Getting Personal
Most retirement plan business is done via relationships to some extent, points out Ronald Joyce, vice president of IVC Wealth Advisors in Silverdale, Pennsylvania. “For example, I meet a plan sponsor at a Chamber of Commerce [function],” he says, “or I am introduced to someone via a mutual friend.” The key is to build trust with the one or two people who own and operate the plan, Joyce says.
Micro plans are a great way to gather assets and help guide friends or associates through the intricacies of the Employee Retirement Income Security Act (ERISA), according to Ryan Mumy, president and founder of Mumy Financial Advisors LLC in Hickory, North Carolina. “Most business owners aren’t paying attention, as it’s a non-revenue-producing activity,” he says. “Offering a solution that reduces their time liability, rather than [merely] selling a product to a plan sponsor, is a great way to get a client for life.”
But doing business with an acquaintance, friend or relative can easily become a minefield.
Plans taken on through personal relationships may have been inexpertly run by another acquaintance or a relative of the plan sponsor. It can make for an uncomfortable situation when the experienced adviser steps in and finds a plan in disarray and has to call this to the sponsor’s attention.
Coming into a plan that has irregularities requires diplomacy, says Tim Wood, principal of Foster & Wood in Portland, Oregon, but there are effective approaches. “It’s awkward,” he says. “No one wants to be told his past decisions were silly or uninformed. The way I do it now is to ask probing questions. ‘Why did you include this fund? Do you know that this fund holds 80% of its money in junk bonds?’ I try to tell a story and ask them questions.”Joyce says that when a sponsor does business with a relative, a brother-in-law or an old personal friend, the sponsor tends to “trust him completely, and [the adviser] takes advantage.” This can result in inappropriate investments, failed discrimination testing or overly high provider costs.
The potential for such problems is great, Joyce says. “We meet with an executive who has worked out a deal with his brother-in-law or high school pal. The problem is, [those people] usually know nothing about plans,” Joyce says.
Moreover, “smaller plans are often handled by brokers, insurance agents or bank trust officers who are not industry leaders in ERISA [Employee Retirement Income Security Act],” says Kevin Stophel, principal at Kumquat Wealth in Chattanooga, Tennessee. “The plans are decided by relationships instead of through a prospective evaluation process.”
This is why it is critical for advisers who win business through personal relationships to emphasize that they will bring a disciplined, formal and expert approach to running the plan.
The fiduciary responsibility means that advisers cannot take on a plan merely because someone is a friend, Wood observes. “We must establish a compelling offering, with a plan free of conflicts of interest, and have a fiduciary standard of care for every person in the plan,” he says.
Shannon Maloney, managing director at Strategic Pension Group in Northville, Michigan, “learned the hard way that a reluctant accommodation for friends doesn’t work out for either of us, so if it is not in my target market, I have learned to say ‘no.’” In other words, if an adviser no longer serves small plans, it is better to say so upfront. Maloney suggests providing names of advisers who could support the plan. “I usually look at some personality traits I think will work well with that associate and tell him to interview all three [that I suggest], for the best fit from a fiduciary standpoint.”
She points out that when friends ask friends for professional
help, expectations sometimes outstrip the service such business typically would
warrant. “There is an expectation of stellar service, as if they are one of
your largest clients, as they trusted you enough to give you the business,” she
says. “The truth is that often they are not—and their expectations and
assumptions [regarding] service very often [exceed what the adviser deems
appropriate].” In that case, Maloney says, both the friendship and the plan can
experience fallout.
Advises Maloney, “If you can provide the same service to a
friend and his plan [as to any other you serve] then take the plan. If not,
refer it to someone you trust who will service the plan appropriately.”
Additionally, employees may be dismayed to find that the
plan’s adviser is a personal friend of the owner, Wood says. For example, his
personal relationship with a company owner-operator also became professional
when Wood assumed the firm’s $1.2 million plan with 16 participants. All the
employees knew about their friendship, and
Wood was concerned about their reaction, he says, so he accepted the
business, prepared for employee skepticism. The concern led him to clarify for
plan participants how his fee-only firm is paid. “We explain that we are not
paid through [selling] investments—we are paid by the participants. And we
explain the value of having an adviser with no conflicts of interest,” he says.
Wood now uses this communication for all plans he services.
Finally, do not accept fiduciary duties because a personal
acquaintance asks you to accept them, even though you are not a named
fiduciary, advises Stophel. When it comes to delivering participant advice,
always make sure you do so with a proper participant fiduciary advice contract
in place and with a proper delivery process, he says. And do not fall for
reassurances such as, “‘Don’t worry about it! I’d never sue you,’” he says. “A
Department of Labor [DOL] audit makes liars and exposes fools.” —Jill Cornfield
KEY TAKEAWAYS
- The plan may previously have been run by an adviser generalist rather than a retirement plan specialist;
- It is important to emphasize a disciplined, formal and expert approach to running the plan; and
- Advisers need to be on guard for irregularities by the owner.
Tales From the Dark Side
When accepting business through a connection, an adviser
also should be mindful that the sponsor does not exploit their personal
connection. The owner of a small soft drink bottling company with a $5 million
plan, for example, fired his adviser and chose one of his own ethnic
background. The two attended the same religious institution, and the adviser,
new to the business of retirement plans, was “blown away by his supposed luck
when he received a call from this friend, asking him to be the new broker of
record on a multimillion-dollar retirement plan,” says Kevin Stophel of Kumquat
Wealth. But the new adviser was unable to make the numbers add up.
“It turned out the owner had been taking salary deferrals
and using them for his operating expenses,” Stophel says, observing that the
company owner thought the new adviser would look the other way because of their
shared heritage. The plan was handed back to the sponsor, and eventually he
made restitution to the participants—but only for the exact amount of their
contributions.
Tim Wood, of Foster & Wood, started work with a “plan that used an
open-architecture provider, which was good,” he says, “but the financial
planner had too much freedom picking investments.” The lineup included only one
bond fund and omitted several asset classes that Wood thinks are critical to
include such as real estate, international small caps and emerging markets. It
turned out that the plan was a near mirror of the company owner’s personal
portfolio, which included potentially volatile high-yield bonds. “You can’t be
exotic in a 401(k) plan,” Wood says. —JC