Under the Employee Retirement Income Security Act, plan sponsors are allowed to hire investment advisors as co-fiduciaries. Carlos Panksep, general manager of the Centre for Fiduciary Excellence, LLC, wrote an article for the American Society of Pension Professionals & Actuaries about how to conduct a fiduciary assessment of your investment advisor.
Advisors who are good at what they do use independent fiduciary assessments as a governance tool, Panksep wrote. Assessments keep them accountable to the assessor and the investor, creating a firm reminder of the professional values of the firm.
Regular assessments force the firm to maintain processes that are sustainable, regardless of market conditions, thereby avoiding ad-hoc management decisions.
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The article recommends beginning any assessment with a background check, including civil lawsuit databases and a review of public information such as from the SEC and Financial Industry Regulatory Authority's BrokerCheck if applicable.
The second step is to review all of the firm's investment-related documents to ensure the fundamentals are sound, including the investment policy statement and the service agreement. According to fi360's "Prudent Practices for Investment Advisors," the best investment policy statements include the duties and responsibilities of all parties involved; diversification and rebalancing guidelines with specific risk, return, time horizon and cash flow parameters; due diligence criteria for selecting investment options; monitoring criteria for investment options and service vendors; and procedures for controlling and accounting for investment expenses.
The assessment should also cover the advisor's procedure for asset allocation and should seek evidence of written communication with investment managers. Documentation is essential.
He added that a client file sampling is the best test of an advisory firm's attention to its clients. The report said that client files are excellent indicators of the state of the relationship and of the advisor's organizational skills.
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