“Financial Innovation Boosts Economic Growth,” an Oxford-style debate — featuring Jeremy Grantham, a doyenne of investment management, and author Richard Bookstaber, author of A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation, opposing the proposition, and Myron Scholes, Noble Prize winner, and Robert Reynolds, CEO of Putnam Investments, in favor of the proposition — is summarized in an Appendix to Grantham’s January 2010 Quarterly Newsletter entitled, “What a Decade!”

In offering stinging criticism about the investment management industry, from which he admits he has profited handsomely, Grantham provides:

Clients can’t easily distinguish talent from luck or risk taking.  It’s an unfair contest [between clients and the investment management industry], nothing like the fair fight assumed by standard Economists.  As we add new products, options, futures, CDO’s, hedge funds, and private equity, aggregate fees per dollar rise.  As the layers of fees and layers of agents increase, so too products become more complicated and opaque, causing clients to need us more.

The ultimate industry insider acknowledges that the game is stacked against the clients in favor of the service providers.  Ironically, however, he includes that the high fees, complexity and opacity, create greater reliance upon the industry itself.

Au Contraire!!  The trifecta of high fees, complexity and opacity cries out for the role of professional fiduciaries to cut through the jargon, smokescreens and hype surrounding the investment of plan assets.

To focus momentarily just on fees, as fiduciaries, with respect to administrative expenses, we clearly have an obligation to “defray reasonable expenses.”  The explosion of fee litigation clearly bears this out.  However, with respect to investment management fees the directive is not as explicit, but nonetheless the obligation to monitor fees is critical.  Certainly there is an obligation to make sure that fees are reasonable, but the exclusive benefit language in ERISA also suggests that where possible, fiduciaries should work to reduce fees wherever possible.  Simply put, any reduction in fees is an increase in the assets available for plan participants and beneficiaries.

The current shock to the financial system, as well as to client portfolios across the board, provides a unique opportunity for fiduciaries to review all of their investment relationships not only with respect to investment performance, but also with respect to fees.  Fiduciaries must ask themselves a hard question; are the fees being charged by private equity, real estate, venture and hedge funds justified by the investment returns being generated and the risks assumed?

The current financial environment levels the playing field between the investment management industry on the one hand, and plan fiduciaries on the other.  Plan fiduciaries must jump at this opportunity to exercise responsibility to strike deals in the best interest of their plans. Negotiate, negotiate, negotiate!

Continue Reading


I did a double-take.   I had not yet settled down with the paper, but merely glanced at the headline.  Thinking to myself, “no this can’t be true”.  I looked again, “Public Pension Funds Are Adding Risk to Raise Return”.  Ditching my usual morning ritual, I sat down immediately in disbelief and read the lead article of the New York Times on March 8, 2010.  The Article outlines that many state and other governmental pension funds are increasing their exposure to riskier asset classes with the expectation of earning higher investment returns and contrasts this approach with many corporate plans which are taking the opposite approach; that is, decreasing risk in their portfolios.

A former chairman of a state pension review board commented, “In effect, they are going to Las Vegas…..Double up to catch up.”  In other words, if the economy and financial markets aren’t experiencing enough challenges, we now have to deal with high-roller state pension officials gambling with pension assets.

While academics, policy-makers and pundits alike continue to offer explanations into the causes and effects of the financial meltdown of 2007 & 2008, one overriding take-away from this experience is the recognition that financial risk is real.  Yes, riskier assets can deliver higher returns, but they can also deliver bigger loses.  I am not an investment professional, but merely a fiduciary lawyer, but even I know that there are two sides to the risk equation.

As a fiduciary matter, one can only wonder about the processes in place which gave rise to these decisions.  Merely from reading the Article, however, one senses that there were no processes.  Instead, confronted with the reality of investment returns not meeting projections and the potential to have to make increased contributions to the plans, it was simply easier to increase the risk profile of the portfolio.  The fiduciary question is whether it is prudent to do so?

Possibly reasonable minds could come to opposite conclusions on the prudence of this strategy. But the real question is, on whose behalf are the fiduciaries making their decisions.  Or, put another way, to whom do the investment fiduciaries owe a duty of loyalty?  It appears that these decisions were made probably with the States and the taxpayer foremost in the fiduciaries minds; that is, if the over all goal is to decrease the contributions by the state, then dial-up the risk attributes of the portfolio.  But, who is looking out for the best interests of the plan participants and retirees?  I always thought that was the fiduciary’s obligation.

Here’s the nub of the issue:  in times of limited resources it can be easy to lose sight of whose interests a fiduciary represents.   Whether it is a state or a corporation which is funding pension obligations, it is always in the funder’s interest to increase the risk profile of the portfolio.   But is it in the interest of the participants?  There is a healthy tension in this equation.

Unfortunately, many times individuals who are plan fiduciaries are nonetheless beholden to the funder of the plan — whether this is a state employee or an employee of the plan sponsor.  In these contexts, its easy to see how risks get shift onto the plans.  Absent robust policies and transparent decision-making, serious conflicts of interest can arise.  Fiduciaries must be sensitive to these conflicts, and avoid them at all costs.

Next week, “Ruth Madoff launches New Investment Fund”. Stay tuned.

Continue Reading

The Prudent Experts

Published on 22 March 2010 by in Thought Leadership


Welcome to the first post by the Prudent Experts, Mitchell Shames and Sean Flannery.

Our overriding mission at Harrison Fiduciary Group (HFG) is to provide professionalized investment fiduciary services on behalf of retirement plans.  With our combined 50 years of experience in investment and fiduciary matters, we have found all too often that while the term “fiduciary” can be tossed around a great deal, there are few individuals and firms devoted exclusively to providing investment fiduciary experiences.

We are committed to the principle that the role of a fiduciary is professional discipline in its own right.  Serving as a fiduciary is not simply ancillary to providing another service such as providing investment or consulting advice.

This blog will be devoted to identifying current issues confronting investment fiduciaries as well as directing readers to other professionals and organizations which are advancing fiduciary issues.   With Mitch’s background as a fiduciary lawyer, and Sean’s as an investment professional, each of our posts will be focused in our particular areas of expertise.  (For greater details on our backgrounds, please see the About Us tab on our website.)

HFG is proposing a new business model with respect to the management and oversight of retirement plans.  The role of serving as an investment fiduciary has enormous benefits both to plans sponsors as well as to plan participants.  We are firmly convinced that sponsors and participants will derive quantifiable value from our services.

Finally, we look forward to your thoughts, comments and questions pertaining to the issues and concepts which we present.  Please, challenge our assumptions, processes and conclusions.  We welcome the debate.

Continue Reading