Practice Management June 20, 2018

Competing for Advisers With Tools and Services: Retirement Industry M&A Activity

Pressing industry trends and emerging opportunities are reflected in recent merger and acquisition activity among retirement plan advisers and service providers, and in the efforts of other firms to restructure their basic approach to sales and service; PLANADVISER hears from Fi360, AssetMark, Cetera Financial and others about their visions for the future.
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Even against the background of years of accelerated merger and acquisition activity in the retirement plan services and financial advisory marketplaces, it’s been something of a busy week of new deals and developments—presenting a chance for advisers to step back and take stock of a rapidly evolving industry ecosystem.

Starting off the week, in a deal that combines two fiduciary training and technology solution providers, news emerged that Fi360 has acquired the Center for Fiduciary Management (CFFM). Talking through the motivation behind the acquisition, Bill Mueller, CEO of Fi360, told PLANADVISER that compatible corporate cultures and a shared vision for the long-term future were both top factors in getting the deal done.

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“I first met Scott Revare, founder and CEO of CFFM, more than a year ago, and it became evident quite quickly that he had a similar corporate outlook to ours—one that is very client service oriented,” Mueller said. “I got the feeling right away that [CFFM] understands where the industry is going. The process unfolded all the better as we found out that they have some key pieces of the puzzle that we didn’t.”

In particular, Mueller said he looks forward to integrating CFFM solutions such as FirmPlus, an investment due diligence platform; RFP Director, a research and RFP management platform; and Stable Value Navigator, which offers data and insight about stable value funds along with an opportunity to compare advisers’ fund choices. Mueller pointed out what he sees as the significance of the Stable Value Navigator. While there is more chatter these days about target-date funds (TDFs) and even money market funds, stable value holdings still represent a significant portion of defined contribution (DC) plan and individual retirement account (IRA) assets.

“We had the Fiduciary Score rating to begin with, but that covers mutual funds, exchange-traded funds, collective investment trusts, and TDFs. Stable value funds, up to this point, were not in there,” Mueller noted. “This is still a really significant piece of retirement plan menus, so it’s great that we can now bring out this stable value product and help advisers and their own clients do peer comparisons and make a more informed decision about the stable value products they select.”

Perhaps most informative with respect to wider industry trends was the way Mueller spoke about the onboarding of CFFM’s Fiduciary Pilot program, especially for non-specialist advisers who have just a handful of plan clients. “Fiduciary Pilot is an easier and more efficient way for them to run their reports timely and make sure they are doing sufficient fiduciary monitoring,” he explained.

A more sophisticated retirement-focused adviser may find certain features and functions missing from the streamlined Fiduciary Pilot, but other advisers, based on their clients and business model, don’t necessarily need all of the fiduciary capabilities than an Fi360 or CFFM can bring to bear. Asked to reflect on this point—that there are still a lot of advisers out there serving only a small handful of retirement plans and focused more on the wealth side—Mueller agreed that recent industry trends have been hard to read.

“At an earlier stage we were seeing a clear push by broker/dealers to consolidate retirement plan [clients] within smaller teams of retirement specialists. But I think this has proven to be more difficult than they anticipated, and with recent regulatory changes, they have come to the conclusion that this is not necessarily the right move,” Mueller observed. “This is not least because clients often want to stay with the advisers or brokers they have, rather than move to a retirement specialist.”

Mueller went on to suggest another important industry trend is reflected in the Fi360/CFFM deal: “We have a new business intelligence layer that we have been working on, meant to give a broker/dealer or wirehouse home office a very granular view into all the products and the pieces of their business on the back end. We are thrilled about our developing custodial data feeds, from that perspective.”

With the CFFM acquisition, Fi360 is collecting data from more than 60 retirement plan recordkeepers. And the data is meant to be actionable, Mueller emphasized.

“The home offices, the offices of supervisory jurisdiction, they are increasingly interested in gaining insight into their advisers’ net holdings and in their clients’ held-away assets,” Mueller said. “This represents an opportunity for them to prospect rollovers, of course, but it’s also a potential source of liability. So there is a real interest in improving visibility into all of these matters.”

Another provider, a similar take

On the same day Fi360 announced its acquisition of CFFM, PLANADVISER also spoke with Cathy Clauson, senior vice president for investment product management, Retirement Plan Services at the advisory tools and solutions provider AssetMark. The conversation marked the third anniversary of an important acquisition in the development of AssetMark—that of the Aris Corporation of America, which provided financial solutions to advisers and their clients.

“That integration effort started with the relatively easy migration of the high-net worth business,” Clauson observed. “But the next task was moving the retirement plans business, which they had been running since 1974. It’s really interesting to look back because at that stage, the plans and relationships were all still highly manual and highly customized, client by client.”

The Aris retirement advisory business had started as an entirely in-house operation conducted by a single attorney and staff actuary.

“They would just build out single plans for clients,” Clauson said. “They would build you whatever plan you wanted, and we inherited that. So our issue was that we had great expertise and great advisers coming on board who really knew the retirement business inside and out, but it was not scalable at all.”

