Can an Investment Advisor be a Manager as well?

Q: Are there any fiduciary issues in assuming the role of both the investment advisor and manager?

A: We are not aware of anything that prevents an investment professional from assuming an investment advisor and investment manager role simultaneously; even to the extent of a registered investment advisor (RIA) including a mutual fund it manages as an option or QDIA in retirement plans to which it is acting as the investment advisor (Pending legislation regarding investment advice may change that).  However, is it a good idea?  By assuming both the investment advisor and manager role you create a conflict of interest, which makes fulfillment of a fiduciary's duty of loyalty less reliable.

A fiduciary’s primary duties to participants, according to ERISA 404(a), include loyalty, exclusive purpose and prudence. ERISA also speaks to the relationships formed when carrying out these duties by specifying certain prohibited transactions in ERISA 406(a) and 406(b).  The essential thrust of these duties and specified prohibited transactions is that fiduciaries must act solely in the interest of plan participants. 

As an example, let's assume that one's intentions are honorable and the advisor has determined it is in the participant's best interest for the advisor's mutual fund to be an option in the plan.  The mutual fund has cleared all screens specified in the objective due diligence process documented in the investment policy statement, the performance is competitive when compared to the fund's peers and an appropriate benchmark, it is aligned with the plan's stated goals and objectives, and even the related fees and expenses are below the industry average. One could still argue that the conflict makes it impossible to ensure that the participants are well served going forward because of the significant issue that the advisor is now in a position to monitor itself.  Will the advisor replace, or recommend replacement of, its mutual fund if it is called for?  Can the advisor remain objective or is even the appearance of impropriety problematic?

We believe the appearance of impropriety creates issues that will be difficult to manage. Any conflict of interest puts the fiduciary in a position where difficult choices may have to be made, which is why we always recommend that they be avoided if at all possible.  In this example, choose to be the investment advisor or the investment manager, but not both.

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Comments

[Steve Smith]

I wonder: Would the same principle apply to a bank (or bank trust department), acting as trustee; and using its own services in functioning as 1)trustee 2)advisor and 3)portfolio manager?

[Rich Lynch]

There is nothing we are aware of that prevents a bank (or bank trust department) from functioning as a 1)trustee, 2)advisor, and 3)portfolio manager, however, in general separation of those roles is preferred as well. One exception might be where cost savings can be realized, particularly as the asset size gets smaller. In that case, the fiduciary has to weigh the importance of structural checks and balances vs. lower fees and make a judgment call. In all cases, an organization that is already engaged as an advisor should not be involved in the selection of the portfolio managers if they are competing for that role as well.