0

Cliche or Aspiration?

A $ Trillion Platinum Coin.  Sounds preposterous, no?  The idea was seriously being promoted by people who are not crackpots.  Paul Krugman, Nobel Prize winning economist and Mohamed El-Erian, CEO and co-chief investment officer of PIMCO have both publicly endorsed the idea.  Neither love the idea, but recognize that the current political environment demands, an “out of the box” solution.

“Out of the box” thinking… a term invented by business consultants, has now become a cliche, its use is so wide-spread it has become meaningless.  And, yet, every successful business person and investment professional know that novel and unconventional ideas or approaches lay the foundation for their success.

Like all cliches.  “Out of the box” thinking contains a germ of truth.

Harrison Fiduciary Group’s business model represents an “out of the box” business model for the management and oversight of retirement and pension plans.  However, time and time again, people say “but that is not how we do it.”   In fact, a few weeks ago I was proposing an idea to someone at a private equity firm.  He had degrees from two Ivy League universities, no doubt earned a sizable income, and yet, all he wanted to know was “who else is doing this?”.  He didn’t want to consider something slightly different.  He simply wanted to blend in with effort else.  Kinda reminds me of adolescence.

Unless circumstances demand novel and creative approaches, most people avoid them.   To use another cliche, most people are more comfortable with the “same ol’, same ‘ol”.

However, today’s economic, and investment environment demand an “out of the box” response. Corporate earnings are lack luster.  As I discuss in my prior post, interest rates are bound to increase and create a new investment environment never experienced by a generation of investment professionals.  And, in the midst of these pressures, there is talk of the Treasury Department issuing a $ Trillion Platinum Coin.

Things can’t get more topsy turvy.

How are corporate fiduciaries responding?  Do they have the time and the skills necessary to fashion appropriate investment responses?  But, more importantly, wouldn’t their time be better spent on executing their business strategies?  All too often fiduciary oversight deflects corporate focus from core business initiatives to the ancillary role of

At Harrison Fiduciary Group we are fiduciaries.  We are not investment consultants nor are we investment managers.  We are not “selling” a particular investment strategy nor are we merely offering advice to plan sponsors.

Instead, we are professional fiduciaries who will make and implement decisions on behalf of a plan.  And, most importantly we will stand by these decisions in a fiduciary capacity.  Our sole mission is to act in the best interests of plan participants and retirees.

Yes, HFG provides an “out of the box” solution to corporate fiduciaries.  Plan participants deserve no less.

Continue Reading

0

Are Fiduciaries Paying Attention?

There are always naysayers.  Prognosticators and analysts who even in the best of times foresee disasters looming on the horizons.  I am very prone to be influenced by those cautious advisors.

However, over the course of my 25 year career, I have learned that more often than not the extremes rarely materialize and decisions based upon more moderate outlooks usually prevail.

And yet, right now, the magnetic pull of impending disaster and hyper-vigilant caution feels overwhelming.

Where will a crisis materialize? To name just a few potential catalysts, some of which were identified by global leaders at a recent gathering in Lake Como, Italy:

  1. Collapse of the Euro
  2. US Fiscal Cliff
  3. Middle East — either the Arab Spring or Israel/Iran
  4. Hard Landing in China
  5. Hyper-inflation.

Any one of these factors alone could trigger financial and/or political upheaval the likes of which our generation has never experienced.  But, what if 2 or 3 erupt concurrently.  I shudder to imagine.

As a fiduciary I worry about these things.  I’m required to make prudent decisions which can have long lasting implications for people’s retirements.  I take this responsibility very seriously.  Workers and retirees have worked long and hard to assemble their retirement nest eggs.

Of course, I can’t predict which crisis will occur or the consequences of any of these crises.  And, I’m very skeptical of anyone who offers any predictions, especially predictions with specificity.

Ever cautious, however, I’m trying to understand how to plan around these various potential crises.  Most importantly, I want to know how other investment fiduciaries are planning;. or if not planning, whether they are thinking about each of these various factors as they manage other people’s money.

I’m particularly concerned due to the general herd-like mentality of Wall Street, investment professionals and retirement professionals.   For the most part everyone does the same thing.

For example, before the 2007 financial crisis, and as $billions were being directed into various mortgage-backed securities and derivatives, industry professionals from various disciplines were all taking comfort in VAR — Value At Risk.

I never understood VAR, and I still don’t.   However, it was a numerical representation of the “risk” inherent in an investment portfolio.  Investment professionals cited VAR as if it was the holy grail. Everyone felt that they had mastered risk because the VAR calculations indicated so.

In retrospect, VAR proved to be overly narrow and somewhat simplistic.  VAR was meaningless as markets plunged and portfolios were depleted.  VAR was ephemeral, but the losses were real.

