T. Rowe Price Advisory Services, Inc.

Transcription

1 T. Rowe Price Advisory Services, Inc. Annual Fiduciary Adviser Audit For the year Congress Street Boston, MA

2 Table of Contents Page 3 Specific Findings 4 DALBAR Asset Allocator Rating 7 Client Ratings 8 Footnotes 9 Explanation of Methods Used 11 Vetting Checklist 12 2

3 INDEPENDENT AUDITOR S REPORT To: Investors Authorizing an Eligible Investment Advice Arrangement with T. Rowe Price Advisory Services, Inc. We have examined the records and conducted tests for compliance with Sections 4975(d)(17) and (f)(8) of the Internal Revenue Code and generally accepted fiduciary practices with respect to Fiduciary Adviser services provided by T. Rowe Price Advisory Services, Inc. The maintenance of these records is the responsibility of T. Rowe Price Advisory Services, Inc. Our responsibility is to express an opinion with respect to compliance with Sections 4975(d)(17) and (f)(8) of the Internal Revenue Code and standards of practice based on our examination of the records and tests we conducted. Our examination and tests were conducted in a manner that has a high probability of identifying deficiencies where the practices and records do not comply with Sections 4975(d)(17) and (f)(8) of the Internal Revenue Code. Samples of records were examined and randomly selected clients were contacted to establish that prescribed practices were followed. The result provides a reasonable basis for our opinion. As evidenced by the specific findings that follow, it is our opinion that T. Rowe Price Advisory Services, Inc. is in compliance with Sections 4975(d)(17) and (f)(8) of the Internal Revenue Code and generally accepted fiduciary practices in all material respects for the 12 months of DALBAR, Inc. 1 July 12, 2016 Boston, MA 1 DALBAR has a 30-year history recognized by industry and government as an independent thirdparty expert in the business of providing evaluations, ratings and performance due diligence. DALBAR certifications are recognized as marks of excellence in adviser services, communications, electronic and telephone services. DALBAR is the only ratings firm with an SEC no-action letter exempting its evaluations from the testimonial rule. Given its history, reputation and our extensive involvement in fiduciary adviser training, we believe that DALBAR meets or exceeds the expertise and proficiency required to conduct audits required by ERISA Section 408(g)(5). 3

4 SPECIFIC FINDINGS Compliance Test Does Fiduciary Adviser s compensation not vary based on the investment advice provided? Were agreements expressly authorized by client? Method of Evaluation Review compensation agreements. agreement signers. Result Foot Notes OK 1,7 OK 2 Did clients receive a written audit report? Written statement OK 3 Was client notification provided before delivering the investment advice? Was notification complete and accurate with respect to: The role of any affiliate or contractor involved in the advice delivery or selection of the IRA s investment options? Past performance of the investment options? Compensation for providing advice? Any affiliation, contracts with or interests in securities available in account? Circumstances under which a client s name or identity is disclosed? Types of services provided? Acknowledgement of fiduciary status with respect to the IRA? Statement of clients rights to engage his/her own adviser? Duties and responsibilities of the adviser? clients. Evaluate notification. Test of client enrollment/advice Evaluate client agreement and test of sample clients. OK 4 OK 5 OK 6 OK 4, 5 N/A N/A 8 Evaluate notification and test of sample clients. Evaluate client agreement. Evaluate notification. Test of sample clients. Evaluate notification. OK 4, 5 OK 4, 9 Exception 10 OK 4, 5 OK 5 4

5 Compliance Test Were there excessive or severe complaints about this adviser from clients? Is the notification provided to clients: Accurate and calculated to be understood by the average client? Provided annually at no charge? Provided on request at no charge? Updated for any material change and delivered to clients at no charge? Have disclosures required by securities laws been made? (Form ADV) Is execution of all securities transactions performed by and at the discretion of the client? Is compensation of the Fiduciary Adviser reasonable? Are terms of agreement as favorable to the client as an arms-length transaction? Are documents pertaining to the adviser s investment management process filed in an accessible location? Are documents maintained for the requisite six years? Does adviser have methods and tools to gather required information about each client being advised? Method of Evaluation Analysis of complaint line. Evaluate notification. clients. clients. clients. Evaluate notification. Evaluate client agreement and test sample of clients. Alignment with peer group. Evaluate client agreement. Random request for delivery of copy of documents and Written Statement Random request for delivery of copy of documents. Test of client enrollment/advice Result Foot Notes OK 11 OK 5 OK 4 OK 4 OK 4 OK 5 OK 4, 5 OK 7 OK 12 OK 13 Ok 14 OK 15 5

