FINANCIAL MANAGEMENT/ Selecting a pension fund adviser

Pension boards should develop specific criteria for the search.

Local government pension boards are composed of individuals who have a fiduciary responsibility to invest pension plan assets for the benefit of their respective jurisdictions and memberships. They need to determine when, how much and which types of investments should be included in a portfolio. However, board members may or may not have experience making investment decisions, and, as a result, some boards are handling their fiduciary investment responsibility by employing advisers.

Adviser services can range from advice only to full discretionary investment management, but local pension boards cannot delegate their fiduciary responsibility to an investment adviser. Therefore, boards must select their advisers carefully. The Committee on Retirement and Benefit Administration of the Washington, D.C.-based Government Finance Officers Association provides guidance for that process.

According to the guidelines, a pension board should consider appointing a selection authority to search, recommend and select a potential investment adviser. Sources for the search should include the selection authority’s database of investment advisory firms, industry reports and articles, marketing materials and references from other pension plans or jurisdictions.

The selection authority should develop criteria to assess the qualifications of the candidates. Criteria might include the number of years the firm has been in business; the dollar amount of other public pension assets under current management; the total assets in the specific investment style being considered; the firm’s investment performance; and the education and experience of key personnel.

Through the process of requesting proposals, the selection authority should perform a Due Diligence analysis of the candidates. The analysis should include, but not be limited to, assessment of:

– the firm’s organizational structure;

– the experience and depth of personnel, including turnover of key personnel;

– the firm’s specific investment philosophy and portfolio management strategies;

– its system of risk management safeguards and investment policy compliance;

– management fees and favored nations pricing, if available; and

– references from pension plan clients.

The selection process will, of course, include interviews with finalists, and investment advisory Form ADV Part I and Part II (including Schedule 1) should be delivered prior to contract execution. After the selection authority has made its recommendation, the investment management agreement must be completed and executed. The agreement should include at least:

– the identity of account managers and their fiduciary responsibilities;

– determination of professional liability insurance for errors and omissions;

– reporting requirements;

– the fee and terms of invoicing and payment;

– a procedure for termination of the contract by either party;

– specifications related to nondiscrimination in contracting and ethics rules;

– a procedure for immediate notification of any changes in firm ownership or key personnel; and

– a certification that mandates adherence to the investment policy established by the pension board.

Once the pension board selects and engages an adviser, it must take steps to ensure that the adviser’s performance meets expectations. The board should develop and implement an ongoing risk control program that provides for Due Diligence reviews, investment and performance monitoring, independent audits, timely account reconciliation and other appropriate internal control measures.