Making the Best Use of External Advisors
Why Use Advisors?
Public retirement systems, often governed by part-time, lay boards, rely extensively on specialized, independent advisors to help fulfill their fiduciary duties of loyalty and care. These boards are typically composed of trustees who volunteer their time and may not have the expertise or capacity to manage the complex operations of a retirement system, and they shouldn’t manage it.
This makes the use of external advisors not only reasonable but necessary. Even expert boards, made up of professionals with relevant backgrounds, generally turn to external advisors for support in areas such as investments, actuarial science, cybersecurity, pension plan design, and more.
One of the key reasons for engaging independent advisors is the lack of internal staff capacity, particularly in smaller and medium-sized retirement systems. Developing a full-time staff with deep expertise in specialized areas can be impractical. Independent advisors fill this gap, offering boards the expertise needed to make informed decisions without the cost of hiring full-time experts. Additionally, external advisors can provide a valuable “second opinion,” which helps mitigate the risks of groupthink, blind spots, and overreliance on internal perspectives.
The role of independent advisors is multifaceted.
Independent advisors not only bring deep expertise to the board but also offer insights into leading practices and trends across the public retirement system landscape. Their ability to provide fresh perspectives on complex issues helps boards avoid insular thinking and consider alternative strategies. Advisors are also crucial in constructively challenging both the board and management by identifying risks or opportunities that may not have been considered. This dynamic helps assure that decisions are well-rounded and thoroughly evaluated.
The General Investment Consultant
One of the most common types of independent advisors used by public retirement systems is the general investment consultant. These consultants play a key role in advising the board on investment strategies and policies. Depending on the maturity and capabilities of the internal investment staff, the general consultant’s role may vary significantly. For some systems, especially those with internal investment teams, the consultant’s role is more advisory, providing oversight and second opinions. In other systems, the consultant may be more hands-on, guiding investment decisions directly. This consultant is a vital component of the checks and balances necessary for effective governance.
The Independent Actuary
Another critical advisor is the independent actuary, who conducts annual actuarial studies and advises the board on policies, assumptions, and potential risks. Actuaries provide the modeling tools trustees need to understand the financial implications of their decisions and the key risks associated with their assumptions. This role is essential for maintaining the financial health of the retirement system and ensuring the long-term sustainability of pension benefits.
Other Specialists
In addition to these core advisors, public retirement systems may engage other specialists, such as fiduciary counsel, board governance consultants, communications consultants, and legislative consultants. These advisors help navigate complex legal, regulatory, and governance issues, ensuring the board stays compliant with fiduciary standards and maintains strong relationships with external stakeholders.
Lessons Learned
To assure the best outcomes, boards must be clear about the roles and responsibilities of their advisors. Active engagement in the selection, management, and evaluation of these advisors is critical. This not only improves the value of the advice received but also assures the board’s independence from management, avoiding potential conflicts of interest.
Finally, independent advisors often provide continuing education to trustees, keeping them updated on industry trends, emerging risks, and best practices. This ongoing education is essential in enabling boards to make informed, forward-looking decisions in an increasingly complex retirement landscape.
