It’s a common scenario for financial advisors: A client for whom you are managing a standalone brokerage account asks if you can also help them select and manage investments for their employer-provided 401(k) or 403(b) plan. Can you, and perhaps more importantly, should you help this investor with assets that are “held away” from your practice? And if so, is there an easy, streamlined way to do it?
Generally speaking, the answer is “yes” to all of the above—with some caveats. While advising on a participant’s 401(k) investments deepens the client relationship, adds assets to your book and can lead to a more tailored, holistic financial plan for your client, there can still be challenges. Providing advisory and management services on held-away assets may pose issues related to ERISA compliance, fee billing, cybersecurity and custody, to name a few.
Fortunately, there are solutions that can help advisors avoid many of these pitfalls, in a way that’s both straightforward and compliant—in particular, the 401(k)’s self-directed brokerage account (SDBA).
“SDBAs solve for a few key challenges financial advisors face in these cases: the ability to advise on held-away, ‘on-plan’ 401(k) assets, stay compliant, and offer more investment choices than exist in the core options of most plans, to better align with the participant’s goals,” says Kenneth Deane, Senior Vice President, Advisors Capital Management (ACM), who oversees ACM’s PathFinder platform.
For more than 70 million active participants, as well as millions of former employees and retirees, a 401(k) is essential for a secure, comfortable retirement. Yet many employers’ plans only offer a limited menu of investment options.
In addition to the challenge of a narrow selection of investments, research suggests that only 18% of workers feel very confident about managing their own retirement savings, so it’s no wonder they often turn to professionals for guidance. However, advisors need to be aware of the possible risks before agreeing to advise clients on retirement assets.
While the aforementioned SDBA offers a potential path for financial advisors to work with participants of held-away 401(k) accounts, when that FA is the advisor to the plan, advising individual participants can lead to so-called “double-dipping” risks. That is, some provisions of ERISA prohibit charging the participant for advice that the 401(k) plan is already paying the advisor to provide. If the advisor tries to work around that by reviewing the client’s statements and making investment recommendations, the client must either execute on those recommendations themself, adding frustration and friction, or share their login information so the advisor can execute on their behalf, which presents data security and compliance challenges.
Additionally, depending on where and how the assets are held, the SEC may consider an advisor to have custody over 401(k) assets on which they are advising (whether the advisor is the plan rep of record or not). If the funds are deemed to be held by the advisor, they must be named as an agent or trustee for the client and are liable for keeping the securities safe while in their possession.
There are technology solutions, such as data aggregation tools, that allow an advisor to view and trade in a participant’s 401(k) account without having to log in with the client's credentials. However, some state regulators have questioned whether encouraging clients to share login credentials with third-party data aggregators may constitute “dishonest and unethical” conduct by the advisor.
“There are a number of risks posed by some of the existing solutions on the market. These include, at minimum, cybersecurity risk, regulatory risk in the form of a custody exam from the SEC, and potential risk from the Department of Labor for being an advisor who is not officially recognized by the plan,” notes Robert Ross, ACM’s Chief Compliance Officer.
Determining the advisor’s fee for managing held-away assets can be complicated. Some advisory firms have one fee level for assets under management (AUM) and another, typically lower, fee for assets under advisement (AUA)—in this case, the 401(k) investments. The rationale is that in an AUM-managed relationship, the advisor is actually managing the client’s money and offering access to a full range of available investment options, whereas the advisor’s discretion and client’s investment options are much more limited in an AUA-managed situation such as a 401(k).
In any case, it is critical that the advisor’s firm clearly delineate and disclose how any fees will be calculated and applied, and determine whether its formula will pass regulatory scrutiny.
For advisors who want to help clients with their held-away 401(k) accounts, a SDBA can be a straightforward, compliant solution. An increasing number of employer plans offer SDBAs that give employees a wider range of choices. Employees can manage their SDBA independently or through a third-party investment advisor (i.e., an advisor not affiliated with the 401(k) plan itself), depending on how their employer has structured it.
Over 100,000 plans representing more than $3.5 trillion in assets offer SDBA options. By some estimates, however, only 3% to 4% of participants with SDBA access take advantage of this option, many unaware that it even exists—leaving a vast untapped market for advisors.
“The attractiveness of an SDBA is that it’s a bridge between the needs of the investor and the services of the FA. It potentially solves the issue of access to held-away assets, while providing the personalized service clients want, in a way that's designed to be efficient and compliant,” says ACM’s Deane.
Adds Ross, “We created PathFinder to leverage the SDBA opportunity by providing a way to invest on a client’s behalf, simplify fee collection and provide proper disclosures.” He notes that an SDBA can potentially address risks related to ERISA, custody and cybersecurity, while helping mitigate possible conflicts of interest through extensive disclosures.
As an investment adviser and fiduciary, ACM designed PathFinder to be secure, adherent to all applicable regulations and easy to implement. After a quick onboarding process, advisors have a complete view of their clients’ retirement plan assets without any password sharing or data privacy concerns. Moreover, PathFinder supports advisors with an end-to-end process: identifying eligible plans, opening SDBAs and seamlessly integrating clients’ retirement accounts into their overall financial plan.
Many advisors have found that incorporating PathFinder into their service offering can add value and enhance client engagement—ultimately enabling them to capture a greater share of the vast pool of 401(k) assets—while navigating some of the regulatory, security and fee-related challenges of advising on held-away investments.
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