‘Top-Down’ And ‘Bottom-Up’ Views Of Fiduciary Proposal

New fiduciary standards proposed by the Department of Labor (DOL) are in store for advisors in the 401(k) business. The smaller the advisory, the more likely it will be faced with higher record-keeping costs and more onerous compliance responsibilities.

The question is who’s likely to suffer the most, and what effect will the DOL proposal have on the marketplace?

New rules issued by the DOL last month would require blanket fiduciary duties of advisors operating in the retirement plan market.

Many advisors already operate to a fiduciary standard. The DOL has inserted exemption clauses to the proposed rule, so it’s not clear exactly who among the thousands of advisors in this trillion-dollar market would be affected.

The proposal was published in the Federal Register April 20 and the industry has 75 days to comment.

For now, the view from the “top down” is decidedly different from the view from the “bottom up.”

From a “top-down” perspective of the large retirement plan providers — the Principals, Prudentials and MetLifes of the world — fiduciary rules will give an advantage to the “recognized leaders” in the 401(k) and individual retirement account (IRA) rollover space.

Larry Zimpleman, chairman and CEO of Principal Financial Group, told analysts last month that more complexity will “continue the 30-year trend of market share shifting from second- and third-tier players” to industry leaders, he said.

Zimpleman was careful not to name these “second- and third-tier players,” but it’s fair to assume that they are smaller companies operating in the defined contribution market. At the end of last year, that market held $7.2 trillion in IRA assets and another $5.3 trillion in 401(k) assets.

Stephen P. Pelletier, executive vice president and chief operating officers, U.S. Businesses, for Prudential, said this week that the DOL proposal could result in higher asset retention and defined contribution plans, which would have “a positive offset” for Prudential’s retirement business.

Small advisors, however, see the fiduciary rule through a very different lens.

Chris Chen, a Boston-based financial planner, said the DOL fiduciary proposal is an opportunity for smaller plan providers to “provide value and a level of service that is difficult for large, tradition-bound insurance companies to provide.”

He also said in an email response to a query that the proposal provides an opportunity for life insurers to exit the segment entirely.

As the private sector and the government employers exit the defined benefit space in favor of the defined contribution model, the industry can count on the expansion of assets held in 401(k)s and 403(b)s, so asset growth isn’t the issue.

How the rule will affect revenue growth, however, is a different story.

Ken Perine, an advisor with Meritage Wealth Advisory in Livermore, Calif., wrote in an email that the fiduciary proposal will mean more contraction to the revenue as retirement plan providers are forced to jettison under performing funds, high fees and “self-serving revenue sharing agreements.”

“They'll have to decide if they want to change their business model and get competitive or exit the business,” he wrote.

“The devil is in the details and we don't know the final regulations yet,” wrote certified financial planner John F. McAvoy, principal with Waterstone Retirement Services in Canton, Mass. “My opinion (hope) is that there will be an adjustment period but, ultimately, no 401(k) plan advisor will be unable to claim they are not a fiduciary.”

There seems little doubt that a fiduciary standard will entail higher costs and that means lower profit margins.

As a rule, higher costs affect smaller players — plan providers and advisors — to a greater extent than larger organizations because expenses are spread over a smaller base. So, if adopted, the rule will affect smaller broker/dealers, registered investment advisors or the record-keepers with agents acting on their behalf.

“If you are a small organization, there are higher compliance costs and more rules around reporting and ensuring participants get appropriate advice,” said Jeffrey H. Snyder, vice president and senior consultant with Cammack Retirement Group in New York, in a telephone interview with InsuranceNewsNet.

Snyder also said the DOL proposal would push more advisors and plans to ditch the commission-based and revenue-sharing models in favor of a flat-fee arrangement. The fee-based revenue model tends to favor larger organizations.

A snapshot of where advisors stand on the matter was captured last week in a poll of 875 financial advisors in a webinar hosted by Pioneer Investments.

When asked about the impact of the new rules on their business, 38 percent of advisors said it would hurt their business and have a negative impact on profitability.

But the poll also found that 27 percent indicated the DOL rule would help them by leveling the playing field on retirement advice. Another 21 percent said the rule would have no effect and 14 percent were not sure of the rule’s impact.

“It’s interesting to see that while most advisors believe that this will hurt their business, quite a few also think that it will help level the playing field,” said Fred Reish, an employee retirement income attorney at Drinker Biddle & Reath, who served as a panelist on the webinar.

Blaine Aikin, CEO of fi360, an organization which offers support and guidance for investment fiduciaries, said that the effect of the proposed rule had been a topic of debate among advisors for many months leading up to its April release.

“The results of this poll demonstrate that, as advisors see and hear more, these concerns linger in the minds of many,” said Aikin, who also served on the webinar. “Here again, though, almost as many foresee either positive or neutral outcomes.”

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].