Gathering Firewood: 401(k) Advice In A Post-Fiduciary World

By Ric Lager

“Some men go through a forest and see no firewood.” - English Proverb

The Department of Labor (DOL) fiduciary rule has expanded the definition of what constitutes fiduciary investment advice. The main focus in the financial media has been on the new full disclosure requirements and potential conflicts of interests regarding individual retirement account (IRA) rollovers.

Company 401(k) retirement plan rollovers have long been a staple of the investment advisory business. There is a great deal of concern about the viability of any company 401(k) to an IRA rollover going forward.

As the old English guy stated above, don’t focus on the forest - the potential problems with future IRA rollovers. Instead, start a client and prospect marketing plan to pick up the firewood; providing a fiduciary level of investment advice to individual company 401(k) retirement plan participants who are still employed.

The DOL fiduciary rule has dominated the financial media news over the last few months. You can bet that your clients have noticed. Your first client marketing assignment is to call or e-mail them and secure a copy of two things.

First, the list of the default menu of company 401(k) retirement plan options. Also ask if there is a self-directed brokerage account (SDBA) option available.

Second, get a copy of their most recent company 401(k) retirement plan account statement. This document could be the year-end 2016 statement, or their most recent monthly statement.

Your first step in building a niche of individual company 401(k) retirement plan investment advice is to compare the client’s current mutual fund holdings to the complete default mutual fund menu.

I would argue that this pile of firewood is one of the biggest client and prospect asset-gathering opportunities of your investment advisory career. Don’t sit idly by and complain along with the rest of your investment advice cohorts. Ask yourself these three questions:

1. Are you in a position at your current investment advisory firm to offer fee-based investment advice for assets not held at your broker/dealer or clearing firm?
2. Can you also use the current generation of account aggregation software to expand your knowledge of individual company 401(k) retirement plan accounts?
3. Are you aware of the investment management technology websites that allow you to analyze, allocate and monitor a menu of company 401(k) retirement plan mutual funds and the self-directed brokerage account option?

Your answers to the three questions above likely will provide you with the opportunity to solicit existing clients and to hand-pick prospects. Offer them your qualifications and credentials as the investment advisor of record on their current company 401(k) retirement plan account.

Do you have clients who are currently employed? Instead of waiting for those hard-to-get referrals, position yourself now as the local company 401(k) retirement plan expert with other individual investors who work at those same companies.

401(k) Participants Want Advice

Numerous surveys conclude that individual company 401(k) retirement plan participants want independent, third-party investment advice from an investment advisor who acts in their best interests regarding their retirement plan assets.

The DOL fiduciary rule provides you exactly that opportunity now.

What has been your standard response in the past when a client has asked you to “look over their 401(k)?” Admit it; you most likely are already providing some level of free investment advice service to several existing clients in order to maintain the other parts of your investment advice relationship.

The DOL rule has brought the issue of company 401(k) retirement plan investment advice to your best clients and prospects. Use the current headlines to supplement your new investment advisory niche opportunity.

You are considered a fiduciary under the Securities and Exchange Commission’s Custody Rule if you have access to a client’s company 401(k) retirement plan login and password. This fact has prevented many investment advisors, and their broker/dealers, from attempting to gain investment advisory access to individual company 401(k) retirement plan accounts.

Those days are gone forever. There are technology vendors that allow an independent, third-party investment advisory to avoid taking custody of a client’s retirement plan account. These vendors allow access to company 401(k) retirement plan account menus. In most cases, this includes access to the self-directed brokerage accounts as well.

There is another set of technology providers that will allow investment advisors to model the default menu of company 401(k) retirement plan mutual funds. These models rank each mutual fund option, and allow the investment advisor to present a customized and risk-adjusted investment management strategy to individual company 401(k) retirement plan participants.

It has never been easier than it is now to answer the “what should I buy” question for your individual company 401(k) retirement plan participant clients. If you are really serious about this investment advice niche, you also can provide a well-thought-out opinion on “when do I sell” as well.

The news gets even better.

The Rollover Opportunity

One of the biggest hurdles in the DOL fiduciary rule is the ability for an investment advisor to gain access to a company 401(k) retirement plan rollover opportunity at a later date.

What if you established your investment advice relationship with the individual company 401(k) retirement plan participants while they were currently employed at the company? In that relationship, you already would be receiving compensation from that client.

What’s more, your investment advice clearly would be in the clients’ best interest. You are not compensated by the company 401(k) retirement plan sponsor or provider in any way. You provide investment advice only on that individual company 401(k) retirement plan to your individual clients. And your annual investment advisory fees are level fees.

You most likely have clearly established an existing company 401(k) retirement plan advice relationship with that working client. If your investment advice remains fee-based in a future IRA rollover, it would seem to me that you are a long way toward a compliant IRA rollover opportunity under the new fiduciary rule.

I’m not asking you to take compliance advice from me. I only offer up this example as another reason to seize the opportunity now to build a niche business on your clients’ and prospects’ company 401(k) advice as I have described.

Your clients have the need. So do other individual investors at the same company. The technology is firmly established. The DOL fiduciary rule has brought the company 401(k) cost and investment performance issue to the top of mind for your clients and prospects. Here is how you can turn the fiduciary rule to your advantage as well as your clients’ advantage.

Ric Lager is founder and president of Lager & Company, a registered investment advisory firm based in Golden Valley, Minn. He has also helped develop the “How to Build a Prosperous Business with 401(k) Participant Advice” training module for The Sherman Sheet. Ric may be contacted at [email protected].