6 Compliance Test Can adviser demonstrate adherence to good fiduciary practices: All sources, timing and distribution of retirement savings for each client been taken into consideration? Each client s retirement time horizon has been taken into consideration? Each client s tolerance for risk has been taken into consideration? An expected or modeled return for a recommended portfolio has been established for each client. Recommendations include guidelines for rebalancing? Recommendations reflect diversification that conforms to each client s time horizon, risk/return profile and asset class preferences? Are adviser s tools and methodology effectively and consistently applied? Is there a periodic review of adviser s operation? Method of Evaluation Result Foot Notes OK 16 OK 16 OK 16 OK 17 OK 18 OK 19 OK 20 Written statement. Ok 21 6

7 DALBAR ASSET ALLOCATOR RATING The DALBAR Asset Allocator Rating summarizes the three major criteria used for this evaluation. The rating consists of three elements, Investment Quality, Allocator Methodology and Investor Outcome. Each element may be one of four letter grades or an if no rating is available: The DALBAR Asset Allocator Rating as of 07/12/2016 for: T. Rowe Price Advisory Services, Inc. 1 A 2 A 3 EXPLANATION OF RATING 1. Investment Quality. This rating is a composite of the underlying investments used in this Asset Allocator s strategy. The rating includes the investment performance, volatility, fees and expenses. A rating of is assigned to Investment Quality and reflects the findings that: Allocator places no limitations on investments that clients may select. 2. Allocator Methodology. This rating shows the thoroughness of the allocation process, fiduciary role, experience and qualifications of the allocator and resolution of potential conflicts of interests (if any). A rating of A is assigned to Allocator Methodology and reflects the findings that: A fully documented and automated generally accepted investment theory is used. Allocator acts as a fiduciary to investors. No potential conflicts of interest were identified. 3. Investor Outcome. This rating measures the effectiveness of the Asset Allocation strategy. It is derived from any of three possible sources: i. DALBAR tests of an Asset Allocator model ii. Investor retention after three years iii. Direct assessment by investors A rating of A is assigned to Investor Outcome and reflects the findings that: Direct assessment by investors describe a favorable outcome. 7

8 CLIENT RATINGS The following are T. Rowe Price Advisor Services, Inc. s scores in the areas of trust, financial performance, quality of services and quality of advice. The scores in each category have qualified T. Rowe Price Advisory Services, Inc. for DALBAR Certification. 100% 80% 78% 82% 82% 78% 83% 77% 87% 84% 60% 40% 20% 0% Trust Financial Performance Quality of Service Quality of Advice National Average T. Rowe Price Advisory Services, Inc. About DALBAR Ratings DALBAR Certifications are issued to financial professionals and firms who have: at least five years of experience, a clear regulatory record, knowledge appropriate for services offered, and exceed national benchmarks in Trust, Financial Performance, Satisfaction with Services, and Quality of Advice. DALBAR Ratings are not representative of any one client s experience and are not indicative of future performance. Additional information concerning these ratings is available from T. Rowe Price Advisory Services, Inc. This information must accompany the publication of DALBAR Ratings in accordance with guidelines issued by the United States Securities and Exchange Commission (SEC). Professionals pay DALBAR a uniform fee for conducting the due diligence These ratings are part of a group of 2,545 professionals and firms tested. 8

9 FOOTNOTES 1. Compensation disclosed in eligible investment advice arrangement does not vary based on clients investment selections. 2. All agreements were expressly authorized by client. A random sample of signed agreements were requested and provided by T. Rowe Price Advisory Services, Inc. 3. Annual audit for the 12 months of 2014 was made available to clients within 30 days of the audit s receipt. Confirmed through written statement clients were contacted, 83 responded. Satisfactory results were achieved in all categories. 42% recalled receiving information about costs associated with advice services (41% did not recall). 73% recalled receiving information about the types of services provided in connection with the investment advice arrangement (19% did not recall). 78% recalled receiving information about T. Rowe Price Advisory Services, Inc. s privacy policies (17% did not recall). 62% recalled receiving historical performance of the investments offered (27% did not recall). 66% reported being aware that they can arrange for advice by another provider that could have no material affiliation or receive no fees in connection with their retirement assets. 93% reported receiving information related to the advice they receive on a regular basis. 5. Required notification was evaluated and found to contain all required information. It was also written in plain, understandable language. 6. Historical performance is provided to clients through an appendix to advice and portfolio evaluation. 7. Fees for investment advice are within reasonable proximity to industry norms. Compensation received by T. Rowe Price Advisory Services, Inc. for evaluating, making recommendations and answering clients questions is a flat fee of $ Condition is only applicable to entities in which T. Rowe Price may invest. 9. Types of services offered are listed in the client service agreement. 10. Notifications contain acknowledgment of fiduciary status but should be more explicitly stated. 11. There were no complaints received concerning T. Rowe Price Advisory Services, Inc. 12. Eligible investment advice arrangement contains no terms that were determined to be unfavorable. 9

