An unintended consequence of the PPA is the significant benefit to you, the transparent financial advisor. While this change has been on the horizon for a handful of years, few advisors have positioned themselves to take advantage of the opportunity that is about to materialize.
To help demonstrate the potential, I will highlight a couple of real world examples.
Wal-Mart. Prior to 2010 and settling a class action lawsuit, Wal-Mart did not negotiate a single discount on fees among the actively managed funds in their lineup. The store famous for putting the screws to suppliers and delivering "everyday low prices," had their 1.2 million participants pay top dollar for investing the over $10 billion in their 401(k) accounts when noticeably less expensive share classes were available.
Unfortunately for employees across America, Wal-Mart is not the exception. It is clear that some of the biggest companies with an army of HR professionals and legal counsel have not understood and adhered to their fiduciary duty. While you and I are not going to win the Wal-Mart plan, countless small and mid-sized companies are even worse off and in the next year will be looking for help.
Acropolis. On over 90% of the plans that Acropolis (my firm) now manages, we have lowered fees from their prior provider by more than 33%. Plan Sponsors have been surprised, and disappointed, to learn that a plan they thought was free was costing their participants so much money. They have also been surprised to learn that their broker, who shows up for one meeting a year, is typically getting paid 25 basis points. Once disclosed, many plan sponsors have not felt like the brokers have earned their keep. Participants, many of whom have never heard of nor met the broker, are about to see the broker being paid and will be asking questions as well.
The 1974 law that brought defined contribution plans into existence was a monumental change from defined benefit plans and brought great opportunity for brokers. The impact of fee disclosure will be even more significant for transparent financial advisors.
This is such a large market that it will take years for a majority of the companies to address their plan and its shortcomings. Therefore, there is still time to get on the train, to lead participants to retirement income security, and to develop a significant revenue stream for your business.
How do you take advantage of this imminent disclosure? To be successful in the defined contribution market, there are a couple of recommendations for advisors.
Hire Experts. The defined contribution business is a different business than private client money management. It is heavily regulated and advisors would be well served to hire someone that knows the industry. You will benefit from having someone on your team who can speak intelligently about plan design, compliance, and the legislative issues surrounding qualified plans.
Start Talking with Owners. Most company owners do not understand their retirement plan. They are unaware that they need help, but will likely start to realize it when disclosure comes. This upcoming "eye opener" will create a great opportunity to start a dialogue.