Rep or fiduciary? Labor department says, 'Choose'

Broker-dealers deciding how their brokers will deal with retirement plans

Mar 14, 2010 @ 12:01 am

By Darla Mercado

Proposed regulations that would limit the way that financial advisers are compensated for working with retirement plans are forcing broker-dealers to reconsider how their -representatives sell and advise retirement plans.

The proposed regulations, which were issued by the Labor Department last month, would allow broker-dealers to offer advice to plan participants only if their reps acted as fiduciaries or, if acting as a registered rep, they used an impartial computer model to pick investments.

“The regulation is trying to separate advisory from other business and keep revenues in separate buckets,” said John Simmers, director of risk management and product development for the Compliance Department Inc. “[The Labor Department] doesn't want advisers doing additional work that results in more compensation, because that creates conflicts, so they're trying to eliminate the conflicts.”

Experts are certain that the proposal, which is open for comment through May 5, will be approved.

“My question to the end-adviser is, are you in the plan for the game of rollover capture and cross-selling or are you in it because you want to provide investment advice to the plan?” asked Jason C. Roberts, partner at Reish & Reicher, a law firm that specializes in the Employee Retirement Income Security Act of 1974. “Some reps may be giving advice in an unlevel compensation situation, and this regulation will highlight that.”

Few broker-dealer firms are willing to talk about their plans for dealing with the proposal should it become law. Many, including Raymond James Financial Services Inc., are still evaluating the proposal.

“Brokers are going to have to decide whether they're going to be fiduciaries to the plan or not, and if they're not going to be, then they're just going to be brokers, and not give advice,” said Marcia S. Wagner, managing director at The Wagner Law Group.

For broker-dealers that employ brokers, one of the major issues to be decided is which reps will be permitted or encouraged to act as plan fiduciaries and which will be required to remain as reps when dealing with retirement plans, including 401(k)s and individual retirement accounts.

The majority of small 401(k) plans — those with $5 million or less — are sold by brokers or advisers. Brokers who work with plan participants often encourage them to roll over their 401(k) assets into an IRA with the broker's firm upon retirement.

The dollar volume of rollover IRAs is expected to hit $266.7 billion this year and grow to $338.8 billion in 2014, according to data from Cerulli Associates Inc.

“We've been hearing from virtually all the major firms, and they're very cautious about taking this step,” said Louis S. Harvey, president and chief executive of Dalbar Inc., a research and consulting firm.

Some firms may offer computer model advice through reps and personalized advice through fiduciary advisers, he said.

Independent broker-dealers also are grappling with the issue.

Commonwealth Financial Network expects that most of its dually registered advisers will go the fee-based route.

“[Going fully fee-based] makes sense, because when you have to report and disclose revenue sharing, the cost and complications could outweigh the benefits,” said Amy Glynn, director of retirement consulting services at Commonwealth.

Executives at Cambridge Investment Research Inc. are discussing the proposed regulation with affiliated advisers, said spokeswoman Cindy Schaus, who added that it is too early to say how the firm would approach the proposed rules.

Advisers believe that the either or nature of the rule may harm smaller investors.

“People need advice and help — and this rule makes it harder to offer both,” said Stuart J. Pastrich, managing director of Compass Financial Group, an LPL-affiliated independent firm that manages $100 million in assets and does about 20% of its business in IRA rollovers.

“Fiduciaries are needed, but we can't work for free. There needs to be some kind of common ground,” he said.

“I have one foot in the transactional world and one in the advisory world,” said Moss J. Kaufman, president of Network Capital Services, which manages $50 million and is affiliated with Investacorp Inc. “Since I always put the client first, I'd have to give up some of my business to keep up with the ethics.”

E-mail Darla Mercado at


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