Help Wanted

In the spring of 2007, Erica Feldblum, President of R2R LLC, was among the first advisers to attain the new fiduciary adviser certification from Dalbar, Inc., in Boston. R2R, a Boston-based registered investment adviser (RIA), is not a plan advisory firm but, this year, Feldblum’s fiduciary adviser certification bore fruit. Since March, R2R has been retained by three small retirement plans as a fiduciary adviser, providing individual investment advice to participants.

Feldblum says that the reason she went through the Dalbar Fiduciary Adviser Network program was because she recognized the business opportunities presented in the Pension Protection Act (PPA) of 2006. “It is a natural extension of what we do now;” she says, “helping people plan for their retirement. This now allows us to leverage the relationship with the plan sponsor and have an impact on many people through the one relationship. This, of course, allows our business growth we could not experience through the normal referral channels.”

The PPA established rules for how detailed, individualized investment advice could be provided by a “fiduciary adviser’ to participants for a fee, while affirming that plan sponsors would be liable for the selection and monitoring of the adviser, rather than the advice. In order to qualify as an eligible investment advice arrangement under the PPA, either the fiduciary adviser must receive level compensation regardless of the investment options selected or, if the adviser compensation does vary as a result of the recommendations, those must be based on a computer model certified by an independent, eligible investment expert. Additional conditions such as the disclosure of fees, the retention of records, and compliance audits also apply. Prior to the PPA, advisers provided this service, but advisers were reluctant to embrace the fiduciary nomenclature without additional structure, and sponsors often were concerned about what they saw as the additional fiduciary liability of offering participant advice.

Although it would seem that advisers would stampede to take advantage of this new business opportunity, Feldblum appears to be more the exception than the rule. Industry watchers, for the most part, say that most advisers are still taking a wait-and-see approach. “There is a reluctance to take on the financial adviser role primarily because additional guidance has not been issued,” says Richard Lynch, the Chief Operating Officer of Fiduciary360 (fi360) in Sewickley, Pennsylvania. CEFEX, an organization related to fi360, offers another fiduciary adviser certification.

Like anything new in the retirement plan business, it will take time for it to get traction, argues Robert L. Francis, Chief Operating Officer, National Retirement Partners (NRP), a broker/dealer and financial advisory service. For example, he says, target-date funds have been around for 10 years, but only became popular in the last four years. “It’s only a matter of time until it works its way through the system,” he says.

Holding Back

While only approximately 35 advisers have completed the CEFEX certification process, Lynch expects more interest in the future. Concerns about fiduciary responsibility and liability continue to grow, he says, because of the Securities and Exchange Commission (SEC) vacating the broker/dealer exemption and the recent Supreme Court decision in the LaRue case, which acknowledged an individual participant’s right to sue a plan sponsor.

One adviser loath to take on the fiduciary adviser role immediately is Wendy Siegal, Vice President of Retirement Services, for Weiser Capital Management in New York. Siegal is a retired enrolled actuary as well as an RIA representative. Siegal services approximately $120 million in retirement plan assets, and works exclusively with retirement plans. “Being an actuary, I’m a conservative person, so I’m going to wait,” she says.

Specifically, Siegal says that it is the lack of guidance that keeps her from jumping in. Among other things, Siegal wants to see rules clearly spelling out the level of additional fiduciary responsibilities she would take on by becoming a PPA fiduciary adviser. “Right now, I don’t know how much I can say and can help an individual,” she says.

Siegal also wants more guidance on the levels of special paperwork that will be needed to protect participants’ privacy, and how individual assets outside of the plan can be taken into account. “We need to protect ourselves to make sure we are not overstepping our bounds,” she says.

Practical Application

Another reason people might not be jumping on the fiduciary adviser bandwagon, notes Lynch, is that the PPA requires that fiduciary advisers be subject to annual audits. However, he adds, there is no guidance as to how the required annual audits are to be conducted. Despite the lack of guidance, service providers, such as Dalbar, Inc., have in place their own audit procedures advisers can follow.

However, while the consensus is that more guidance is needed, none appears to be immediately on the horizon. Lynch has spoken to people in the Department of Labor who essentially have said that the guidance is being worked on, although when it will be published is unknown.

In addition to lack of guidance, says Francis, under most compensation programs, plan advisers would be considered conflicted under the PPA rules. The rules require that fiduciary advisers receive level compensation, he says, but getting actual level compensation is difficult. Certain plan investments, such as employer stock or index funds, usually do not pay the same level of compensation as other plan investments, he says. A large percentage of advisers still earn product-based compensation, which is not sanctioned under the fiduciary adviser rules, says Louis Harvey, President of Dalbar, Inc. This means, he says, that advisers would have to give up part of their income to become fiduciary advisers.

Yet, while adviser hesitancy may be one explanation for the lack of fiduciary adviser uptake, others see it differently. Advisers already working in the retirement plan space want to build fiduciary programs and do not want to wait for additional guidance, says Jason Roberts, a senior associate with Edgerton & Weaver LLP in Hermosa Beach, California . “I never see reluctance,” he says. “I always see advisers ready to take the plunge.”