I’m nervous about today’s equivalent of VAR, and I don’t even know what it is.

Today’s $18.9 trillion of ERISA assets (as reported as of March 31, 2012 by the Investment Company Institute), are all generally managed the same way.  Steeped in the principles of Modern Portfolio Theory, retirement plans hire consultants who develop intricate asset allocations, spreading risk among all the asset classes.  Plan sponsors then hire multiple managers with proven track records in the specific asset class.  The industry supporting this system is gigantic.

This system has been in place for 25+ years.  In the explosive boom years beginning in 1982 all has worked well — for the most part.  However, the 2007 Financial Crisis revealed fissures in the extraordinarily complicated and intricate edifice constructed by the retirement investment industry.

What about the storm clouds forming on the horizon?  Are the foundations of the edifice strong enough?  Are fiduciaries exploring whether any levees are in place, and if so, whether the levees are capable of weathering the storm.

At a minimum fiduciaries should be talking about these issues.  They should demand that other investment fiduciaries outline their analyses and their proposed responses.  The debate on these issues should be robust and rigorous.

Unfortunately, my sense is that many are simply hoping that the clouds dissipate never gaining the force of a full fledged storm.

Personally, I often carry an umbrella when there is the slightest hint of rain.  Now, I’m concerned that an umbrella will be a mere cipher in an upcoming devastating storm.

Fiduciaries, what do you think?

Continue Reading

0

Confusing Times  – Simple Measures

The headlines may change, but the theme is the same — too much debt.

Weather it is the never-ending saga of European debt (Greece, Portugal, Spain), or the debt-ceiling gridlock here in the US, policy makers, politicians, economist, investors — everyone is trying to make sense of out the debt.

No one has any answers, just best guesses.  In the midst of all of this confusion, however, fiduciaries still must act prudently.  What’s the best course of action?

First, and foremost, fiduciaries do not need to be economic or investment experts or savants.  They do not need to look into their crystal balls and predict the outcome or even the best course of action.

Instead, they must act prudently.  The following actions will advance their fiduciary obligations:

1.  Review investment policy statements and investment accounts

Simply identify the investment accounts or strategies which might be effected by the debt issues.  One could say that all investment portfolios could be effected.  However, it would not be difficult to prioritize the accounts.  No doubt cash,  money market, stable value, and other fixed income portfolios should be at the top of the list.

2.  Meet with your consultants and advisors

Pick and the phone and request a meeting with your advisors — either in person or via teleconference.  Don’t worry if it isn’t time of a quarterly or half-yearly portfolio review.

3.  Obtain their analysis of the market environment and their recommendations

Remember, while a fiduciary does not have to be an expert on these issues, your investment advisors do.   They are paid to be experts.   Therefore, they should have cogent positions and explanations for the current market environment.

4. Question their assumptions

Don’t blindly accept their responses.  Questions their assumptions.  Explore alternative options in the event that their predictions don’t materialize.

5.  Inquire if they have conducted stress tests on the portfolio

Simulating various market conditions has become a standard tool for monitoring investment portfolios.  Require  your managers to provide you with the results of these various tests.  And, most importantly, determine if you are comfortable with the results.

6.  Get recommendations in writing

Don’t be bashful.  Ask your advisors for their advice in writing.  If they hesitate, explore their motivations.  But, continue to press.

7.  Document, Document, Document

Document your process.   This cannot be stressed enough.  Contemporaneous written records of your process and the results of the process are critical to fiduciary prudence.

The issues are daunting.  The landscape changes daily.  Nobel prizing winning economists line up on every side of the issue.

For fiduciaries, be diligent about your process.  This will ensure that you are acting in the best interests of plan participants.

Continue Reading

1

Fiduciaries Really Need to be Experts

Plan sponsors need to re-calibrate their fiduciary obligations with respect to their retirement plans.  They have to ask hard questions. Do they have the relevant expertise to fulfill these roles?  Do they understand the “business” of maintaining and administering plans?  And, finally, do they want to devote time and resources to this responsibility?

In reality, most plan sponsors are too busy executing on their business strategy to worry about fiduciary matters. And, this is the way it should be.  Typically, HR and finance staff members oversee the plans and identify policies, procedures and vendors — all to be rubber-stamped by  high-level corporate committees.

This model is old-school, is broken, and must be fixed.  A recent appellate court case, in the 7th Circuit, is bringing these issues into sharp focus.  Plan Sponsors need to pay attention.

The volume and sophistication of ERISA class action lawsuits has grown significantly over the past decade.  Until this April, however, plan sponsors and retirement plan service providers have largely successfully defended against this onslaught.  This has been good news for fiduciaries.

