Article from The Inside Edition

With the new year approaching, 'tis the season for reflection and resolution.

I have seen three broad market challenges for retirement financial service providers over the past year: compression of prices and profits, competition for market share, and an increased need for return on investment. As they adapt to the competitive climate, retirement professionals must balance a heightened need to manage business, relationship, regulatory and financial risks.

As a result, retirement service providers need to find scalable, profitable solutions that help manage these risks for themselves and their clients. The adoption of a fiduciary reporting system can provide an attractive and competitive offering that both meets fiduciary needs and improves the bottom line.

Piece One: Fiduciary Reporting – What is it?

Fiduciary reporting provides on-going documentation of investment performance that is based on the standards established in a plan’s Investment Policy Statement (IPS). Monitoring a plan’s performance is a crucial step in assuring that plan sponsors and third-party professionals have in place processes that meet fiduciary standards of care.

The ultimate objective of fiduciary reporting is to answer four key questions for clients:

The first issue is to determine what should be measured. While any standard addressed in the IPS should be tracked, common reporting items include:

Reporting should be explicitly tied to Investment Policy standards and should note when IPS criteria are not met. Criteria may include rank within peer group, rank within broad asset class, or absolute benchmarks.

Piece Two: Fiduciary Reporting – Why do it?

Of the many reasons to have a fiduciary reporting system, two in particular spring immediately to mind: your clients want it, and your competition has it. Fiduciary reporting is quickly moving into the “gotta have” category for plan sponsors and the retirement professionals who serve them.

The reason for this is straightforward: it’s the law. Investment options must be periodically reviewed and evaluated, and plan sponsors and other retirement professionals face increased scrutiny in how they carry out their fiduciary duties. If Eliot Spitzer doesn’t presently inhabit every fiduciary’s nightmares, he will likely make an appearance in the near future.

Ultimately, however, fiduciary reporting is the right thing to do. Fiduciaries are judged not on investment results but on the processes that they follow. For plan fiduciaries, monitoring and documentation are essential to meeting fiduciary standards of care and due diligence.

Piece Three: Fiduciary Reporting – Who does it?

Once a retirement professional has made the decision to obtain a fiduciary reporting system, he or she must determine the appropriate service provider.

There are several different types of fiduciary reporting providers:

Outsourcers and subscription service providers may provide reporting services as part of asset management services, as co-fiduciaries, or on a fee-for-service, subscription basis.

Piece Four: Fiduciary Reporting – How Does It Work?

There are three basic approaches to creating a suitable fiduciary reporting system for the business:

1. Build Your Own
2. Buy / Customize Someone Else’s Offering
3. Borrow an Existing Solution

A company that builds its own reporting system can create a unique solution that is tailored to the look, feel and deliverable components of its existing offerings. Retirement professionals can also buy someone else’s offering and customize it. Customization of an existing reporting platform involves modification of off-the-shelf components that enable a private-labeled or co-branded solution.

Finally, an organization can borrow an existing solution. This option enables advisors and other retirement professionals to efficiently manage their fiduciary responsibilities without extensive or expensive modifications.

So, given the diversity of options, how should a retirement professional make the decision about whether to build, buy or borrow?

Piece Five: Fiduciary Reporting – When to Outsource or Partner?

The decision to outsource reporting involves finding the right balance for the organization between what are at heart conflicting goals:

It is hardly surprising, but keeping costs low will require a retirement professional to give up some customization and control. If the professional is comfortable with that trade-off, a borrowed solution will provide the perfect organizational fit. If control or customization is a key business need, a build-your-own or customized solution is most appropriate.

At bottom, the decision about which solution option to choose comes down to a desire to manage risk, including technical, compliance, legal, financial and staff risk. When considering outsourcing or partnering with a reporting service platform provider, I suggest that retirement professionals ask the following due diligence questions:

This process is about meeting fiduciary standards of care and should reassure rather than increase anxiety levels. If a service provider’s answers to any of the preceding questions cause discomfort, the retirement professional should look elsewhere.

Conclusion

The retirement services industry is a $ 7 trillion industry in which all of the money is temporary. It is a highly competitive space undergoing considerable change. But new competitive pressures create opportunities to increase efficiency, establish alliances and better serve the client.

Fiduciary reporting enables retirement professionals to be confident they are meeting their fiduciary responsibilities while meeting business objectives. The need for clear standards and processes has never been stronger. The key is to determine the best fit for the organization. The right reporting platform can provide a solid return on investment, provide effective risk management and allow the company to focus on core business concerns.