From the Mouths of Advisers

Far from pre-approval of the FINRA oversight normally associated with a retirement plan adviser’s brochures, presentations, and Web site, there is one area where each retirement plan adviser has a degree of free reign (within reason) over how they present, position, and describe their product and services. Advisers use their voice every day to make an impact with clients and prospects. The spoken word is temporary and fleeting—but that gives no adviser carte-blanche to speak without thinking!

Our firm recently conducted a search for a defined benefit plan recordkeeper on behalf of a plan sponsor. The plan assets were approximately $25 million, and the client’s needs included actuarial, administrative, benefit-check payments, custodian, and investment management—nothing out of the ordinary. A surprising aspect of this search was the frequency with which many advisers used three phrases: “back-tested,” “The Brinson Study,” and “best practices.”

There is nothing wrong with any of these references, per se. However, it is the context, accuracy, and understanding of these easy-to-roll-off-the-tongue references that render the phrases ill-fitting or dangerous when swirling around the ears of the receiver.

Back-Tested—Results or Data?

We can be brief on this one. Results are never “back-tested”; it is the data that are. During this recent search, asset managers and plan advisers used the statement “our results are back-tested.” These statements are frequently followed up with a eureka-esque quote that goes something like “and it works!”

Having more than a cursory experience with the back-testing of data, I will share what I consider a well-kept secret of back-testing: You will never see or be presented a product where back-testing of the data has failed to support the intended outcome. Think about it.

The Brinson Study

Many in our industry reference the Brinson, Hood, and Beebower Study from 1986.  Although the work addresses the variability of returns as impacted by the asset allocation of a portfolio, it does not impede the ignorant adviser from making inaccurate or outlandish claims. Advisers should know better than to credit the trio with findings that they had no intention of proving—but many do not. Sharing inaccurate “truisms” is, as it should be, a fast trip to a short career in institutional investment services.

If a retirement plan adviser is going to use this study—or any academic research—to support their sales efforts, I suggest he follow three simple rules: 1) read the research;

2) comprehend the study; and 3) be verbally adroit at accurately communicating any conclusions reached in the research.

Best Practices Revisited

I used to be guilty of abusing this phrase myself. The phrase “best practices” can be interpreted in any number of ways. You may even say you use best practices in the management of your own business or team. Who wouldn’t? It is normal to want to do so.

The logical step of incorporating industry best practices into your service model centers around the work you perform for clients. When you tell clients you are employing “best practices” in advising their plans, or that their work in managing the plans is a “best practice,” what does that mean?  Are you able to confidently state that you are employing industry best practices for your clients? You may believe so, but how do you know? Can you know?   

A good exercise would be to picture yourself on the witness stand (you could be there one day) fielding the question (from plaintiff’s counsel), “Mr. or Mrs. Adviser, you stated to my client that you employed best practices. What tests or research did you conduct, as it relates your client services, to determine that your practices are the best in the industry?”

After one responds to that inquiry, the adviser is positioned for the zinger, “Can you produce for the court the detail of your analysis and the corresponding results that support your claims of employing best practices for the plaintiff?”

That is not a position that most advisers would relish defending.

Thinking before speaking is clearly a best practice.

Steff C. Chalk is CEO of the Fiduciary Consulting Group, a fee-only fiduciary consulting practice ­serving corporations and nonprofits. A judge for the PLANSPONSOR Retirement ­Plan Adviser of the Year award, and a faculty member of the PLANSPONSOR Institute, he is also the ­co-author of How to Build a Successful 401(k) and Retirement Plan Advisory Business.