Investment Consulting: True Independence vs. the NASCAR® model

Posted on December 1, 2015

Author Name By Steve Gordon

MetLife Stadium®, Philips Arena®, AT&T Stadium®, Staples Center®, KFC Yum! Center®.  America is filled with stadiums and arenas whose naming rights have been sold to companies seeking ways to promote their business and stadium owners looking for ways to recoup their costs. Likewise, in NASCAR®, drivers race around the track in stock cars covered with logos of varying sizes, promoting the sponsors who have given money to their racing team. When drivers step out of the car, their racing suits are also covered head-to-toe in logos to further promote their sponsors.  We recognize many drivers or sports teams by their primary sponsors, but we understand how the relationship works.  In other words, this is a transparent business model.     

Unfortunately, in the investment consulting business, many firms have similar sponsorships that are not advertised. Independence is a powerful idea, and one that should come with a certain level of responsibility. To some consultants, independence is merely a word that can be leveraged to gain entry into a hiring process in which trustees take a consulting firm at their word.  Since there are currently no restrictions on how firms must define independence in the consulting industry, the term itself can, ironically, be used to deceive the buyer.

A perfect example of the divide between truly independent consulting firms and those that feign independence can be seen on display at industry conferences, which are attended by thousands of trustees and board members every year to seek learning opportunities for their organizations and to make vendor connections. What these attendees don’t realize, however, is that many consulting firms have become bedfellows with money managers and outside vendors. In fact, some of these firms have a presence at conferences solely because their booths, giveaways and social functions are funded by the very vendors they are being asked to review. This may seem somewhat innocuous, but the harm comes when such plans are pushed to a client who is expecting advice from an independent and unbiased investment consultant.

A truly independent consulting firm is one that places its customers first by remaining uninfluenced by ulterior motives and conflicts of interests. Such firms never accept kickbacks from special interest groups and/or deal only in hard dollar fees, their sole interest being their clients. 

What should “independence” mean in the world of consulting firms?

Truly independent consulting firms:

  • Are backed solely by hard-dollar fees. Hard dollar fees provide income to independent consulting firms through a thoroughly explained and agreed-upon charge for their investing consultation services.
  • Have no relationship with money managers or outside vendors. Beyond the realm of providing consultants with investment options, money managers and consultants should act as completely separate entities. If a consulting firm maintains relationships with money managers and outside vendors, this should raise a red flag for clients, as money managers can easily offer additional commission to consultants for recommending a particular investment opportunity over another option that is more beneficial to the client.
  • Only act in the best interest of clients (fiduciaries). What exactly entails a client’s best interest? A truly independent consulting firm will only evaluate an investment opportunity based on its benefits to the client. No outside factors have a place in the conversation.

How can I tell if a firm is truly independent?

The SEC® contemplated long ago that the typical buyer of consulting and advisory services had few ways to understand potential conflicts of interest.  As a result, they began requiring all advisors to complete Form ADV Part 2 to bring these potential conflicts into the light.  This form can be found on the SEC® website (www.sec.gov) and should be the minimum for any review of a vendor’s level of independence.  AndCo Consulting’s Form ADV Part 2A can be found here.

If you are curious as to whether your current consulting firm is truly independent by these standards, it may be time to ask some hard questions. Demand to know if your consulting firm deals in hard or soft dollars and ask them to explain the nature of their relationships with money managers and recordkeepers. When it comes to your group’s funds, you deserve a firm that will put your interests above the interests of a third party.