Despite uncertainty, Department of Labor fiduciary rule upends 401(k) biz

Market shifts will largely remain intact in the event the regulation is amended or scrapped, and non-specialists are adjusting

Mar 19, 2017 @ 12:01 am

By Greg Iacurci

Even though its fate is unclear, the Department of Labor's fiduciary rule is upending the retirement plan adviser market, which spans the adviser spectrum from "dabblers" to defined contribution "specialists."

Observers say such changes began taking root prior to the promulgation of the rule last year but are being accelerated by the DOL regulation.

"The fiduciary rule has created a catalyst that has changed people's time frame," said Troy Hammond, president and CEO of Pensionmark Financial Group, with $40 billion in DC assets. "It's why we have this compression of activity."

The conflict-of-interest regulation, which raises investment advice standards for retirement accounts such as 401(k)s, is having an outsized effect on plan advisers whose primary revenue generator is individual wealth management rather than defined contribution plans. These dabblers, also known as "two-plan Tonys," represent by far the largest group of plan advisers, and they are most likely to serve plans in a nonfiduciary capacity today.

There are roughly 250,000 active, licensed financial advisers who either work on or get paid for a defined contribution plan, according to data from The Retirement Advisor University. Among them are an estimated 225,000 dabblers, those advisers who oversee fewer than five DC plans, according to TRAU.

"Core" advisers — a middle-tier group managing at least five DC plans — number 22,500. There are just 2,500 "elite" or "specialist" advisers, who manage more than $250 million in DC assets and derive the bulk of their revenue from DC business.​

"These onesie-twosie folks have to make a decision if they're in [the DC business] or not, and if they're in it, they have to make some changes," Mr. Hammond said.


Broker-dealers are "all over the map" in terms of how they're helping their brokers comply with the regulation and mitigating their own risk in the process, if those brokers remain in the DC market, said Robin Green, head of research at Ann Schleck & Co., an affiliate of fiduciary consulting firm fi360 Inc. that provides retirement industry research.

At a minimum, there's a "broad requirement" among broker-dealers that advisers receive fiduciary training, whether through an internally created or external program, said Marcia Wagner, principal at The Wagner Law Group. Such trends had emerged prior to the DOL rule, largely as a result of 401(k) litigation that has proliferated in recent years, which has broadened awareness of fiduciary responsibility and tenets, observers say.

Thus, even if the rule doesn't survive in its current form — and many expect that it won't given the Trump administration's call to review the rule and delay its implementation, the initial phase of which is supposed to begin April 10 — experts believe many market changes are here to stay.


"The horse has left the barn," Ms. Wagner said. "The question is will it trot or will it gallop?"

As a compliance example, LPL Financial, the largest independent broker-dealer in the U.S., with roughly 14,000 advisers, is telling advisers to use one of five options if they want to continue doing DC business, said David Reich, executive vice president at LPL Retirement Partners, which oversees roughly $127 billion in DC assets.

Advisers can outsource fiduciary investment services, such as fund selection and monitoring, and some administrative work, such as reporting and semi-annual benchmarking, to LPL through its Small Market Solution program. Advisers can opt to use a program called the Tool Suite that allows LPL to monitor advisers to ensure they've fulfilled their fiduciary responsibilities.

Advisers can also serve plans in an advisory rather than brokerage capacity through the Retirement Partners Consulting Program, which requires completion of a fiduciary educational program.

Further, they can outsource fiduciary investment responsibility to third-party providers available through record-keeping platforms and partner with specialists. LPL discourages that route because it's more difficult to supervise, Mr. Reich said.

Several observers, such as William Chetney, the founder of Global Retirement Partners, said the wirehouses are taking "pretty hard-line positions" on compliance.

One wirehouse, Morgan Stanley Wealth Management, requires partnerships on "large" DC plans, said spokeswoman Christine Jockle. She declined to quantify a specific plan-size threshold, but said the partnerships are "particularly valuable in the world of retirement plans, where the complexity grows with the size of the plan."

Less-experienced Morgan Stanley advisers can partner with a "corporate retirement director" at the firm or with a director within Graystone Consulting, the firm's institutional consulting arm.

Earlier this month, Morgan Stanley partnered with the record keeper Ascensus to offer a packaged fiduciary product for small 401(k) plans with up to $10 million in assets. The product, ClearFit, allows Morgan Stanley advisers to serve clients in a nonfiduciary capacity, while Morgan Stanley takes on fiduciary responsibility associated with 401(k) investment selection.

Spokespeople for Wells Fargo, Merrill Lynch and UBS declined to comment.


"I think a lot of firms will continue to move in that direction even more and put their specialists on the forefront so they can feel like they're protected," said Brady Dall, an adviser at 401(k) Advisors Intermountain, with more than $2 billion in DC assets.

Mr. Dall, whose broker-dealer is LPL, has been partnering with less-specialized advisers both in and outside of LPL for several years and believes doing partnerships "is going to get trickier" because of the DOL fiduciary rule.

That's because a dabbler getting paid for the referral of a specialist to a client could become a fiduciary under the rule, and becoming a fiduciary is "what they were trying to avoid by bringing us in" to begin with, Mr. Dall said.

Referrals may slow down as a result, depending on broker-dealers' response, he said.

Babu Sivadasan, group president of Envestnet Retirement Solutions, which provides third-party fiduciary services, believes there's another challenge as well — a nonspecialist might not be "comfortable" working with another adviser and sharing a client relationship.


Overall, the fiduciary rule is "compressing the small end of the marketplace, which is a good thing for mid-level and elite advisers," said Mr. Chetney, who oversees a network of independent advisory practices with $200 billion in DC assets.

However, midlevel advisers also have to make a choice to stay or go, and some are approaching specialists to buy out their practices, Ms. Wagner said.

"Are they really going to jump into the [ Employee Retirement Income Security Act of 1974 ] pond feetfirst? If they do, they'll become specialists," she said. "You can no longer be half pregnant."

Ms. Wagner advised on a recent deal in which a wealth manager sold his book of DC business, which made up roughly 25% of his revenue, to a specialist. The wealth manager decided bringing that business into compliance with the DOL rule wasn't worth the amount of resources needed to do so, she said.

"I think [wealth managers], if they're wise, will get out of the pension or ERISA world unless they intend to learn it," Ms. Wagner added.


For specialist advisers, the fiduciary rule "is kind of a nonevent," Ms. Green said, explaining that specialists always have been fiduciaries and are "regimented" in how they serve clients.

Observers also say specialists advise less frequently on rollover transactions, one of the areas seen as causing the most compliance difficulty. Any operational changes required by specialists as a result of the rule are often slight nuances, such as tweaking documentation, Ms. Green said.

However, large RIA "aggregators" such as Global Retirement Partners, NFP Corp. and Pensionmark have seen an uptick in interest from advisory groups looking to join their ranks, according to their executives. Pensionmark, for example, will be onboarding more advisers in the second quarter this year than it previously has in a whole year, Mr. Hammond said.

Advisers look to leverage the firms' technology, practice management, compliance and sales support and other resources such as staff ERISA attorneys, for example, observers said.

But joining the ranks of these so-called aggregators comes with a "big haircut," whether it's a large fee or the loss of independence, Mr. Dall said. And the firms can be selective in which groups they choose to ultimately join their ranks, observers said.


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