Category Archives: PlanTools

Is the DOL Fiduciary Rule the End of Solicitor Arrangements? – Part 2

In my last blog, I discussed why the solicitor structure has grown in popularity and why it will continue in the future but without the same benefits enjoyed in the past. In this blog post, I review how the DOL’s Fiduciary Rule will change the role and structure of the solicitor.

First and foremost, every solicitor will become a fiduciary on April 10, 2017. As a fiduciary, a financial adviser (FA) is subject to an ERISA fiduciary standard. This alone may be sufficient reason for some FAs to exit the industry, but what is more likely to happen is a flood of new fiduciaries will be marketing to retirement investors. Consider that there are approximately 700,000 retirement plans filing a 5500, but this number is dwarfed by the 40+ million homes that hold an IRA. In other words, there are approximately 60 times more IRAs than retirement plans, so it is safe to assume there are more FAs handling IRAs than retirement plans. In short, we will see a drastic increase in the number of fiduciary advisors in the market.

In addition, based on our own internal survey, IRA assets held by a Broker-Dealer (B-D) range between 40 and 80% of B-D total assets. However, many of these FAs know very little about ERISA fiduciary standard of conduct. This lack of knowledge increases B-D litigation risk as tens of thousands of misguided fiduciary missiles seek to secure new engagements or service existing clients. B-Ds will have to establish new training protocols in conjunction with compliance oversight to mitigate this risk. More on training to follow in our next blog.

Keep in mind that many of the FAs that handle IRA assets have historically avoided the retirement plan market place altogether; however, if they want to continue working and building their IRA practice they now have they have no choice but to become familiar with and adopt the ERISA fiduciary standards and obligations into their practice. As a result, we will likely see a drastic increase in FAs and Insurance Agents taking the Series 65, and I would not be surprised to see testing centers unable to accommodate FA’s date requests the longer the FA procrastinates. My advice, order the Series 65 study materials now and take the test ASAP.

After the Series 65 is passed, FAs will have to secure Fiduciary Errors & Omissions (E&O) coverage. Trust me, your competitors that live and breathe ERISA will be sure to tell your clients (their prospects) they should not deal with anyone that does not have Fiduciary E&O. Of course, this is an added cost of doing business that has not been necessary in the past for most FAs. Small B-Ds that have prohibited their registered reps from using the “f” word will find this cost difficult to swallow, whereas many of the larger B-Ds have turned this cost area into a profit center due to their bulk buying power. I suspect between this cost and the technology costs necessary to monitor the FAs business subject to the new DOL Fiduciary rule, many small B-Ds will give consideration to a merger or acquisition.

Once the FA has secured the Series 65, consideration should be given to the FA’s business model. Whether an FA decides to adopt a fee-based business model or continue exclusively in a commission-based, new agreements, contracts, policies, procedures, and website disclosures will need to be created. The cost for ERISA legal counsel to draft these documents after gathering an understanding of the business model will be a new cost for the FA, their B-D and/ RIA. Small independent RIAs will bear the full brunt of this cost whereas much larger organizations may be able to secure these documents as part of normal overhead. Either way, these new documents and disclosures represent more work and cost.

Regarding the business model, an FA currently in a solicitor arrangement will need to update their contract with the client to reflect their fiduciary status. This represents additional work and client education, but, more importantly, it changes the dynamic of the FA’s relationship with the RIA they referred. First, the FA will need to address their responsibility to monitor the RIA. Remember, recommending an RIA to a retirement investor is a fiduciary act. As a fiduciary act you must monitor the RIA to ensure they continue to meet the client’s needs and objectives. So, there is more work and risk to the FA for no additional pay. Second, since the FA is a fiduciary, the recommendation to use an RIA could be challenged as a prohibited transaction. You may recall, a fiduciary cannot use its position to increase its compensation. This is found under 29 C.F.R. 2550.408b-2(e)(1) which states:

“Thus, a fiduciary may not use the authority, control, or responsibility which makes such person a fiduciary to cause a plan to pay an additional fee to such fiduciary(or to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary) to provide a service. Nor may a fiduciary use such authority, control, or responsibility to cause a plan to enter into a transaction involving plan assets whereby such fiduciary (or a person in which such fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary) will receive consideration from a third party in connection with such transaction.[Emphasis added.]

