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Do 401(k) assets require all fiduciary care all the time?

Steve Winks and Mike DiCenso engage a in a back and forth with big ramifications

Friday, November 18, 2011 – 4:11 PM by Brooke Southall
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Mike DiCenso: If there are no funds to be recovered from the fiduciary should something go wrong then there is no risk mitigation and protection.

Brooke’s Note: The fiduciary questions surrounding 401(k) plans are complex and hard to follow. See: Why the DOL’s massive new 401(k) disclosure requirements are a 'very, very big deal’.

Textbooks and street-style explanations are both of limited help. The debate that broke out between Steve Winks, a fiduciary expert, and Mike DiCenso, whose company oversees $82 billion of assets, in our comments section after an article — The head of a $12 billion RIA spars with UBS and LPL execs on the great fiduciary debate — helped me see some of the issues more clearly and I thought other people might appreciate it if I brought it out of the shadows of our comments section.

Advisors at wirehouses, independent broker-dealers and RIAs are all handling 401(k) plans and calling themselves fiduciaries — even though the structure of these firms are quite different.

It seems like a fair question to ask whether or not consumers and the Labor Department will continue to allow this to happen. Advisors aren’t required to take on fiduciary responsibility for the 401(k) plans they oversee, but a select few choose to do so. Right now, just a fraction of LPL and UBS retirement advisors have fiduciary status. At UBS, 400 of 6,500 advisors can act in fiduciary capacity and at LPL, it’s 400 to 500 out of about 12,000 advisors, according to executives at those firms.

Randy Long's bold words at the CFDD conference kicked off this debate.
Randy Long’s bold words at the
CFDD conference kicked off this debate.

Randy Long, founder and managing principal for SageView Advisory Group, LLC, an RIA with more than $12 billion in assets, said at the recent CFDD conference that those who don’t act as fiduciaries will likely face extinction. He also predicted that more consolidation of advisory firms working with 401(k) plans will occur.

Stephen Winks, principal of Sr. Consultant in Richmond, Va. had this to say in response to Long’s views in a comment he left below the article

Randy Long is absolutely correct in his assertion that if a broker is not a fiduciary to the fullest extent possible, they will not have a chance at serving retirement assets in the best interest of the consumer of their services, to include IRA assets. See: IRA assets could be ripped from the grasp of brokers if DOL has its way.

Fiduciary Plan Review’s innovation, which empowers brokers to provide 338 services through FPR eliminating the b/d fiduciary liability cited by Bill Chetney, does resolve the B-D fiduciary liability problem, but is an inferior competitive market position to that provided by Randy Long. The only way for B-Ds to compete is to empower the broker to actually act in a fiduciary capacity, acknowldeging fiduciary status, requiring B-Ds to professionally support the broker with the prudent processes, technology, workflow management, conflict of interest management and expert advisory services support for advising retirement-related assets.

Morgan Stanley Smith Barney is making great strides in creating the most complex consideration of advisory services — the development of comprehensive performance reporting of all a client’s holdings to include those not directly custodied — which is essential for the asset/liability study and adding value. Those firms which are whistling past the graveyard, thinking no serious transformative innovation is required, will be vulnerable to those firms that professionally manage the enabling resources necessary to support the expert fiduciary standing of the broker.

Randy Long is simply saying through asking eight or 10 questions that consumers readily understand, there’s presently not a broker in the business than can compete with an accomplished RIA like himself. The number of such examples is very large and growing, constituting very large businesses.

Michael J. DiCenso, National Practice Leader – Gallagher Retirement Services and president, GBS Investment Consulting of Itasca, Ill., responded to Winks:

Actually both sides are correct. First of all not every client wants a fiduciary, therefore why would you provide a service that is not desired and in conflict with the clients needs. Second of all, those clients who do want a fiduciary need to hire a truly independent fiduciary who is acting soley in their best interest and not accepting any soft dollars in any way from providers, mutual fund companies and investment managers. This is includes no meals, no entertainment, no conference discounts, and no training trips. The key answer to this issue is not whether the advisor is acting as fiduciary or not, the key is whether the advisor is holding themselves as truly independent under the fiduciary standard.

Also, clients need to understand what hiring a fiduciary really means. If you hire a fiduciary who possesses little to no net worth and no financial backing from a larger parent company there is actually no fiduciary risk mitigation for the client. If there are no funds to be recovered from the fiduciary should something go wrong then there is no risk mitigation and protection. This is a major issue in our industry. Many advisors are saying they are a fiduciary and providing protection to the client but have little to no net worth to deliver any protection at all. The days of the “false fiduciary” are coming to an end.

Stephen Winks added:


The two counterfiduciary arguments you advance are specious.

First, literally every investor wants their broker to be accountable for their recommendations after the recommendations are consummated and the broker is paid. Further, literally every consumer expects the broker to have an ongoing duty of care and loyalty on behalf of the investor in the investor’s best interests entailing a broad range of ongoing fiduciary duties. To maintain otherwise suggests the consumer/investor is acting against their own best interest. Only in the perverse logic of the brokerage industry would that make sense and then simply because it serves the best interest of the brokerage industry. Is this not clear? See: Proposed DOL regs expose more advisors to fiduciary liability.

Second, in the institutional world, brokerage licenses are often dispensed with to avoid any appearance of conflicts of soft dollar compensation, further at the top of the food chain, mutual funds are rarely used for a number of reasons — principally the expense and redundance of account administration that adds no value and the absence of real-time holding data required for continuous comprehensive counsel required for fiduciary standing.

