Conflicts in Investment Management Consulting Industry?

Green Ostrich and Friend

Conflicts in Investment Management Consulting Industry?


A new study by a group that serves as a watchdog for clients of SEC registered investment advisors calls into question the validity of investment advice made by some investment management consultants. The group, Diligence Review Corporation, specializes in performing due diligence reviews for pension funds, which typically use investment consultants. The report, highlighted in a recent edition of AI CIO newsletter, looks at 155 consulting firms and draws out several issues that all investors can learn from.

  • ·         Some of the consulting firms are also registered as broker dealers, which crosses a divide that many investors encounter, but perhaps are unaware of. This essentially means that the consultant provides advice on; how to structure a portfolio, which managers/mutual funds to use and how to evaluate performance in the context of investment policy…AND also sells investment products and services.  The report correctly notes that consultants who are also broker dealers cannot be impartial to the products that end up in client portfolios.
  • ·         Other consulting firms are registered representatives of broker dealers, which constitutes a strong affiliation often grounded in “cross-selling” of services and products.
  • ·         Some consulting firms have broker dealer affiliates, which perhaps is a looser connection, but still implies a far less than impartial viewpoint regarding investment products and services.

The authors of the report openly question how firms with these kinds of conflicts can provide independent and objective advice to clients.

The point here is that fiduciaries have a duty to be aware of who they are working with, what their real roles are and whether or not there are conflicts of interest.  

Some very basic questions to ask:

  • ·         Who regulates your financial adviser? If it is the SEC, then they are either “registered investment advisors” or pension consultants.  If it is FINRA or both FINRA and the SEC, you are dealing with a broker dealer, a no-no according to the report.
  • ·         Who owns your adviser? A Broker Dealer, another investment advisor, a bank?
  • ·         What affiliations does your adviser have with other service providers?

Of course every financial advisor will claim that their advice is objective. But if you want advice that is truly independent, the answers to these questions will guide the way.


About Jim Jeffery, CFA

Jim Jeffery, the founder and principal of Jeffery Asset Management has joined Solaris Advisors LLC as Managing Director where he will lead the non profit senior living effort. Jim is a Chartered Financial Analyst (CFA) with more than 20 years experience in the financial services industry. Have a question about your financial plan? ASK JIM

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