10 13. Requested and received documents stored by T. Rowe Price Advisory Services, Inc. and confirmed through written communication to DALBAR. 14. Documentation is archived by T. Rowe Price Advisory Services, Inc. for required 6 years. Requested and received documents stored by T. Rowe Price Advisory Services, Inc. and confirmed through written communication to DALBAR. 15. T. Rowe Price Advisory Services Inc. uses a client profile to gather client information and has a documented process for using the profile to develop recommendations. 16. Client profile includes sources, timing and distribution of all retirement savings, client s time horizon and risk tolerance. 17. Recommendations contain projected returns based on 1,000 market simulations. 18. In both the initial recommendation and the ongoing Checkup, T. Rowe Price Advisory Services, Inc. provides an model with suggested changes to the sub-asset class allocation. Allocation changes are made at the client s discretion. 19. Selected documents include evidence that recommendations reflect client profile, including time horizon, risk/return and asset class preference. 20. T. Rowe Price Advisory Services, Inc. applies a consistent methodology. 21. A periodic review of adviser s operations is conducted. Confirmed through written communication to DALBAR. 10

11 EXPLANATION OF METHODS USED Evaluation Review compensation agreements agreement signers Written statement clients Evaluate notification Test of client enrollment/advice process Evaluate client agreement Analysis of complaint line Alignment with peer group Random request for delivery of copy of documents Description of Process Adviser discloses agreements used as Fiduciary Adviser and other descriptions of other sources of compensation in an annual report. These disclosures are examined for evidence of cases where compensation has or may vary based on the investment advice given to clients. Adviser discloses a randomly selected sample of signed agreements to determine if signatories are the client. Additional written statements were requested and provided by the Fiduciary Adviser. Adviser discloses all clients that have engaged him/her. A randomly selected sample are contacted and asked about the receipt of required notifications and services. Adviser provides examples of notification provided to clients, which are reviewed for compliance with disclosure requirements. Notification must contain all required content, even when response is negative. Auditor examines the enrollment and advice process of randomly selected clients. This includes notifications, client profile and resulting investment recommendations. Eligible Investment Advice Arrangements are examined for unfavorable terms. Terms are considered unfavorable if they are outside of the usual practice of Fiduciary Advisers or fail to conform to generally accepted fiduciary standards. Complaints received are evaluated to determine if there are an excessive number or if there are severe complaints of breach of fiduciary duty. Compensation of all advisers is used to compute a minimum, maximum and mean cost per client after removing outliers (Highest and lowest 10%). The adviser s compensation is compared to this peer group norm. Adviser is asked to deliver copies of documents used in connection with one or more clients that are randomly selected by DALBAR. Adviser provides examples of materials, which are reviewed and analyzed. An Asset Allocator Rating is produced. 11

12 VETTING PERFORMED The following assessments were made during the course of the audit for the reasons indicated. Any material deficiencies found are reported as Specific Findings in an earlier section of this report. Vetted Item Increase Benefit Cost Saving Reason for Vetting Regulation Good Practice Avoid Litigation Background checks X X Validation of knowledge/expertise Willingness to formally declare fiduciary responsibility. Client evaluation of trust, financial performance, quality of advice and quality of service X X X X X X X X X X Scope of work performed X X X Regulatory compliance across multiple regulators Reasonableness of arrangements and contracts Avoidance of self-dealing, potential conflicts of interest and other improper influence Adequacy of insurance protection Completeness, clarity, accuracy and usefulness of communication Practices, processes and controls X X X X X X X X X X X X X X X X X X X X Costs, Fees & expenses X X X X Use of generally accepted investment theory Investment track record X X X X X X 12

13 303 Congress Street Boston, MA