In April, however, the 7th Circuit, previously a defendant-friendly court, handed plan sponsors and fiduciaries, a very serious set back.  In a class action suit against Kraft Foods, the court did not dismiss the case, but instead sent it back to the district court to determine whether the plan sponsor, Kraft, breached its fiduciary duty to the participants.

This holding is a nightmare for plans sponsors and corporate fiduciaries. No fiduciary wants a trial court to determine whether it’s acts or omissions satisfied the fiduciary standards of ERISA.  Likely the insurance companies will settle.

Nonetheless, this case goes to the heart of the critical importance of fiduciary processes.  With respect to a company stock fund, the court questioned whether the fiduciaries ever examined the operational structure of the fund and balanced the relative merits and drawbacks of different structures.  Furthermore, a question was raised as to whether Kraft ever reached an affirmative decision supporting one structure over another.  Surprisingly, no documentation was submitted which would support that a decision had, in fact, been made.

In addition, the court was not comfortable with Kraft’s 10 year relationship with its record-keeper.  Although consultants had advised that the recordkeeping fees were reasonable, the court was critical that third party bids were not obtained and used for comparison purposes.  Maybe the court just thought that the relationship was too cozy.

At a minimum, this case indicates that fiduciaries must develop a sophisticated understanding of the technical intricacies of the mutual fund, recordkeeping, and fund administration businesses.  Relying on consultants is not good enough.  Instead, fiduciaries must dig into the weeds, compare and assess the merits, deficiencies and costs of various service delivery models.

Plan Sponsors need to focus on capturing their own target markets, developing products, satisfying customer needs and growing their earnings. Why should they be bothered with this stuff?  It can be a nuisance.

As stated in the title of this posting, fiduciary oversight is not a part time job.  There is significant subject matter and procedural expertise required in discharging fiduciary responsibilities.  Plan Sponsors should recognize the professional skill set required to serve as a fiduciary, and acknowledge that it is not in their interest to develop or maintain this expertise in house.  Plan Sponsors, as well as participants and beneficiaries would be best served by hiring expert Independent fiduciaries to oversee the plans.

Continue Reading

2

Outsourced Chief Investment Officer — More Questions Than Answers

Pension investment consultants have found their latest fad …..outsourced CIO services….otherwise known as OCIO.

From benchmarking, to style boxes, every couple of years the investment consultants cook up a new fad to sell to retirement plan fiduciaries.  As a business model, replenishing the product line has served the consulting industry very well.  The question, however, is “how well have the plans performed using their advice?”

And now, the industry is off on its newest fad:  OCIO.  While each firm might tailor their services in a unique manner, the general theme is the same. Rather than offering traditional consulting services, with an OCIO, a plan turns over its entire portfolio to the consultant to be managed.

Presto Change-o!!!!  The lowly consultant morphs into the coveted role of investment manager.  Rather than receiving a fee for consulting services they can now charge fees based upon the assets under management.  And, who knows? If they are lucky, they may even get a performance fee: the holy grail of asset management.

FundFire reports on this industry trend, Consultants Tweak Outsourced CIO Message.  As FundFire explains, however, there is a lot of confusion underlying the OCIO title and the services actually being provided.   This confusion requires the industry to “Tweak”  its message.  In fact, one public plan rejected the shift from traditional consulting to OCIO because of the lack of clarity surrounding these services and this role.

Two points in this article jumped out at me.

First, a critical term is missing. Neither the consultants, nor the article, mention the term “fiduciary”.  This entire model is presented as an asset gathering and fee generating exercise by the consultants.   But where is the fiduciary obligation to the plans and the participants?

Second, the article, in the opening paragraph, references potential “new conflicts of interest” presented by this new arrangement, but does not fully explore these conflicts.  Very often consultants provide multiple services to their clients.  Adding a OCIO role can add to these potential conflicts.

Furthermore, consultants also have significant relationships with other investment managers.   This side of the relationship equation is very murky.  How will the consultant  select managers for its OCIO services?   How will these services be priced?  These are just the start of the questions.

From the perspective of the consultant industry, it is completely understandable that they want to explore new ways to develop their services.  As Shale Lapping, president of IPEX, an independent consulting firm in Plymouth, MI states, “the ability to generate additional revenue is obviously an attractive position …. The margin has always been smaller for consultants (than for managers); that’s not secret in the industry. [Outsourcing] brings in higher margins and makes it easier to retain quality talent.”

This is well and good for the consulting industry.

At Harrison Fiduciary Group, we unequivocally and categorically reject this form of the  OCIO business model as embraced by many consultants.  While it might make sense for the consultants, it doesn’t necessarily makes sense for clients.

