Some believe that one effect of the new DOL fiduciary rule will be that many Americans with small retirement accounts, particularly IRAs, may lose access to professional advice and guidance. On the other hand, there is a likelihood that the new rules will encourage many advisers to start providing active fiduciary level advice to their clients with employer provided retirement accounts, such as 401(k)s and 403(b)s.
There are three particular areas where advisers will need to adjust their business practices:
• IRA accounts
• Advising clients on their employer-provided retirement accounts
• Rolling over from an employer retirement account to an IRA
(More coverage: The DOL fiduciary rule from all angles)
Most of the discussion around IRAs has focused on the new requirement to either become a fiduciary as defined under ERISA or to operate under a best interest contract. A best interest contract subjects advisory firms to legal liability for the equivalent of fiduciary violations. Some have argued that small IRA accounts will be abandoned by advisers because of the increased cost to operate at a fiduciary standard and the risk of investor lawsuits.
What is more likely to happen is:
• A continued shift from commission to fee in these accounts, with some experimentation with fixed fees and minimum fees.
• An acceleration in the use of technology that allows advisers to efficiently manage these accounts and track that advice was given
• An increase in the use of aggregation software to help advisers show they understand each client's entire financial situation.
• Advisers will offer streamlined financial planning software to small IRA clients as another way to demonstrate they are acting in the clients' best interest.
The other area in which advisers have both increased liability and opportunity is in advising clients on employer-provided, self-directed retirement accounts, such as 401(k)s. All advisers have clients that ask them to “look at their 401(k).” Advisers will need to be careful that they have not accepted fiduciary liability for “complimentary” advice.
SEC CUSTODY RULE
401(k)s have limited investment choices. This means that to give fiduciary level advice, the adviser needs to know what the investment choices are. For most advisers this meant getting the client's login and password. At that point the adviser becomes a fiduciary and subject to the SEC fiduciary rules including the annual unannounced financial audit.
And yet technology has identified a solution to this problem. Technology providers have developed the ability through account aggregation to not just get the holdings in the employer retirement account but also the investment choices. By using technology to gather this information, the adviser now can give fiduciary level advice without taking custody.
Fidelity states that for employees in a 401(k) plan for 10 years or more, the average balance is $251,600. By way of example, if an adviser with 100 high-net-worth clients adds 401(k) advisory services for 20% of them, these 20 clients will create over $5 million in additional advisory assets. If the adviser charges 1% for this service, his or her revenue will increase by over $50,000 without adding one new client.
CHARGING FOR 401(k) ADVICE
The DOL rule will accelerate advisers adding employer retirement advisory services because under the new rule, if an adviser rolls over an employer-provided retirement account into an IRA where the adviser is now earning incremental compensation, the adviser will need to prove that the rollover was in the best interest of the client. The fact that the adviser is earning increased compensation will be a significant hurdle to jump over. Yet, if the adviser is already getting paid to advise the client on their employer retirement account and the client rolls over the account into an IRA, as long as the adviser maintains the current advisory fee, this problem is effectively eliminated.
Everyone in the advice industry has an opportunity right this moment to get in front of clients and talk with them about their options. Seize it.
John Michel is chief executive of CircleBlack, an online financial data aggregation platform for advisers.