Most importantly, fiduciary standing has absolutely nothing to do with the financial backing of the advisor. It has everything to do with accountability and responsibility for recommendations— which entail duties and liabilities from which brokers have absolved themselves through pre-agreed-upon arbitration proceedings. In fact, it is the very fiduciary liability associated with the broker being accountable and responsible that assures the broker-dealer will not allow the broker to act in the consumer’s best interest.
All in all, until the brokerage industry supports the fiduciary standing of the broker to the fullest extent possible—the RIA will be able to win any brokerage account at will.

The facts argue against your counterfiduciary assertions, the ball is in the brokerage industry’s court to be responsive to the best interest of the consumer and supporting the professional standing of the broker.

Mike DiCenso added:

The facts are the facts. The vast majority of plan sponsors are not willing to give up discretion, authority and/ or control of the decisions. In order to truly alleviate the fiduciary liability this must be done by an advisor who is an independent fiduciary, taking full discretion and control ( or a named fiduciary), with the financial backing to pay a potential claim. What protection is there if the said fiduciary advisor does not have the financial backing and liquidity to pay a claim? What is there to disagree with?
In our business model we either act as a consultant or as a fiduciary, whichever the client desires. Either way we hold ourselves to the fiduciary standard of nonconflicts of interest working solely in the best interest of the plan sponsor, participants and beneficiaries. We then document in writing whether we are a fiduciary or not. I am sorry, but this is not an all-or-nothing proposition, and clients do not want it this way.

Stephen Winks added:


I couldn’t disagree more. Either you are a fiduciary or you are not.

If the client does not want their advisor to be accountable or responsible, it is clearly their call. The problem arises when the client does not understand that they are letting the advisor off the hook when discretion is not permitted. Named fiduciary has too many caveats to be materially effective.

The consumer does not understand if their advisor holds themselves to a fiduciary standard but is not allowed to acknowledge fiduciary status by virtue of the client withholding discretionary, it is literally not possible for the advisor to act on behalf of the client in the client’s best interest as the client has thwarted the intended purpose of fiduciary duty and protection. The teeth of being a fiduciary is fiduciary liability as it forces a legal, professional and technical discipline that has material consequences. Thus, the disagreement is, there is a difference between acting as a fiduciary and being a fiduciary.

You are incorrect in asserting fiduciary status is not an all-or-nothing consideration, as it actually requires one to be a fiduciary, not [merely to] act like one. It is clearly preferable to act as a fiduciary with accountability and responsibility than to be absolved from accountability and responsibility for recommendations like brokers. But acting as a fiduciary is not the same as being a fiduciary.
Your thesis leaves a hole big enough for the brokerage industry to drive a truck through, as the brokerage industry would simply act as a fiduciary but the broker would never become a fiduciary. If that position were to prevail, the meaning of fiduciary would be subject to interpretation, rendering it meaningless and providing disincentive for the brokerage industry to properly support the fiduciary standing of the broker to the fullest extent possible as required in the best interest of the consumer.

This is not splitting hairs, as the question is whether the brokerage industry will support the fiduciary standing of the broker to the fullest extent possible —making advice safe, scalable, easy to execute and manage. The SEC has already established it is the responsibility of the broker-dealer to properly support the fiduciary standing of the broker, not each individual broker’s responsibility.

If acting like a fiduciary were the solution rather than actually being a fiduciary, the brokerage industry would never create the necessary authenticated prudent processes, technology, workflow management, conflict of interest management and expert advisory services support essential to make advice safe, scalable easy to execute and manage.

Thus I respectfully disagree. One actually has to be a fiduciary rather than acting like one on TV.

Mike DiCenso added:

You can disagree all you want, but just saying you are a fiduciary does not make it so. Under today’s ERISA definition of fiduciary it is only actions that make you a fiduciary. Thus if you perform a fiduciary function, you are a fiduciary.

in our industry the vast majority of people who say they are a fiduciary do not perform a fiduciary duty and thus alleviate no liability for the plan sponsors, which is exactly why the DoL is looking to establish a new definition of fiduciary under 3(21).

Gallagher Retirement Services and GBS Investment Consulting now have more the $87 billion of assets under care and $52 billion under management. We are an SEC-registered RIA that is held to the fiduciary standards when acting as a fiduciary. I see numerous people in our industry who are dual registered and are riddled with conflicts of interest. Again, this is the vast majority of those “false fiduciaries” in the [defined-contribution] market who have no liquidity of financial backing to pay a claim.

Please tell me this: Who pays the claim if the fiduciaries under a breach do not have enough money to make the plan whole and pay the penalties? The answer is the plan sponsor. So how much protection do you feel a plan sponsor fiduciary receives when a hired fiduciary who claims to protect them does not have enough money (net worth) to pay the claim?

Stephen Winks added:


The equivalency argument of acting like a fiduciary is the same as being a fiduciary does not secure the same consumer protections for the consumer, and thus is a brokerage industry work-around. It is great for the brokerage industry but terrible for the consumer.

As we know, disclosure does not remove conflicts, it just perpetuates conflicts. It is saying, “I am not acting in your best interest but as an advisor I feel better that you know I am not acting in your best interest”—which just compounds the conflict.

Full transparency is different from full disclosure, as cited above. The fiduciary standard based on statute, case law and regulatory opinion letters is clear on all this. Further the [Office of the Comptroller of the Currency] is definitive on trust powers and fiduciary responsibility.

I would love to see this definitively explained for retail application.

Many brokerage firms, turnkey asset management programs and advice products are misleading advisers that an entity acting as a money manager in a fiduciary capacity absolves the advisor of their fiduciary responsibilities to the consumer. It doesn’t. The structure and nature of the relationship between the advisor and the consumer is different from that of a money manager which is governed by offering document.

Mentioned in this article:

Sr. Consultant
Consulting Firm
Top Executive: Stephen Winks

SageView Advisory Group, LLC
401k Plan Consultant, Advisory Firm
Top Executive: Randy Long

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