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PANC 2015: Adding Wealth Management to Your Practice
Asked whether advisers still look to add wealth management and rollover business to their practice, in light of the proposed fiduciary rule, David Kaleda, principal at Groom Law Group, said, “For plan advisers moving into wealth management, that’s always been a tricky area. Under the proposal, it will become even trickier because it broadens the definition of those who are fiduciaries and includes rollovers.” Kaleda was speaking at the 2015 PLANADVISER National Conference in Orlando, Florida, on the panel “Practical and Legal Tips for Adding Wealth Management and Rollover Solutions to Your Practice.”
“Under current law, there are exemptions that do allow you
to be paid, but they aren’t suited for rollovers,” Kaleda said. The new
proposal allows for a best interest contract exemption (BIC), but as it is now
structured, “almost no one can comply with it. This will certainly change in
the next six months to a year.”
As for cross-selling to participants, “Everyone is looking for a way to
monetize their relationship with participants through an IRA [individual
retirement account], and, due to the sheer number of Baby Boomers retiring over
the coming years, it is certainly going to happen,” said George Revoir, senior
vice president, distribution, at John Hancock Financial Services. “You can make
it an easier conversation, depending on how you look at it. The majority of John Hancock’s
retirement plans in the smaller end of the market allow for lump-sum distributions, so it is not hard to have
a conversation about an income option in an IRA rollover.”
The other option is for an adviser to suggest including lifetime income options
in a plan to keep retired participants invested, Kaleda said.
In the years ahead, this is an option that advisers will need to consider, particularly for large plans, Revoir observed.
NEXT: The appeal of wealth management
“People in the plan with high balances will be attractive to
you,” Kaleda said. “Lower and middle balances could also be attractive if you
have some scale. But you need to remember that managing a 401(k) is very
different than managing an IRA. These are taxable accounts and are subject to
the prohibitive transaction rule with regard to compensation. If you are a
fiduciary to the plan, you are precluded from increasing your compensation, so
most folks very carefully present their retirement plan practice and their
wealth management practices as two distinct services.”
It is also important for advisers that are affiliated with a broker/dealer (B/D)
to “consider the compensation to the B/D that is a custodian of the IRA. Even
if you aren’t making more money, if the B/D is, it’s a prohibitive
transaction,” Revoir said.
At all times, advisers are expected to consider participants’ best interests,
Kaleda said. “Other than the key question about compensation, if I am a
fiduciary to the plan participants and to the plan, am I conflicted?” he said.
“Take the case of a small business where the owner has sizable assets and
wants the advisers to place certain funds in the plan. The adviser is obligated
to have all plan participants’ best interest in mind.”
NEXT: How to conduct rollovers
Rollovers will be critical for advisers looking to build out
a wealth management practice, Kaleda said. “If you are a fiduciary at the plan
level and recommend a rollover, you have to act in the participant’s best
interest and make sure you aren’t getting additional compensation. If you aren’t
a fiduciary, you can recommend a rollover, but if you are affiliated with a
B/D, remember, FINRA will scrutinize you,” he said.
As for your management of investment decisions in the IRA, those currently
are not subject to the Employee Retirement Income Security Act (ERISA), but the new
rules will make them subject to it, Kaleda said.
While arguably all advisers want to act in their participants’ best interest, the BIC
will make you “contractually obligated to do so and therefore subject to
lawsuits,” Kaleda said. “The DOL [Department of Labor] is using this threat of
lawsuits by plaintiffs and class actions as a threat.”
It is also a good idea for advisers to embrace the lifetime income concept in rollovers, if it is not available in the plan, Kaleda said. “That will help your argument, because the DOL is very much in favor of lifetime income.”