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401(k) referrals rare from wealth managers despite DOL fiduciary rule

There are still many obstacles, especially for retirement plan advisers within independent broker-dealers

Oct 11, 2017 @ 5:50 pm

By Fred Barstein

Conventional wisdom is that the Department of Labor's conflict-of-interest rule would result in a flood of referrals from wealth management advisers and other less-specialized retirement plan advisers to retirement-plan specialists.

Beware of conventional wisdom. Though 401(k) referrals are likely to increase, there are still many obstacles, especially for advisers within independent broker-dealers.

I caught up with Bill Beardsley, newly minted retirement chief at independent broker-dealer LPL Financial, who said LPL encourages 401(k) referrals, especially between the "emerging" plan advisers and "elite" advisers, who do very little else other than 401(k) business. However, he acknowledged a few challenges:

• Independent broker-dealers stop short of mandating how their advisers conduct business, other than for compliance reasons.

• Wealth management advisers who stumbled into 401(k) relationships are more likely to seek help from a wholesaler at a record-keeping firm than risk their relationships by introducing another adviser.

• Experienced plan advisers have moved up market and don't view small plans as economically attractive, especially if they have to share fees.

The heightened fiduciary standards created by the Department of Labor fiduciary rule may actually limit adviser referrals, because the act of referring could be considered a fiduciary act. Referral fees paid to advisers who are not working on or adding value to a plan might not be deemed "reasonable compensation," a key tenet of the rule.

(More: How 401(k) advisers can bullet-proof themselves against litigation risk under DOL fiduciary rule)

Andy Kalbaugh, managing director at LPL, notes that ensemble adviser practices in the same group who don't share common revenue and costs might not refer 401(k) opportunities because they don't have a shared economic interest. And a 401(k) specialist in a $9 billion LPL wealth management group who joined thinking he or she would get referrals is disappointed. Not only is the specialist not getting many referrals, Mr. Kalbaugh noted most wealth management clients aren't business owners with a 401(k) plan to manage.

Many broker-dealers may have reduced referral opportunities in their reaction to the DOL fiduciary rule by setting up services in the small-plan market that limit the work and liability of less-experienced advisers. Why refer clients and share fees when there are plug-and-play options?

Referrals from wealth managers and employee-benefit brokers work well, especially when there is a mandate from senior management, and the advisers are employees with compensation geared toward rewarding referral activity.

Insurance-agent networks seem to work well, as do wirehouses. Bank of America Merrill Lynch, for example, has retirement plan specialists and bankers team up to create relationships and trust. And then there are "pure" 401(k) advisers, who do nothing but retirement-plan business, who team up with an RIA network to get referrals. Risk is limited and trust is built because of the adviser's pure, focused business model.

A simple way for retirement plan specialists to get referrals from wealth management advisers relies on basic common sense. To make a friend, be a friend. In other words, start referring clients to wealth managers or benefit brokers from your 401(k) plans, especially as part of a tight and exclusive referral network that might also include a banker and CPA. Nobody owes you anything — until they do.

Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews' Retirement Plan Adviser newsletter.

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