Data & Research April 18, 2017

Most Investors Would Be Happy to See New Fiduciary Standard

Financial Engines says it has clear and compelling evidence that Americans strongly favor stricter conflict of interest protections when it comes to retirement investment advice. 
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A new survey report published by Financial Engines argues the fate of the Obama-era Department of Labor (DOL) fiduciary rule has grown increasingly complex and uncertain since President Trump took office.

While the new president, along with Republican leadership in Congress, have expressed a desire to dial back or wholly overturn the fiduciary rule reforms, currently they are still very much intact. The rulemaking’s implementation has simply been delayed, from a previous target date of April 10 to instead take effect June 9.

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It remains to be seen what path President Trump and/or Congress may take, but Financial Engines says it is abundantly clear that average Americans favor the implementation of new conflict of interest protections for the retirement plan investing industry.

According to Financial Engines, fully 93% of Americans “think financial advisers who provide retirement advice should be legally required to put their clients’ best interest first.” In fact, more than half of respondents (53%) mistakenly believe that all financial advisers are already legally required to put the best interests of their clients first.

On Financial Engines analysis, these two stats taken together should offer something of a moral imperative to advisers to be more willing to embrace true fiduciary roles.

NEXT: Testing investor understanding of conflicted advice 

Compared to a similar survey last year, Financial Engines finds Americans “have a slightly better understanding of the difference between a financial adviser who is a fiduciary and one who is not.” Specifically, 21% say they understand the difference today, compared to 18% a year ago.

“However, many Americans still don’t know how to tell if an adviser is a fiduciary,” Financial Engines warns. “Only 50% of investors who work with a financial adviser are certain that their adviser is a fiduciary, while 38% don’t know if their adviser is a fiduciary or not.”

Christopher Jones, chief investment officer at Financial Engines, warns the “bar is rising.”

“Once people understand the benefits of working with a fiduciary, they want one on their side,” he says. “Consumers want to know that they can trust their financial advisers. According to the survey, if investors discovered their financial adviser was not a fiduciary, many say they would take action.”

The Financial Engines data shows only 12% of investors feel they would continue working with the same adviser in the same capacity, after learning the adviser is not in fact a fiduciary.

Speaking frankly, Jones suggest financial firms and advisers “often parse their words carefully to give the appearance of being a fiduciary, even when they are not … While the debate over the conflict of interest rule has raised consumer awareness about this important standard, investors must still be careful to demand advisors that act in the sole best interests of their clients.”

Additional results from the survey, along with other research reports, are available at https://financialengines.com/workplace/resources. 

Compliance April 18, 2017

ESOP Awarded More Than $9 Million for Overpayment of Company Stock

A federal court held that First Bankers breached its fiduciary duties to the plan’s participants by failing to conduct a prudent investigation into the fair market value of the shares.
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A federal judge, presiding over a U.S. Department of Labor lawsuit, has found that First Bankers Trust Services Inc. breached its duties of prudence and loyalty to the participants of an employee stock ownership plan (ESOP) when it caused the plan to overpay for shares of the company’s stock.

U.S. District Judge Michael A. Shipp of the U.D. District Court for the District of New Jersey awarded to the plan $9,485,000 (plus interest), subject to the reduction in a 2016 consent order against SJP Group Inc.’s CEO Vincent DiPano.

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SJP Group, the plan’s sponsor, hired First Bankers as an independent fiduciary to advise the company’s plan on whether, and at what price, to purchase company stock from its majority shareholder DiPano.

An investigation by the department’s Employee Benefits Security Administration found violations of the Employee Retirement Income Security Act (ERISA) and, on July 17, 2012, the department filed suit against both First Bankers and DiPano seeking to recover losses suffered by the plan participants.

Following a 17-day trial, the court held that First Bankers breached its fiduciary duties to the plan’s participants by failing to conduct a prudent investigation into the fair market value of the shares. As a result, First Bankers approved the participants’ purchase of 38% of the outstanding stock of SJP Group from DiPano for $16 million, which was nearly $10 million more than what the stock was worth.

Shipp held that First Bankers failed to independently and thoroughly investigate the true value of the shares. As the plan’s fiduciary, it was responsible for ensuring that the participants paid no more than fair market value for the shares. In addition, Shipp found First Bankers relied on unrealistically optimistic projections of SJP’s future earnings.

“Participants’ retirement benefits depend on the plan buying and selling stock for fair market value, the department intends to make certain that the price a plan pays for the plan sponsor’s stock reflects its true market value,” says Jonathan Kay, EBSA’s regional director in New York. “Those retained to advise a plan about the stock purchase must fulfill their fiduciary duties under ERISA and prevent those who sell their shares to a plan from receiving an unwarranted windfall.”

In a 2016 consent order, the department resolved its allegations that DiPano violated his fiduciary duty by failing to monitor First Bankers adequately. DiPano agreed to pay $2.25 million in restitution and a penalty.

The department is currently in litigation with First Bankers in three other matters, in which the department similarly alleges that First Bankers failed to prudently determine the proper value of plan shares resulting in substantial losses to plans and their participants. The matters are all filed under the name of Secretary vs. First Bankers Trust Services, Inc. et al. The matters involve the Rembar Company, Inc. plan; the Maran, Inc. plan; and the Sonnax Industries, Inc. plan.

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