A way forward for the Plan Adviser industry – investment selection and removal

Last Updated: September 08, 2016

Performance transparency is the plan adviser’s path to a better future. As a group, we need to openly choose to move off of the path we have been on and move onto this new path. The one we have been on was set for us by the historical roots of the financial services industry. That failed path based its “professional” value upon relationships and is leading us off the cliff.
It fails us because the value proposition is based upon a perception, not reality. However, by measuring our performance contributions for our clients, we have the opportunity to improve not only our clients’ results, but also ours. A basic tenet of economics states that two parties will only engage in a financial transaction with each other when each party believes they are getting the better end of the deal. Otherwise, one of the two parties will not engage in the transaction. In our case, our clients must believe that their plans will be better off after hiring us than before. However, as we all know, the client rarely has a clear understanding of the exact performance improvement we will make to the plan. They only have a vague expectation that things will be better, that someone more skilled than they will be watching out. A plan’s performance can be measured in three aspects that are under the direct influence of the plan adviser.
  1. The plan’s investment lineup performance can be measured relative to other investment alternatives.
  2. The plan’s record keeper services and fees can be measured relative to other record keepers that compete for the plan’s business.
  3. The plan’s performance can be measured in its ability to prepare its participants for retirement.
Other facets of the plan adviser’s job, such as fiduciary training and plan design guidance, will to one extent or the other, impact one of these three performance standards. For now, let’s use our role in selecting and removing plan investments to compare the current path that we are on as an industry to a new path that is available to us. A plan adviser performs a critical function in the selection and removal of plan investments. Plan advisers, in general, would point to this service as one of our primary responsibilities. But, surprisingly this is one of the hardest areas to judge the plan adviser’s value to the plan. To illustrate, consider this typical situation found on our current path: An investment is added to the plan’s lineup, as recommended by the plan adviser. The plan adviser performed the due diligence and presented the information to the client who then accepted the recommendation. At the time of the addition to the plan’s lineup, the investment had a stellar track record – why else would it be recommended? From that point forward, the now added plan investment’s performance is compared to a benchmark and reviewed periodically. The investment’s return is compared to the benchmark’s return for the most recent one-, three-, and five-year time periods. Several years in the future, when the plan investment’s performance slips relative to its benchmark, the plan adviser recommends to the client that the investment be removed from the plan. Did the plan adviser provide perceived or real value to the plan? We can only be sure of perceived value. There isn’t any way to know if real value has been given to the plan. The only way to find out would be to track the performance of the newly-added investment, compared to its benchmark, only during the time the investment was added to the lineup until it was subsequently removed from the lineup. With this data, we would know if the investment performed better than the benchmark during the time it was in the plan lineup. Without this time specific data, there is no way to know if the plan adviser’s recommendation helped or hurt the plan’s performance relative to other investment alternatives that the plan might have chosen. To further illustrate, consider this hypothetical situation involving a broker and individual client:

Stock ABC has risen in price from $50 per share to $100 per share in the last 36 months. A broker calls her client and recommends the client buy ABC stock and points to its impressive returns over the past three years. The client buys the stock at $100 per share. Subsequently, over the next year, the stock falls from $100 to $90.

If we were to judge the company’s performance (i.e. its stock price), we would determine, all things being equal, that it has performed very well, going from $50 to $90 per share over the four year period. However, shouldn’t we also judge the broker’s performance? Isn’t that what’s important to the client – the broker’s ability to select stocks for their client? The broker, in this case, has not performed well. Stated another way, the client has not received real value from the broker. In fact, they cost their client money.

In our case, our real value lies in our ability to successfully select and remove investments for the plan. Unfortunately, by and large, plan advisers do not track the performance of investments that they have recommended for the time period that it was in the plan lineup. Therefore, we do not track nor report our own performance for the plan. Since this crucial information is never communicated to the client, they cannot ascertain our real value. Any value the client assigns us therefore is perceived only. As a result, in the current plan adviser arrangement, the client’s belief that they will receive greater value in a financial transaction with us is not based upon knowable facts. It must be based solely on perception. They enter into a transaction with us because they perceive they will get the better deal. Currently, they do not have the ability to judge it or prove it on facts. This perception of value versus tangible or knowable value opens up our “profession” to personable imposters, which hurts us all. To move our profession onto a sustainable path, we must have a clear and understandable value proposition. A free market simply will not support it otherwise, in the long run. For our profession to thrive in the future, we must embrace performance transparency and be willing to measure our value. Performance, not relationships, should be our standard. In this way, we will achieve what everyone is seeking – a trusted adviser; an honorable profession.
PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.


Brian Allen, CFP®, Founder & Chairman



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