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Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Georgia is representative of a common question on advisors for retirement plans.
There are some publicly available tools to help plan sponsors conduct their own due diligence research on candidates seeking to be the advisor of record on their retirement plans. Under ERISA, a plan sponsor has the responsibility to prudently select and monitor service providers for their retirement plans, including the investment fiduciaries selected to advise on their plan’s assets.
There are several things a plan sponsor needs to know about prospective investment fiduciaries to make a prudent selection, including but not limited to the following:
How does the fiduciary charge for their services?
Are these fees reasonable for the services provided?
What experience and qualifications do they have?
What is their reputation in the investment advisory industry?
To start the vetting process, a plan sponsor should request the Form ADV for the prospective advisor and their firm. Form ADV is a tool intended to provide transparency between clients and advisors, and advisors and investment firms must file Form ADV when they first register with the SEC or the state securities administrator and update and refile the form every subsequent year.
The form includes disclosures regarding a firm’s background, ownership, assets under management, services offered, fees, practices, potential conflicts of interest and risks, as well as other operating information. Firms and financial advisors must also disclose any professional disciplinary actions on Form ADV. Once submitted, the North American Securities Administrators Association (NASAA) and the Financial Industry Regulatory Authority (FINRA) review the form. See this sample Form ADV for the types of information this form contains.
Another helpful source of information on brokers/dealers is the BrokerCheck website maintained by FINRA and the SEC, which includes employment history, registrations, qualifications, customer complaints, regulatory actions, and criminal matters. To look up a record for an advisor, all you need is the advisor’s name and firm.
The FINRA disciplinary action database is also a good source to check for any FINRA disciplinary actions issued since 2005 that are eligible for publication according to FINRA Rule 8313 (Release of Disciplinary Complaints, Decisions and Other Information). Results also include opinions issued by the SEC and federal appellate courts on appealed FINRA disciplinary actions.
In addition to the federal securities laws, individual states have their own securities laws, commonly referred to as "Blue Sky Laws" to protect investors against fraudulent sales practices and activities. The laws also license brokerage firms, their brokers, and investment adviser representatives. You can find links to state securities regulators at the North American Securities Administrators Association website.
The resources discussed thus far focus on professional complaints and disciplinary actions, which still leave other potential areas of concern. Form ADV requires the disclosure of certain past legal issues, such as felony convictions or restraining orders, but it does not require disclosure of every legal issue the firm or its employees may have faced in the past. Because professional disclosures do not cover every area of potential concern, a basic Internet search for information on potential investment advisors may provide additional information that can help with the selection process.
Conclusion
Selecting a financial advisor for a retirement plan is an important fiduciary duty. Luckily, many free tools are available to assist plan sponsors in this process. Remember, doing a diligent investigation is only the first step in prudently selecting an investment provider. The best defense against possible fiduciary breach lawsuits is a well-documented selection process.