The founders of Chicago’s DiMeo Schneider & Associates, Bob DiMeo and Bill Schneider, started working with 401(k) plans when they were still at Kidd er, Peabody & Co. in the mid-1990s, says the firm’s director of institutional consulting, Doug Balsam. The firm now has roughly $30 billion in assets under advisement for DC plans and has more than 150 retirement plan clients.
Balsam agrees that there wasn’t a lot of scrutiny of fees back in the early days. Back then, he says, you picked bundled packages that wrapped in an investment selection with record-keepers like Fidelity, Scudder or Kemper, and the selections were proprietary.
“For many years, there was no way you were going to get a Vanguard fund on a Fidelity platform or vice versa. There were a lot of closed walls between the investment firms and record-keepers.” Those walls came tumbling down not because of regulators but because of the revolt of other market players: Asset managers wanted a taste of the plans, plan consultants wanted more flexibility, plan sponsors wanted better-performing funds, and employees wanted more fund choices. “You had the investment-only providers … who were knocking on doors and saying ‘We’re managing your DB plan and you see us doing well. Why don’t you let us manage your 401(k)?” The fiduciary movement meant there could no longer be closed walls, Balsam says.
But when RIAs got into the space, he continues, they realized that they would have to extend their expertise beyond their regular services. That’s led to a new breed of third-party service providers popping up like mushrooms after the rain. RIAs “are starting to realize now, ‘I’ve got to balance what I’m doing for my individual clients and go out to speak to 50 people in a manufacturing plant three times for a couple of days.’ I think it really forced the hand of advisors to say ‘I’m going to be in this space and I’m going to hire people who can get a staff together that can provide education, help with the print material, get up to speed on taxing and administrative issues.’”
CapTrust, a Raleigh, N.C., firm, has $200 billion in assets under advisement, most of it in retirement plan advisory client relationships around the country (it also has a huge wealth management business). It was founded as a wealth manager in 1997 after being spun off from broker-dealer Interstate/Johnson Lane and is now overseen by CEO Fielding Miller. Miller had a lot of 401(k) clients since the early 1990s.
“There weren’t a lot of retirement plan advisors in the early ’90s or late ’80s because the world was not really set up for that,” says John Curry, CapTrust’s senior director of marketing. He also says that companies used proprietary arrangements, often with group annuity products or bank products, and these were trustee directed, not participant-directed.
By the early 2000s after the tech bubble burst, Curry says, the new status quo was full of confused plan sponsors who didn’t know where to turn looking for guidance. “All of that is a perfect setup for an independent and objective retirement plan advisor like CapTrust to inform and put some perspective around the choices to be made and to help plan sponsors negotiate their partners, pick their fund lineups and educate or provide advice to their employees.”
Buddy List
Curry also says that new business used to be based on relationships, but that’s changing at the high end of the market. Marty Bicknell, the CEO of Mariner Wealth Advisors in Leawood, Kan., agrees with that assessment.
“In the past,” says Bicknell, “it was definitely that you could be managing money for the CEO of a company and get the opportunity [to advise its 401(k) plan] because you were doing a good job for them personally. Those days are gone.”
In fact, he says, if you have a relationship with the plan, it might be used against you. “The buddy list is behind us,” Bicknell says.
Curry says that CapTrust has done 1,300 or 1,400 RFPs in its corporate history, and that this trend has really taken root in the last six years.
Still, according to Schweiss, it would be premature to write the obituary of the “two plan Tonys,” especially in the smaller client space, where TD now has an offering that bundles record-keeping and plan design and administration. The RIA has only to bring the TD Ameritrade product to the plan sponsor. (Vanguard and others have also bundled record-keeping into a plan sponsor offering.)
“We have many, many hundreds of two-plan Tonys,” he says. “We keep hearing predictions that that person is going to get shaken out. … [But] the advisor who is really going to put together a business plan for proactively going after plans, really understanding what the opportunities are, is going to have a leg up on somebody doing it on a reactive basis.”
Legal Environment
But it’s not enough to know how to deal with HR departments. These days, you are going to have to understand the legal landscape if you want to play in this space says ERISA lawyer Marcia Wagner, whose firm the Wagner Law Group has represented dozens of RIAs, often on the defense side, and says, “We’re up to our eyeballs in this in every conceivable way.
“You can’t be an RIA firm and not have a really strong knowledge and understanding of ERISA,” Wagner says, “and the best practices and the evolving best practices. If RIAs are going to do well and mitigate risk, I often say they need to be mini-ERISA lawyers.”
She says many class action suits against 401(k) plans are about fees being excessive. “This is a standard type of argument.” It was started by one law firm and then it snowballed and many others got in the game.
Advisors also need to realize that the standard for being an ERISA fiduciary is higher than that for an SEC fiduciary. “Under the SEC rules, in general, if a fiduciary has a conflict of interest, full and complete disclosure satisfies the legal issues,” Wagner says. “Under ERISA, if a fiduciary merely discloses prohibited conflicts, that disclosure provides people with a road map of how to sue the fiduciary, unless the fiduciary complies with a prohibited transaction exemption, such as the best interest contract exemption.”
The standard defense for plans that have higher fees is that they must provide better services and provide a better mousetrap.
“ERISA doesn’t require the lowest cost option being provided with respect to fees,” Wagner stresses, “but that the fees for services are commensurate.” Firms get in trouble, she says, with things that are egregious. “If your gut tells you something isn’t right, guess what, it probably isn’t right.”
For instance, lawyers might pounce if there hasn’t been an RFP done for a number of years, if the fees are excessive, if the returns of the funds have underperformed basic industry benchmarks, if plan participants have been complaining, if the plan has had bad audits that haven’t ended well with the IRS or DOL, or if the plan sponsor isn’t making timely distributions when people leave the company and seek to cash out. “These are all red flags,” Wagner says.
But the new fiduciary rules are going to change the game. “RIAs are going to have to up their game to be in compliance with these new rules,” Wagner says. “There’s going to be a lot more compliance costs; more paperwork; a lot more outreach to the clients to explain what all this is; and a change in processes, protocols and procedures.”
She says her clients are working around the clock to get themselves into compliance by April 10. “We’ll make it,” she says. “Fingers crossed, knock wood, spit to the wind, salt over the shoulder.”
But with all these headaches, she says she doesn’t see advisors shying away from the business. Like Schweiss, she sees people seizing opportunity: People who want to practice advice will feel compelled to do it, as they would any passion. “No matter how litigious medicine has gotten, every year you see more people going into it,” she says. “I think becoming a financial advisor is going to become more and more difficult, but people who truly have the calling, this isn’t going to hamper that. If anything, they’ll up their game.”