I suspect this is more of a concern for the FA that provides no service other than a referral, than for the FA that was engaged to provide non-fiduciary services. However, every financial institution will need to consult with their legal counsel to determine the extent to which this issue presents a fiduciary risk.

As you can see there are numerous issues that both the Financial Institution and the FA will need to address. I am sure that some FAs will choose to leave the industry, but it seems hard to fathom a smaller number of marketing RIAs in the future. Those that choose to stay engaged will need to change their business model to align with the new DOL Fiduciary Rule. It will cost more, there will be more work, more risk, and no additional pay at this point. FAs that have never provided an investment review to monitor the investments will need to do so in the future to justify their compensation especially on complex products. Of course, there is plenty of opportunity but even the optimistic FA will need to temper their enthusiasm with a large dose of pragmatism.

As printed in the eMoney Blog.

Education Isn’t a Best Practice It Is A Requirement

Expect to see more articles on the subject of Fiduciary Education in the months to come e.g., (Investment News) and do not be surprised to see the following Department of Labor (DOL) position on training from the preamble quoted in those articles:

In particular, Financial Institutions must ensure that Advisers are provided with information and training to fully understand all investment products being sold, and must similarly ensure that customers are fully advised of the risks.” 

While we await the DOL’s response to many questions, a plain reading of the statement above implies a new fiduciary standard of product expertise, not previously expected of advisers in the past, has been established. Although adviser success has historically been measured by who they know, it now appears that adviser success will be based on what they know especially if fiduciary risk mitigation is an adviser priority.

More specifically, does the adviser fully understand the risk associated with the recommendation and has the adviser fully educated the investor of all risks so s/he can make an informed decision? Furthermore, is the adviser educated on the role a recommendation might fill under an ERISA standard of care? In other words, the adviser not only needs to be educated about the products they recommend but also why the products recommended are prudent and meet the best interest standard of care.

With less than 7 months before April 10, 2017, effective date, product manufacturers are under the gun to provide the necessary product education to their distribution channels. Smart compliance officers will demand documentation to support a claim their adviser has been adequately trained on each product they sell before permitting an adviser to sell that product after April 10, 2017. I also foresee a compliance officer prohibiting any adviser from selling products without documented proof they have been properly trained to mitigate litigation risk. Unfortunately, it is impossible for a product manufacturer to train all the advisers they have agreements with by April 10, 2017, if the education is delivered face to face. To reach all advisers that have or may sell your products you must establish an online Learning Management System (LMS) deliverable.

In other words, training must be web-based, on-demand, and gamified. Training tracks should include multiple modules that are content-rich. Between the education and the test, it should take no more than 15 minutes per module. Upon completing each module and successfully passing the test the adviser should be given a certificate of completion with a compliance officer access to pull reports that track adviser activity. Content must not only cover the product comprehensively, it must also address ERISA nuances especially fiduciary duties. ERISA training should be provided by a law firm since plaintiff attorneys tend to hold training from the peers in higher regard than ERISA laypeople. In short, training provided by an attorney on ERISA statutes, regulations, and judicial decisions is a strategy that maximizes risk mitigation.  However, product modules should be prepared by the product manufacturer to avoid liability for education that cannot be controlled by a party outside of the product manufacturer.

FRA PlanTools and Wagner Law Group have partnered together to provide a low-cost solution that can be provided for free to advisers if structured properly.

To learn more about this solution visit www.erisatraining.com. For more information, contact David Witz at 704-564-0482 or dwitz@fraplantools.com

Is the DOL Fiduciary Rule the End of Solicitor Arrangements?

Is the DOL Fiduciary Rule the End of Solicitor Arrangements?

David Witz post on eMoney Advisor

A solicitor arrangement is a common practice among financial advisers (FAs) who want to avoid fiduciary status but still receive compensation in exchange for a referral that results in a sale to a retirement investor. In some instances, the referring FA serves in any number of ongoing non-fiduciary roles such as a communication and/or education specialist, or vendor manager.

