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To the surprise of some, Dept. of Labor grants get-out-of-DOL-rule-jail card to 225,000 firms that dabble in the 401(k) business

Without recent guidance, 401(k) specialists were set to devour one-off accounts held by brokers but new DOL rule guidance offers well-lit path to build toward a far larger 401(k) practice

Tuesday, August 15, 2017 – 12:54 AM by Lisa Shidler
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Fred Reish: It may be that the broker-dealers will limit the advisors who can work with large plans.

Brooke's Note: Until now, DOL rule mania centered almost exclusively around IRAs. Advisors and broker-dealers were rightly flustered because the trillions of dollars of lightly regulated retail assets in individual retirement accounts were dragged under heavy ERISA oversight written by the Dept. of Labor. But what hung fire was getting clarity on the DOL rule effect on a second mismatched mess of free enterprise -- the management of 401(k) plans by semi-accidental stewards, or namely stockbrokers (and RIAs) managing one, two or a handful of 401(k) accounts. Some sympathy should be granted. Many of these advisors did not deliberately plunge into this associated discipline like a rugby player thinking he or she can play football. Clients egged them on. Still, you end up with scads of retail advisors overseeing institutional accounts. The DOL rule's efforts at upgrading fiduciary care would seem to warrant rationalizing this widespread quasi-freelancing. Until now, the presumption was that the DOL rule would essentially say that an advisor in for a dime needed to be in for a dollar as far as fiduciary status goes. In other words, no dabbling. Instead, the DOL is making a play at creating a framework for dabblers to get better, maybe much better -- with the idea that determined broker-dealers and the advent of better technology makes this notion reasonable. But for now it seems you may have a bunch of rugby players out there scrumming for the football, trying for a try.

The Department of Labor's new guidance on the fiduciary rule just brought the 90% of advisors who dabble in retirement services out of uncharted territory and onto a more rigorously ruled grid -- one that gives them a much better shot at expanding and elevating their 401(k) practices.

The Conflict of Interest FAQ, released in early August by the DOL, also postpones -- perhaps indefinitely -- the day when those 225,000 advisors become so handicapped by new DOL strictures that the 25,000 advisors who specialize in the 401(k) business will be able to feast on those accounts unchecked. See: LPL Financial's DOL-rule memo to reps implies deeper message: Become an RIA or stand down on giving rollover advice

Jason Roberts: In the past, these non-specialists didn't have an internal path to become more specialized but now they do.

Put simply, this is a massive break for 401(k) dabblers -- both as a bullet dodged and as an option retained to expand their businesses into non-IRA retirement assets in the future, says Jason Roberts, CEO of  Pension Resource Institute LLC in Overland, Kan. 

"A larger percentage of these non-specialists will become specialists because firms are now providing them with more tools and guidance. In the past, they had very few tools to compete for the business. Behind the scenes these firms are taking steps to train up advisors to deliver more competitive services," he says. See: Report: 'Brother-in-law' dabblers are giving 401(k) ground slowly to specialists in $1.3 trillion market.

Still, if you're a broker-dealer in a big firm, vigilance is a reasonable act of self-preservation. Broker-dealers and firms are likely going to provide guidance for inexperienced 401(k) advisors, says Fred Reish, partner in the Los Angeles office of Drinker Biddle and Reath LLP, headquartered in London.

"I suspect that, over time at least the broker-dealers will educate their advisors how to work with plans, he says. It may be that the broker dealers will limit the advisors who can work with large plans, because of the greater expertise required for those plans."

DOL leg-up

Broker-dealers who keep to the shallow end of the 401(k) pool demonstrate the trust -- or at least familiarity -- on the part of their high-net-worth clients who own small businesses or serve as a executives at larger ones. Such clients can and do funnel their 401(k) business through their individual brokers -- a phenomena that occurs on the RIA side, too. See: 401(k) industry howls as DOL lets state governments become DC providers with advantageous exemptions.

But even with good will and general competency assumed, such advisors find it hard to stay up on the vagaries of  DOL compliance -- all the more so now that the DOL rule's first provisions went into effect in June. 

But with this latest DOL guidance, the casual 401(k) provider has gotten a significant leg-up because the B-Ds that serve them have little choice but to up their games, says Tom Clark, an attorney with the Wagner Law Firm in Boston.