On one level, we do support the delegation of investment oversight, monitoring and management to outside, independent experts. In contrast, however, at HFG our business model starts and finishes with our role as a fiduciary for plan assets.  First, we provide a single service to plan sponsors — fiduciary services.  We don’t have multiple services to sell, or rather cross-sell, to a plan sponsor.  We have no ability to increase our fees with a client.  We also do not have affiliates such as broker/dealers which also can give rise to conflicts of interest.  Plain and simple, we pledge:  No Conflicts of Interest.

Importantly — and maybe even heretically in our business — we will charge a flat fee for our services.   We are not engaged in an asset gathering exercise and will not charge a basis point fee for assets under management.  Anwill bed, of course, we will never charge a performance fee. Instead, our flat fee is based upon (i) the complexity of an engagement, (ii) the resources needed to execute the project and (iii) the fiduciary risks which we assume.  Our fees will never increase simply because the value of a particular market increases.

To use a much over used expression; “we are thinking outside of the box”.  We present an alternative business model for the oversight, monitoring and management of retirement assets.  We are competing against traditional big players in our field.  However, we have a principled and new approach which puts the best interest of plan participants at the core of our business model.

We are not embracing a fad by serving as a fiduciary.  The duties of a fiduciary harken back to the 16th century.  At Harrison Fiduciary Group we serve a time honored role.

Continue Reading

0

Credit-Related Strategies Warrant Heightened Scrutiny

It’s called the Great Liquidation.  As reported in today’s NYT, The Haggling for Troubled Assets Begins, “hundreds of billions of dollars of bad investments …are going up for sale”.  Fiduciaries must ensure that these bad investments do not end up in retirement plans.

Notwithstanding TARP, QE1 and QE2, financial institutions still hold impaired or “bad” assets.  This simply means that the assets are still held by institutions at values that are likely far in excess of their fair market value.

And so, the Great Liquidation begins.  The term — coined by Fortress Investment Group — refers to the prediction that “you’re going to see in the next five years, more financial asset liquidations than you’ve seen in the sum total of the past 100 hundred years.”  An exaggeration?  Ok, let’s assume it’s simply more than in the pat 50 years – that’s still a lot of assets being put up for sale.

If this appears daunting, don’t worry.   Fortress already has $12.7 billion of assets devoted to credit-related private equity and hedge funds.  No doubt the entire spectrum of the Wall Street herd — investment banks, commercial banks, hedge funds and private equity firms — will be bulking up in this area, if they haven’t already.

Just imagine a 2% management fee and 20% of profits on “hundreds of billions of dollars”.  Now that’s a nice bonus pool!

Before the Great Liquidation Orgy (my term) begins, however, Wall Street is going to need to raise money to indulge in this financial bacchanalia.  Certainly there will be private investors, wealthy individuals, sovereign wealth funds.  But the $16 trillion pool of pension assets is the granddaddy of all funding sources.

I can just see the entire pension investment consulting industry working itself into a frenzy cranking out their graphic laden presentations recommending Credit Related investment strategies and firms.  The graphs and the statistics, no doubt will be very impressive – worthy of PhDs.  But Beware.  “Its déjà vu all over again”.

Think back to the early 90’s.   Who had heard of hedge funds?   Private equity firms were still referred to as LBO firms.  In terms of financial markets and products it was a different era.  As the new century dawned, however, investment strategies and products exploded in complexity.  Simultaneously, in order to remain relevant, the pension consultants began touting these new products.

In time, consultants were recommending significant shifts in allocations to “Alternative Investment Classes”.  It was not surprising to see allocation recommendations of 8%, 10%, 15% or more to alternative asset classes.  In fact, in the summer of 2008, I had lunch with the Chief Investment Officer of a university endowment who said that they had allocated 45% of the endowment to hedge funds.

We all know the outcome of this story.  In the end, the investment returns of many plans were negatively affected by these allocations.  No one knows yet, if in the long run the plans were better off or worse for these significant allocations to Alternative Asset Classes.

We do know one thing, however.   Consultants merely make recommendations.  Plan fiduciaries hold the real power in making allocations to asset classes and to specific managers.

Without a doubt fortunes will be made in the course of the Great Liquidation.  The question is whether retirement plans need to venture into this arena.  Fiduciaries must invest assets prudently.   When a new asset class emerges, such as credit-related investments, how is a manager evaluated?  What’s the track record?  How is risk measured?  How are projected returns evaluated against the risks that are assumed?  What about due diligence on investments?

The list goes on and on.

The Media is going to feature the newly minted credit-related billionaires.  Investment returns may likely be huge.  The allure of jumping into these investments will be strong.  The consultants will be putting on a hard press.

Plan fiduciaries must be very wary.  For those who do decide to play in this game, make sure you do your homework.  Remember, you are investing other people’s hard earned retirement dollars.  Keep the financial debacle of 2007-2009 at the forefront of your mind.  And, tread carefully.

Continue Reading