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IRA proposal irks some independents

It would prohibit those affiliated with product companies from giving advice

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By Sara Hansard

March 29, 2009 6:01 am ET

A congressman's suggestion that only independent advisers be permitted to give advice to participants in the small-company individual retirement accounts proposed by President Obama may not go far enough, according to some financial advisers.

"It's too narrow. It's really missing the point," said Scott Leonard, a senior economist with Trovena LLC, a family office in Redondo Beach, Calif., that supervises about $500 million.

"The real issue is you want people who are legal fiduciaries [who will] put clients' interests ahead of their own and disclose conflicts of interest," he said.

Mr. Leonard's comments come in response to remarks by Rep. Robert Andrews, D-N.J., chairman of the Health, Employment, Labor and Pensions Subcommittee, which has oversight over retirement issues.

At a hearing last week, Mr. Andrews said that advisers who provide advice on IRAs should be independent of companies that sell investments.

In an interview, the congressman said that he will push to ensure that regulations governing IRAs are similar to those in the Employment Retirement Income Security Act of 1974. The act generally prohibits advisers affiliated with companies who sell investments from providing direct advice to pension plan participants.

Kevin Grant, vice president of retirement plans at Higginbotham & Associates Inc. in Dallas, said that requiring advisers to act as fiduciaries if they provide advice on IRAs is more important than requiring that links between advisers and financial service companies be severed.

"A fiduciary standard is a good way to go," said Mr. Grant, whose firm manages about $500 million.

"You're either a fiduciary or you're not. If you're going to be a fiduciary adviser I don't care who you're connected to. I don't think that's the relevant issue," Mr. Grant said.

The lawmaker's push is rooted in President Obama's fiscal 2010 budget proposal, which would require all employers that do not offer retirement plans to automatically enroll employees in IRAs unless the workers specifically "opt out." The requirement aims to increase retirement savings for the estimated 75 million workers who do not have access to retirement plans (InvestmentNews, March 16).

"I don't think somebody should be giving advice on your retirement money if they serve two masters, whether it's your 401(k), your IRA or your defined contribution account," said Mr. Andrews, whose subcommittee is part of the House Education and Labor Committee.

"I want to be sure that the advice is motivated by what's best for you, and not because their commissions are going to be higher or their incomes are going to be higher," he said.

"By removing the link to products, you sort of get that, but not completely. It doesn't mean that somebody doesn't have some other agenda," Mr. Leonard said. "The goal is to remove agendas other than giving your best advice."

While many advisers welcome the prospect of requiring all advisers who work with retirement accounts to be independent of mutual funds, brokerage firms, insurance companies and other entities that sell financial products, some worry that the mechanism is not in place to serve additional consumers who need help managing an IRA.

"The infrastructure isn't there to provide advice for all people who need it," said Milo Benningfield, the principal of Benningfield Financial Advisors, a fee-only investment advisory firm in San Francisco that manages about $33 million. "The number of independent advisers out there is a small fraction of the total advisers. The number of people who need advice is just enormous," Mr. Benningfield said.

Requiring all advisers to be independent of companies that sell investments could lead to an increase in the number of independent advisers, Mr. Andrews said. "More advisers would qualify and register as independent advisers. That's kind of the point," Mr. Andrews said.

"There'd be a ready source of income for those advisers. The supply would meet the demand."

Other advisers say that prohibiting advisers who sell their company's products from offering advice on retirement plans is counterproductive.

"Who are they suggesting has the knowledge and education to sell these things, and to stay on top of it?" asked Jon Ten Haagen, a certified financial planner who is founder and principal of Ten Haagen Financial Group in Huntington, N.Y., which manages about $35 million.

Advice given by representatives who sell their company's retirement products "can be conflicted, there's no question," he said. "But is [the restriction] necessarily? I don't think so."

Bringing IRAs under the types of restrictions that 401(k)s are subject to under ERISA could make it more difficult to move ahead with President Obama's automatic-enrollment proposal for IRAs, said Liz Varley, managing director for government affairs in the Washington office of the Securities Industry and Financial Markets Association, which has offices in New York and Washington.

"That would be a great way to kill their auto-IRA proposal," she said.

ERISA applies to employers that offer retirement plans and sets requirements for employers to act as fiduciaries of the plans. However, IRAs that are owned individually, rather than through employers, would not have an employer in the role of fiduciary, Ms. Varley said.

If IRA automatic enrollment is mandated, "there's a little bit more of an argument if you're talking about an employer offering, or requiring, a payroll deduction arrangement," she acknowledged.

But the need for regulatory protection must be weighed against the impact that added regulations would have on businesses, Ms. Varley said.

If the Obama plan becomes law, "you're mandating on these small employers that they offer these arrangements and on top of that, [are you] going to have the employers accept full ERISA fiduciary responsibility? It may not be in the interest of keeping their business running," Ms. Varley said.

E-mail Sara Hansard at shansard@investmentnews.com.

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