James Holland: I find it amusing that people who have built their business models off of unqualified people generating millions of dollars in revenue ... are suddenly going to ...read a book and make them all experts.


"You'll see a lot of third-party firms partnering with advisors and that's natural," Clark says. "That has been intensified by the rule and it's not a new concept. You see people doubling down on opportunity because for the first time the broker-dealers are paying attention to this space. Now, thanks to the rule, you'll see more firms offering up training, guidance and education making it easier for dabblers. The rule has accelerated this process." See: 'Poof, it's gone!' DOL quietly strips two heavy lifts from the fiduciary rule as it makes delay official.

The updated FAQs from the DOL also mean that specialists won't have open season to poach these dabblers' 401(k) business, Roberts says. 

"Beforehand, if I had a service that had been non-fiduciary and it was going to be a fiduciary service as of June 9, then I had 60 days to update my clients  and tell them it was a fiduciary service. A lot of fiduciaries were waiting with bated breath. Specialists were hoping for the opportunity to prospect that business. And, now it's not going to come to fruition." See: Why an RIA's willingness to get fired by clients is a mandatory mindset -- now especially under the DOL rule.

Trump-era hands-off

Broker-dealers and other firms are working the problem by delineating small, medium and large amounts of services they provide to advisors. The firms' menus could offer basic 401(k) plans to advisors who have a limited amount of clients. Once an advisor completes certain CE credits and courses they could wander into "medium" territory being able to give extra services. The most experienced advisors would be able to offer up the most services to 401(k) plans.  

"The broker-dealers are offering up these menu options for advisors. If you're going to deliver the medium level then you need to subscribe to the right tools and have the right education," Roberts says. "In the past, these non-specialists didn't have an internal path to become more specialized but now they do." See: One security lawyer's unvarnished take on DOL's 34 answers to 34 questions and what unsettles him about them

In the last year or so, as the reality of the DOL rule began to take hold, broker-dealer compliance departments have ramped up. Now it's the advisors with small 401(k) practices who stand to benefit the most, Roberts says. Since they didn't tripped the wires making it necessary to become a fiduciary, they can go right ahead and serve 401(k) accounts.

Skeptics see the latitude afforded stockbrokers to switch hats from sales to advice and offer varying levels of fiduciary service is a recipe for fudge.

"I find it amusing that people who have built their business models off of unqualified people generating millions of dollars in revenue in the qualified space are suddenly going to wave a magic wand or read a book and make them all experts," James Holland, director of business development and assistant compliance, Millennium Investment & Retirement Advisors of Charlotte, N.C.

Tom Clark: I don't think anyone is getting any easy break. The DOL is not micro-managing things as much in this administration.

But the Trump Administration's approach has practical advantages, Clark says.

"They're accepting the idea that goals of the rule are obtained if you disclosed that you're a fiduciary or told your clients the services you're providing," he says. "It's a practical approach. I don't think anyone is getting any easy break. The DOL is not micro-managing things as much in this administration. They're taking a hands-off approach," See: Alexander Acosta's DOL rule letter to WSJ contains double message and one long-term objective: 'Gut' it.

No millions for compliance

Clark adds that there will be a mass-migration of advisors moving to firms which provide better tools and services to comply with the DOL rule. 

"If you were a big team and your broker-dealer was offering you no tools and made you build compliance from scratch, why not go somewhere else where a firm has spent millions on compliance. Why would you wonder in the desert with a firm that hasn't put money into these areas." See: LPL Financial's DOL-rule memo to reps implies deeper message: Become an RIA or stand down on giving rollover advice.

But the dabblers who will continue are those who understand the new rules. 

