant, in terms of level and detail of reporting. Who will attend meetings to present reports and discuss results? You will want to ensure that the service model aligns with your requirements (i.e. is it designed to encourage long-term relationships? Is it project oriented? Is it designed to maximize their profit and promote short term thinking?) and that the process the consultant uses to make recommendations is transparent.

Topic: Unique Capabilities

5. What unique capabilities and deliverable can we expect from your firm? How will these be of benefit?

In short, you will want to see what tools are available that will assist you, as a busy fiduciary, make better decisions and monitor the investments. Leading consulting firms have the ability to make the complex intricacies of investing and distill them into a clear and concise format.

Ask yourself: will these unique services benefit the fiduciaries and will these services benefit the members? The answer of course should be YES!