Roberts says that advisers working in the 401(k) plan space view the fiduciary adviser designation as the next opportunity. It is often the advisers who are pushing to set up a fiduciary model to assume the fiduciary adviser role. It is the broker/dealers, he says, that are hesitant, not the advisers. “The advisers are the ones making the push and the home office is the one asking “what will we do? How will the processes be worked out?”” says Roberts.

Historically, says Lynch, broker/dealers have been, from a risk management standpoint, reluctant to allow registered representatives to take on fiduciary status. The new fiduciary adviser rules, however, require that advisers acknowledge fiduciary status. From the broker/dealer perspective, he explains, particularly for the larger ones, their whole business model traditionally revolves around not accepting fiduciary status. To change that means, among other things, drafting new service contracts and different training programs requiring time and money. Lynch believes broker/dealers eventually will allow registered representatives to assume fiduciary status because they ultimately do not want to walk away from that business.

While many broker/dealers have not allowed represen­tatives to become financial advisers, agrees Francis, NRP actually embraces fiduciary adviser practices. NRP currently has 15 of its member firms going through the Fiduciary Adviser Network certification process sponsored by Dalbar, and four firms had completed the process in June.

Feldman had conversations with R2R’s broker/dealer, LPL Financial, as to how to provide investment advice. Since a resolution has yet to come, Feldblum and her partner set up a separate registered investment advisory firm to provide fiduciary adviser services to plan participants. R2R, however, still sends all advertising and other required paperwork through LPL’s compliance department. “We don’t need their approval,” says Feldblum, “but we wanted their tacit approval so that they couldn’t come back in a year and say “You can’t do that.””

Even if the broker/dealer issues are worked out, notes Lynch, it is too early to tell if being a fiduciary adviser makes financial sense from the adviser’s perspective. “It’s so new, that no one has an idea as to what reasonable fees are,” says Lynch. The fees an adviser may feel are adequate to make it worthwhile may not be the fees that a plan sponsor feels are reasonable, he says.

Another concern, says Lynch, is the take-up level. If an adviser signs on with a plan with 1,000 participants, there is no previous track record to determine how many of those participants actually will sign on for the advisory services. If only 20 participants sign on, he says, it may not be worthwhile to the adviser from a financial perspective. If fiduciary advisers are compensated solely in accordance with the number of participants they advise, he says, then they would be concerned about the number of participants that choose to take advantage of the service.

The three plans Feldblum works with each has from 30 to 60 participants. Since R2R’s fiduciary adviser program only got off the ground in March 2008, enrollment is not completed on any of these plans, she says. R2R’s fiduciary adviser plan sponsors pay a flat fee to cover both an educational component and to give participants access to the fiduciary adviser. Participants who wish to use the fiduciary adviser services pay $250 annually for 401(k) plan asset allocation advice only, $500 for basic financial planning, and $2,500 for executive financial planning.

NRP recommends that its member firms charge a $500 annual flat fee per employee who utilizes the financial adviser services, says Francis. NRP also recommends that the sponsor subsidize part of the fee. NRP, however, does not believe that plan advisers should simply change stripes and begin advising individual participants in retirement plans he says. Instead, NRP believes that plan advisers should recruit investment advisers into their practices to serve as fiduciary advisers. A majority of NRP firms seeking fiduciary adviser certification, 12 of the 15, have recruited wealth management expertise into the firm.

While few advisers currently market themselves as fiduciary advisers, the experts believe that will change. It makes perfect sense that advisers would want to access this market, says Roberts, because there are not many opportunities for financial planners to make an institutional-level sale. “It’s the reason why independent RIAs are so eager to get in,” he says.

Even those advisers who are now expressing reluctance acknowledge that can change. “I’ll reevaluate my position in the future to see if I’m being too wary,” says Siegal.

[sidebar:] Fiduciary Adviser Certification Processes

Under the Fiduciary Adviser Network (FAN) certification program offered by Dalbar, Inc., in Boston, Massachusetts, (www.fiduciaryadviser.com), advisers undergo a due diligence process that produces the documentation required to qualify for the prudent selection as a fiduciary adviser. The certification is updated annually. Thus far, says Louis Harvey, President of Dalbar, only 100 advisers have completed the certification process, although another 200 are in the pipeline. Generally, he says, it takes approximately 90 days to complete the process at a cost for individual advisers of $1,995.00.

There are four steps to the due diligence before the adviser is certified for one year and receives a certificate, documen­tation­, listing in FAN Network, and the right to advertise his/her rating. First, candidates must complete an application to determine if basic requirements are met. Second, a background check is completed. Third, Dalbar assesses client experience. Fourth, candidates are tested for knowledge of ERISA and PPA, although this testing can be waived.

Another certification organization, CEFEX (www.cefex.org), sister organization to fi360, was launched on January 1, 2006. Approximately 35 advisers have completed the process, and there are another 100 in the pipeline, says Lynch. The certification process must be completed in 90 days. To attain CEFEX certification, an adviser must comply with all 23 fiduciary practices and associated criteria (defined in fi360’s handbook, “Prudent Practices for Investment Advisers”).

*Illustration by Cristian Turdera