DOL guidance may hurt independent providers

WASHINGTON — Department of Labor guidance allowing money managers to offer investment advice directly to 401(k) plan participants could squeeze the bottom lines of leading independent-advice providers Financial Engines Inc. and Morningstar Associates LLC, but it’s a big win for mutual fund companies.
A key provision in the Pension Protection Act of 2006 opened the door for money managers to offer advice, but it required them to charge participants the same fee regardless of what investment product the participant selected — a stipulation at which managers balked.
But the Labor Department’s Feb. 2 guidance creates a regulatory loophole that lets managers charge varying fees as long as the compensation of the corporate affiliate and the representative through which the advice is provided doesn’t vary, regardless of which investment option is selected.
Until now, mutual fund companies and their defined contribution plan clients used third-party advice givers such as Financial Engines of Palo Alto, Calif., and Morningstar Associates and Ibbotson Associates Inc., both subsidiaries of Morningstar Inc. of Chicago. Such companies offer computer-generated advice.
Now, though, mutual fund companies will be able to offer 401(k) clients their own advice services.
Many mutual fund firms have formal agreements with the advice providers. Financial Engines’ mutual fund customers, for example, include Fidelity Investments and J.P. Morgan Retirement Plan Services LLC. T. Rowe Price Retirement Plan Services Inc. is a customer of both Financial Engines and Morningstar.
But with the new guidance, the need for those advice middlemen has diminished.
“Competition in the marketplace for this kind of advice may get hotter now that the mutual fund [companies] themselves will for the first time be able to enter the fray,” said Andrew Oringer, an attorney who specializes in the Employee Retirement Income Security Act at Clifford Chance LLP in New York.
“Fidelity, like other fund firms, has been awaiting the DOL’s guidance, and we’re pleased that we’ll now be able to assist our clients by expanding access to advice on retirement accounts,” said Jenny Engle, a spokeswoman for the Boston-based fund giant.
She said that Fidelity officials have been pleased with their relationship with Financial Engines, but added: “We intend to provide investment advice in compliance with the law and envision a model that includes both online and
representative-led interactions.”
Fidelity lobbied hard for the right to offer advice to plans it manages, Washington insiders said.
“We’re definitely going to be looking at all our opportunities,” said Bob Holcomb, vice president, legislative and industry affairs, at JPMorgan Retirement Plan Services of Kansas City, Mo. “We’re always looking at ways we can better serve our plan sponsors and their participants.”
Mr. Holcomb added, however, that the firm won’t necessarily change any of its current advice arrangements with Financial Engines.
Although the new guidance creates competition for investment advice providers, executives at the two dominant independent providers said they’re not worried.
In an interview, Christopher Jones, Financial Engines’ chief investment officer, said that the guidance wouldn’t hurt his company, in part because the larger plans that Financial Engines predominately serves want independent investment analysis.
Mr. Jones also said that a legislative and regulatory emphasis on the importance of investment advice had expanded the pool of plans seeking advisory services. “The impact has been quite positive,” he said.
“At the end of the day, having a third-party approach to ensure the advice provided is appropriate, sound and unbiased is a huge consideration,” said Peng Chen, president of Ibbotson Associates.
“[The continued use of third parties for advice] also removes any perceived conflict of interest for the service providers or money managers,” he added.
Despite the change in rules, T. Rowe Price of Baltimore will stick with a platform that includes third-party advice generated by Morningstar and Financial Engines — at least for the near term — because that’s what plan sponsors want, said John Doyle, vice president of marketing and communications.
“The market is not asking for proprietary advice; the market is asking for objective advice,” he said.
But ERISA attorneys said that many of their money manager clients have made clear their interest in direct advice.
“It’s going to, for the first time, enable employers to get out to participants the kind of advice employers have been clamoring to provide and participants have been clamoring to get,” Mr. Oringer said.