The structure has been widely marketed by many registered investment advisors (RIAs) who offer Employee Retirement Income Security Act (ERISA) Section 3(21) investment advisory or Section 3(38) discretionary investment management services to retirement plans through FAs as a distribution channel.

There are several primary reasons this collaborative effort has prospered in the past including:

  1. Fiduciary risk and liability for the FA is avoided.
  2. The referring FA does not need to become an RIA or IAR to receive compensation.
  3. The referring FA does not need to acquire fiduciary E&O.
  4. The referring FA can solicit IRA rollovers from the plan participants without engaging in a prohibited transaction.

Although the July 2012 changes to ERISA Section 408(b)(2) made the solicitor arrangement more complicated, it did not eliminate the structure as an ongoing solution. In fact, the 2012 changes to 408(b)(2) actually became the impetus to accelerate the continued proliferation of the solicitor model. Growth of this model is based on the assumption that an FA can recommend a client or prospect retain the services of an RIA without becoming a fiduciary. The industry has relied on the following section of the Regulation that defines the term “fiduciary”:

A person shall be deemed to be rendering “investment advice” to an employee benefit plan, within the meaning of section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (the Act) and this paragraph, only if…Such person renders advice to the plan as to the value of securities or other property, or makes recommendation as to the advisability of investing in, purchasing, or selling securities or other property.  [Emphasis Added] 29 C.F.R. § 2510.3-21(c)(1)(i) (Oct 31, 1975)

Notice the Regulation does not state fiduciary status is tied to “advice to the plan as to the value of an RIA” or a “recommendation as to the advisability of investing with or through an RIA.” The focus of the Regulation is on advice rendered in regards to a “security” not an “RIA”. Of course, this has been debated and even litigated in a case involving investments made with Madoff but the popularity of the solicitor arrangement has continued to grow in reliance on this Regulation. Unfortunately, this approach is on life support with an imminent end in sight.

Effective April 10, 2017, the solicitor arrangement will no longer operate with the same benefits FAs have enjoyed in the past. Instead, any FA that refers an RIA to a retirement plan or IRA investor (i.e., a retirement investor) will become a fiduciary as that term is defined under ERISA. More specifically, any FA that refers an RIA to a retirement investor in exchange for compensation is a fiduciary. Of course, the referring FA’s liability is tied directly to the RIA recommendation not necessarily to the investments recommended or selected by the RIA. This also means the FA has an obligation to monitor the RIA to ensure the RIA continues to execute the investment mandate as promised. Should the FA fail to monitor the RIA, the FA could be liable for investment results should the RIA fail to execute its responsibilities prudently and according to the investment mandate. The liability associated with an FA recommendation is supported by the following wording found in the preamble:

“As amended the Regulation provides that a person renders investment advice with respect to assets of a plan or IRA if, among other things, the person provides, directly to a plan, a plan fiduciary, plan participant or beneficiary, IRA or IRA owner, the following types of advice, for a fee or other compensation, whether direct or indirect…A recommendation as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services . . .[Emphasis added.] FR 21005 (April 8, 2016)

Bottom line, the new DOL Fiduciary Rule has not prohibited the solicitor structure, but the DOL has made a solicitor a fiduciary under ERISA; and as a fiduciary the solicitor now has more liability and responsibility. What impact this change will have on this popular structure one can only guess, and since I’m not bashful about guessing I will provide you with what my crystal ball suggests could happen to solicitors in the future in Part II of this blog, coming soon.

As printed in eMoney Blog.

$140 Million Settlement: What it Means to Your Retirement Plan Practice

[The following article by David Witz originally appeared on the eMoney Advisor blog and is reposted here with permission]

In December 2014, two parties in a high-profile ERISA fiduciary breach case filed a motion for the court to approve a settlement worth $140,000,000. This settlement is nearly 10-times greater than some other recent high-profile settlements. To date, this is the largest settlement ever in an ERISA fiduciary breach case involving the receipt of revenue sharing by a service provider.