"The real test is does this person understand how the rules affect their clients and are they able to provide in writing the services for clients," Roberts says. See: How a $12 billion RIA grew to $20 billion in less than a year by raiding 401(k) accounts from legacy players

Mentioned in this article:

Pension Resource Institute, LLC
Compliance Expert
Top Executive: Jason C. Roberts

Retirement Law Group, PC

Top Executive: Jason C. Roberts

Tom Zgainer

Tom Zgainer

August 15, 2017 — 4:09 PM
While dabbling in painting, or writing poetry is a fine thing.....plan sponsor and participants, real people trying to save for a dignified and secure retirement, do NOT need dabblers involved in their financial future. Not brokers moving them from provider to provider every couple years so they broker can get a 100 bps upfront, fee, not brokers sending plans to insurance company providers that are marking up index funds 700% or more..(because they can't get paid on those funds so this ensures they do), not brokers sending plans to insurance companies that will add 1% to 2% in "Contract Charges, or "Program Charges" or other made up fees purely designed to line the pockets of the brokers and insurance companies at the expense of the real people inside the plan socking away a portion of their pay....and thinking that money is working for them. To suggest dabblers can become experts due to resources is like saying I can be a pilot after going in a few hours in flight simulators. Please, dabblers...find a new career path.
Brian Murphy

Brian Murphy

August 16, 2017 — 7:44 PM
I think it's pretty clear at this point that the industry is broken and the regulatory bodies are at best dysfunctional. The only way the status quo changes is for a new business model to be introduced that is so obviously better than the current sad state of affairs that it renders the unsavory players obsolete - from the perspective of the sponsors, the employees and the RIA community. It will be part low cost plan provider (Tom, that's your piece - hope you continue to do well), and new ways of engaging the participant with a combination of personal education and advice/management. It won't come from existing "stakeholders", as they have no incentive to risk their current agendas. We're taking on that task and are happy to do so. To the extent others wish to become involved we're happy to have you onboard.
Stephen Winks

Stephen Winks

August 15, 2017 — 4:12 PM
Why should b/ds care about supporting expert standing in advisory services as required by statute when the DOL doesn't care? The positive implications of b/ds supporting fiduciary duty of brokers acting in an advisory capacity is that "retail" investors might benefit from brokers understanding and acknowledging fiduciary duty in the client's best interest. The entire industry is moving to fee for service and a more detailed delineation of the services provided. This is made easier when b/ds are obligated to acknowledge and support the fiduciary duties of their brokers when serving retirement accounts. All brokers have a vested interest in achieving professional standing in advisory services, hopefully this motivation will press b/ds to support fiduciary duty of the broker in spite of this DOL Ruling. SCW.
michael sanford

michael sanford

August 15, 2017 — 4:58 PM
Shouldn't the person telling you what to do with your retirement accounts be legally required to act in your best interest? Sounds simple enough, but regulation to that affect has long been resisted by the financial industry. I believe the new DOL rule will help B/Ds instead of hurt them with the shift to fee based accounts rather than commission based. This move will als assist financial technology and information firms, Robo advisors,, ETF and index firms. The focus on investment advice has shifted from managed accounts that have higher asset management fees to fee based accounts. It's the same debate the financial industry has been having for years: active vs passive and fee based vs commission. Shouldn't the person telling you what to do with your retirement accounts be legally required to act in your best interest?
Pat Mulvey

Pat Mulvey

August 15, 2017 — 5:03 PM
I agree with and enjoyed reading Tom's comments especially (Steve's too). Here's what I don't get- regardless of what the ultimate outcome of the DOL stuff is- the plan sponsor (committee /Board) overseeing the assets is at huge risk. Let's say the DOL says 'let's scrap this fiduciary stuff' - it doesn't change the responsibility of the sponsor which is obligated to demonstrate they are acting in a prudent manner. If they don't there can be all kinds of bad stuff including personal liability. Plan sponsor beware regardless of the outcome-
Stephen Winks

Stephen Winks

August 18, 2017 — 12:25 AM
Brian, , I was wondering if I were the only person who saw things this way>SCW
Brian Murphy

Brian Murphy

August 18, 2017 — 5:07 AM
SCW - nope, your concerns are warranted and reflected in the views of quite a few others I suspect.
Stephen Winks

Stephen Winks

August 18, 2017 — 3:14 PM
100% of clients prefer their best interests being served rather than the b/d's, yet given advisors are at the mercy of their b/ds compliance protocol which do not acknowledge or support their brokers rendering advice, it seems it doesn't matter what the client or the advisor thinks is relevant as b/ds have a mind of their own regardless of statutory imperative. The fact that the SIFMA and the FSI oppose fiduciary duty for brokers is the principle impediment to professional standing of brokers when rendering advice. SCW

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