Hands-on Oversight

How well do you run your business? Are you in charge, or does someone else oversee your firm’s day-to-day operations? More importantly, do you oversee and proactively take responsibility for the investment process? If you responded affirmatively, great. That is where you need to focus to serve your clients effectively.

Consider your practice three or five years hence. Would you be willing to transfer the responsibility for oversight of your investment process to another? Perhaps not.

Do you oversee your investment process methodically and consistently for each plan sponsor client? Perhaps not.

Would you be willing to instill a more rigorous investment process?

As retirement plan advisers, you continually make investment-related decisions and, for many clients, investment recommendations. How successful are you at guiding their assets? 

If you and the effectiveness of your investment management expertise were to be measured, how would you and your clients measure up?

Setting Biases Aside

Every adviser, as well as every individual, approaches decisions with a certain amount of bias. Advisers bring these biases—be they behavioral, social, economic or cognitive—to the investment management function of their relationships. If you disagree, that’s bias at work!

If you accept the premise that all retirement plan advisers are biased, then I ask you: What is your bias?

Are you aware of your own preconceived notions, personal beliefs and heuristics, which likely have become part of your own “bias creep” when making investment management decisions? Many advisers will lament that they have either acted too swiftly when pulling the trigger to replace an investment manager, or they have dragged their feet too long when replacing an asset class within a portfolio.

If an adviser feels he had nothing to do with the timing or informally decides that it was just the right time to make the change, then perhaps he should become a bit more engaged in his own decision process. There is much to be learned by analyzing and looking back at how and when strategic portfolio decisions were undertaken.

Many retirement plan advisers lead a comfortable existence, content to live in the moment—and fail to conduct any type of true assessment of their own style, beliefs and decision process.

How many advisers can accurately articulate their own opportunities for improvement, in the parlance of improved performance, by waiting longer to swap a manager in a particular asset class? Many advisers accept the bias of one-year performance and permit it to outweigh three- and five-year performance by not waiting until these demarcations before putting a fund on a watch list and making a change. Do you?

Most retirement plan advisers are recklessly comfortable with the mentality of “as long as I have a documented process for how I make an investment decision, then performance can be defended in a courtroom setting.”

That may be true, but the forward-looking adviser does not accept such pabulum.

What and How to Measure

I believe that more performance measurement is on the horizon for all facets of our business and industry. Measurement is critical to knowing and understanding exactly what biases exist for any adviser. Until you have tracked at least 10 consecutive, unique investment decisions, I suggest that you really do not know.

I was introduced to my own biases approximately 12 years ago, when an Employee Retirement Income Security Act (ERISA) attorney said to me, “Good managers do not ‘get stupid’ overnight.” I took to heart what he said, and decided to challenge him and prove him incorrect on this premise by, of all things, measuring performance.

After reviewing approximately 15 manager changes during the prior five years, my eyes were opened to the fact that I had historically—repetitively and consistently—pulled the trigger on manager changes too early.

We now track manager changes as well as a handful of additional measures that help us to fine-tune our own overlay on the plethora of measurement tools available in the marketplace. What we additionally consider is not something that research houses or databases track. We evaluate our own bias and how such a bias can impact the overall client experience.

How aware are you of your own biases?

Steff C. Chalk is CEO of Fiduciary Consulting and Governance Group Inc., 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.”