The lawsuit was originally filed against the defendant in 2001 over an allegation that undisclosed revenue sharing payments from non-proprietary mutual funds were made in violation of ERISA. By no means is this an indication that group annuity contracts are prohibited from use or that the settlement is an admission there was any wrong doing or that the allegations are true. However, the settlement does include a number of action items that I suggest represent a blueprint to mitigate litigation risk for any retirement plan whether it is funded with a group annuity contract or a trust.

If you are an advisor that sells and services retirement plans, you need to consider adopting the following recommendations in your business. These recommendations will require the establishment of new documented processes and procedures that will add to an advisor’s labor burden but result in mitigated litigation risk.

  1. Present all products offered by a single-covered service provider (“CSP”) that your prospect or client qualifies to purchase. Typically, multiple products are tied directly to different pricing scenarios that should be communicated to the responsible plan fiduciary (“RPF”) in order to make an informed decision. Any changes that affect pricing after the buying decision is made should also be reviewed with the RPF within 60 days. Clients using Legacy products that have been replaced with more efficient and cost-effective contemporary solutions should be informed of the opportunity to adopt a better solution.
  2. If the CSP offers the same investment option in multiple share classes, present your recommended menu with each share class, or at least the book-ends to demonstrate each pricing scenario or range.
  3. Identify which investment options are proprietary, non-proprietary, and sub-advised, and identify the cost impact by using one type of fund over another.
  4. Disclose the gross and net operating expense ratio, the 12b-1, and any other indirect fee by fund. In addition, disclose the amount as a percent and dollar amount, who can receive it, and who pays it.
  5. Provide the RPF with an estimate of the revenue sharing expected for each fund at the beginning of the plan year and a final tally of the revenue sharing paid for each fund at the end of the year. The amount of revenue sharing paid should be compared to other platforms to confirm that the amounts received are competitive.
  6. Document the file for any investment option additions, removals, or substitutions added during the course of the contract year by the plan sponsor and the effect that will have on overall cost. Documentation must include affirmative consent to the investment change by the plan’s trustees or the investment manager. Investment changes imposed by the CSP, i.e., product vendor, must provide the RPF with the option to terminate the relationship.
  7. Provide access to this information on your website and store the information in a document lockbox.

Keep in mind that these recommendations are not legal requirements, though some are imposed specifically on the defendant as a result of the settlement agreement. To learn how PlanTools technology can assist with meeting these objectives contact David J Witz by email or at 704-564-0482.

Are These Fees Unreasonable? – Part 3 of 3 – Recordkeeping Fees

In the final post in our series entitled “Are These Fees Unreasonable?” we address Recordkeeping Fees. (For the two previous posts, see Are These Fees Unreasonable? – Part 1 of 3 – Inv. Advisory Services and Are These Fees Unreasonable? – Part 2 of 3 – Inv. Management Fees)

To recap, FRA PlanTools offers a Benchmarking Report through its web based PlanTools Risk Management System. The report benchmarks the fees paid by a retirement plan for the services rendered against other plans of similar size by plan assets or participant count using a proprietary, independent and objective database.

As a service to the industry for the purpose of starting or continuing the conversation about fees, we are publishing our internal data for the 95th percentile of fees entered into our system for (1) Investment Advisory Services, (2) Investment Management Fees, and (3) Recordkeeping Fees. What this means is that 95% of the retirement plans in our system pay at or less than the amounts found in the charts below. The data was pulled from our system on June 30, 2013.

I think this chart is especially relevant this week with the proposed settlement in the excessive fee case filed against International Paper. One of the allegations there was that the plan overpaid for recordkeeping by $58 million because it was paying $112 a head rather than $52. But how/why does this apply to a plan with less than $10 million in assets? Because the fiduciary duties are the same. Regardless of the size of the plan, the fiduciaries have an obligation to ensure that the fees paid from plan assets are reasonable. One of the most cost effective ways to do that is through benchmarking. Bottom line: if your plan or a plan that you service is paying anything close to the numbers below, it is time to grab the bull by the horns and figure out why.

Click here to download the infographic in PDF form: FRA PlanTools – Are These Fees Unreasonable – Part 3 – Recordkeeping Fees.

FRA PlanTools - Are These Fees Unreasonable - Part 3 - Recordkeeping Fees