Following the release of the SEC report, however, management at the Baton Rouge, Louisiana-based Shaw Group asked the firm to respond to a set of 10 questions put out by the SEC and the Department of Labor (DoL). “[Kuhns] not only provided us with answers to the questions,” reports Belk, “it also supplied us with its code of ethics.”
In fact, R.V. Kuhns has posted its answers to the SEC/DoL questions on its Website. There the firm also states that 100 percent of its revenue comes from direct cash payments from clients. In addition, Kuhns claims it accepts no gifts, perks, or other gratuities from investment managers or other firms.
Meandering Money Trail
Whether such disclaimers carry any legal weight — or get plan sponsors off the hook — remains to be seen. One thing is for certain, though: the money trail between pension consultants and fund managers is often a maze.
In some cases, consultants charge fees to money managers to attend conferences that are free for other clients. Other times, pension advisers sell proprietary software — at full price — to fund managers to analyze the performance of clients’ accounts. In addition, observers say many consultants operate “commission recapture” programs through affiliated broker-dealers. Under that type of arrangement, a portion of the brokerage commissions paid by plan sponsors is rebated to the plans or used to pay consultants’ fees.
Admittedly, these sorts of setups are not illegal, and sometimes even benefit corporate clients. But the SEC warns that when the arrangements are not well documented, they raise troubling issues. For starters, a plan sponsor may not receive the best available terms on a transaction, because trades have been funneled to a broker that is providing rebates to a consultant. It’s also possible that a corporate client can overpay for the services of a pension consultant if directed-brokerage arrangements don’t terminate when the consultant’s fees are paid in full. Moreover, experts say a retirement-plan administrator might agree to a trading strategy that’s actually intended to generate more commissions for a consultant’s affiliated broker-dealer.
J. Fielding Miller, CEO of independent advisory firm CapTrust Financial Advisors, says the Raleigh, North Carolina, firm does operate a commission-recapture program through an affiliated broker-dealer. But CapTrust limits the arrangement, Miller notes, to so-called 12b-1 fees — that is, commissions that mutual funds pay brokers and other investment advisers to market their funds. When a mutual fund in a corporate client’s 401(k) plan pays such commissions, he adds, any revenue CapTrust receives above that fee is rebated back to the client.
That’s not always the case. Indeed, plan sponsors often have no idea that a pension consultant has a business relationship with a money manager. On paper, there often is no relationship. A consultant will merely recommend a money manager to a client. That money manager, in turn, routes trades through the consultant’s broker-dealer — even if the trades are not for that pension plan’s account. “It’s kind of a wink deal,” Miller says. “The money managers are saying, ‘I’ll get you trades another day another way, but it can’t be traced back to that particular client.’”