practice management | PLANADVISER May/June 2017

Shielding Yourself

Deciding whether to be a 3(21) or a 3(38) fiduciary

By John Manganaro | May/June 2017
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Art by Uijung Kim

Christopher Venuti is senior vice president and institutional consulting director for Graystone Consulting, a business of Morgan Stanley, in Los Angeles. His team consults on about $5.5 billion in assets, with an average plan size of around $100 million. According to Graystone leadership, a big part of the recent growth and client retention success of the firm has involved delivering discretionary investment management services as a 3(38) fiduciary.

Roughly 60% of the advisory group’s book of business is now serviced under 3(38) arrangements, Venuti observes, and just about three-quarters of all new plans brought on in recent years utilize the service. “It is a topic that’s really important right now among our existing clients and prospects,” Venuti says.

Regulatory and litigation pressures—as well as organic client demand—have forced most advisers serious about having a future in the Employee Retirement Income Security Act (ERISA)-governed retirement planning industry to take on the somewhat less rigorous 3(21) fiduciary role. The 3(21) arrangement involves requirements to offer best-interest advice to plan sponsor clients but still leaves them with the final decision; 3(38) services mean the adviser is in control, offering discretionary investment management services.

Against this backdrop, Venuti says, offering “the next level of fiduciary service” as a 3(38) investment manager can be a natural and powerful differentiator in the eyes of clients, who now commonly see 3(21) advisers.

“Clients are very attracted to the notion of gaining additional fiduciary protection however they can,” he adds, “and the 3(38) investment management service can offer just that.”

Sizing the 3(38) Marketplace
The latest PLANADVISER Practice Benchmarking Survey (PLANADVISER, November–December 2016) showed a large increase in advisers serving as fiduciaries, of any type, to plan sponsors and plan participants. There was a jump in the percentage of advisers acting as a 3(38) to plans—from 56% up to 60%—and as a 3(21)—from 90% up to 92%.