Trustees of retirement funds are individuals in their own right when it comes to ﬁnancial planning and preparing for retirement, meaning they need to obtain appropriate advice. Having a ﬁduciary duty towards retirement fund members puts them in the same position of having to avoid advice potholes when it comes to achieving the fund's objectives.
A retirement fund appoints a combination of service providers and the employee beneﬁts consultant and the asset or investment consultant fulﬁl the key advice roles. It is important for trustees to carefully consider the roles and responsibilities and what they should expect from their advisors in ﬁnding the best long term solutions for the fund and its members.
A good place to start in avoiding a disconnect between the advice needs of a retirement fund and the service being delivered by the advisors is to ensure complete alignment in terms of the objectives and needs of the fund. Documents such as the fund rules, communication policy and investment policy statement should be reviewed and updated on at least an annual basis and made available to all parties that are key in assisting the fund to meet its objectives. These objectives need to be well documented, and the requirements and responsibilities related to meeting them clearly deﬁned to avoid any room for excuses by the advisors if not fulﬁlling their duties. Quarterly and ad hoc fund meetings, where necessary, should be used to ensure that any uncertainty is cleared up and non-alignment addressed with the advisors. Allowing discontent to fester is not in the interest of the Fund as it can lead to a lack of cohesion and blame shifting between the parties involved.
Another very important consideration is the level of objectivity and independence of the advice received by the fund. This is a critical requirement for ensuring that the fund is provided with the best options when it comes to risk beneﬁts, administrative services and investment solutions. Subjective advice could result from a preference the advisor has for certain service providers with whom they work on other retirement funds but that may not necessarily suit the needs of the fund. Although advisors promote themselves as independent their preference for what they are most comfortable with and feel safe with rather than what the best solution is for the fund may result in a sub-optimal solution and outcome for members. An additional risk is that an advisor has a vested interest in promoting in-house solutions at the expense of lower quality solutions and higher costs to the fund. True independent advice is based on objectivity, transparency and seeking the best interest of the fund rather than serving the self-interest of the advisor. When it comes to the role of each advisor, trustees need to set clear boundaries for the advisors in terms of their areas of accountability and expertise, with each advisor sticking to their speciﬁc area of their
proverbial knitting. Where an employee beneﬁts consultant interferes with the design of the investment strategy and the selection of asset managers it can easily create an environment of tension and break the cohesion and trust between the various parties involved. It can also result in costly delays and mistakes in the design and implementation of the required investment strategy when the roles become blurred. As the advisor with the broadest view of the fund, the employee beneﬁts consultant has an important role to play in coordinating and guiding the Board when it comes to the complete solution set of the fund. This, however, does not provide the employee beneﬁts consultant with the license to interfere with the role and responsibilities of any of the other service providers. It is therefore important that documents such as the service level agreements between the fund and the various service providers and the investment policy statement clearly sets out the responsibilities of each role player.
While it is good to have the roles and responsibilities of the advisors documented in the service levels agreement and investment policy statement, service delivery by the advisors must actively be monitored on an ongoing basis. This can be achieved by the Board assessing the advisers against a scorecard that speaks to the contracted service requirements, as well as a self-assessment by the advisors themselves. Any deviation or gaps in service delivery should be addressed in a constructive manner and the required areas of improvement monitored. The ongoing evaluation of service delivery will avoid nasty surprises for all parties involved when it comes to the termination of services while ensuring that the necessary value is obtained by the fund for the service fees paid.
A ﬁnal pothole to avoid is a misalignment between the value the advisor is expected to deliver, and the service fee paid to the advisor. The service fee needs to be market related for the level of service required. The basis on which the fee is charged should align the interest of the fund and the advisor. For example, regular reporting and administrative functions required for the eﬃcient functioning of the fund should be compensated for on a ﬂat fee or rand amount basis in compliance with the regulatory guidelines.
When it comes to the fund’s assets, an asset-based fee will be more appropriate as an incentive to grow the assets of the fund on a competitive and sustainable basis. The asset-based fee can be linked to a sliding scale, and where appropriate capped, as the fund assets continue to grow, and the level of advice required relative to the asset size needs to be balanced out. Not paying an appropriate fee for the advisory and administrative services provided to the fund can easily lead to a lack of commitment or complacency with the service provider.
In avoiding these common advice potholes, the best interest of the fund members is served and a healthy level of professionalism is maintained between the fund and its service providers.