Clauson and company spent more than a year, most of 2016 and into 2017, studying that business and mapping it over to a more scalable solution.

“We have moved to work with a service provider that helps us with all the recordkeeping and administration—we have outsourced it,” Clauson said. “Today it is a white-labelled solution that we use, coming from Epic Retirement Plan Services out of Rochester, New York. We like that they are independent, like us.”

Clauson stressed that the effort was far from easy to make this migration.

 “As service providers plan for their future, they must understand any major conversion of business processes and systems is going to be painful, especially when you’re doing something new, which we believe we are.”

The lesson is that moving to scalable, repeatable solutions with the right service model is not a simple matter. AssetMark did lose some advisers (and their sponsor clients) during the conversion, Clauson confirmed, but they kept the vast majority of the assets and now feel well positioned for what is to come.

“Many readers are probably facing conversion challenges of their own, and they can certainly identify with the difficulties of migrating away from legacy technologies and manual systems to a more modern approach,” Clauson added. “It was difficult, but if you follow your vision and you can deliver something new, the payoff will be there. And our advisers are grateful, because they can now compete even more effectively, including in the small plan space.”

Clauson concluded with another reflection from earlier in her career.

“I started my career with Charles Schwab, and we were seen as being very disruptive at that time for bringing investment services directly to investors,” she said. “Of course, this disruption did not by any means kill the brokerage market, as some predicted it would, and it certainly didn’t kill the adviser market. It was simply a new platform for investors to use. I was also around when the Internet was first coming into this space, and everyone for a while assumed that broker/dealer branch offices would just vanish, and that obviously hasn’t been the case, either.”

The real outcome of these developments was that it pushed brokers and advisers to adapt and to become more capable on the digital side, Clauson said. In fact, self-service and digital communication technologies have greatly benefitted advisers and brokers and have helped them up their game. Thinking about today’s marketplace, as robo-advice providers and other new sources of competition come into play, the same story is playing out.

Questions of commitment

Another interesting advisory market development this week came in the form of an announcement from broker/dealer Cetera Financial Group, which revealed the launch of a new 401(k) Practice Development Program tailored for its advisers—both those currently serving retirement plans and those seeking to expand into this market.

According to the firm, the program features a “robust curriculum of live, web-based training sessions supplemented by industry-leading resources and tools.” It has been developed with Nationwide Financial and the retirement plan advisory consultancy KnowHow 401(k)—with the stated goal of accelerating the growth of Cetera’s 401(k) businesses.

Reflecting the language used by Fi360 and AssetMark, Cetera said its new program “demonstrates a long-term commitment to supporting retirement plan-focused advisers by expanding the firm’s existing offerings in this area, and it will help to extend our focus on holistic advice to more retirement plans and participants.”

Tim Stinson, head of wealth management for Cetera Financial Group, said an important motivator behind the new program is the simple fact that plan sponsors are increasingly searching for solutions that can help them meet their fiduciary responsibilities and maximize participant engagement.

“Our new 401(k) Practice Development Program provides both experienced advisers and those new to this market with the knowledge and tools they need to address these opportunities confidently and expand their retirement plan businesses,” he explained.

For advisers participating in the program, web-based training sessions are conducted over a three-month time frame by KnowHow 401(k) founder and Managing Director Chris Barlow. Each session will cover topics such as sustainable business planning, marketing, meeting with plan sponsors, and more. Enrolled advisers will also have access to KnowHow 401(k)’s fully integrated resource center, and will receive support during and after the program from Cetera’s Retirement Plan Solutions consulting team, who will be available to help them implement the strategies and tactics they learn.

Jon Anderson, Head of Retirement Services at Cetera Financial Group, emphasized that this move is about the long-term retirement industry outlook. He said the 401(k) Practice Development Program complements and further strengthens Cetera’s investments in its growing Retirement Solutions team, which currently consists of 45 professionals with backgrounds in the retirement plan space. “Cetera is also the only network of firms supporting independent financial advisers with its own in-house third-party administrator (TPA) offering,” he suggested.

Are others pulling back on retirement advice?

This expansion by Cetera to increase its support for retirement plan-focused advisers is coming at the same time that LPL Financial, another large national broker/dealer with a significant footprint in the retirement market, has confirmed it is in the process of closing its Worksite Financial Solutions platform, which had been designed in part to help advisers generate new business from 401(k) rollovers. While the move by LPL has been interpreted by some as a pullback from the retirement market—that is not the only possible interpretation.

Indeed, as explained by LPL spokesperson Lauren Hoyt-Williams in a recent interview with InvestmentNews, the plan at LPL is actually to leverage savings from the winding down of the Worksite program and “reallocate it to enhance components of retirement plan support, including financial wellness, marketing resources and advice programs that enable advisers to serve in a fiduciary capacity.” LPL is also “increasing capabilities within our Retirement Partner Consulting Program, and creating a suite of marketing materials for insurance, high-net-worth and trust clients to help our advisers capture ancillary business related to the employer-sponsored plan space,” she added.

Providing some additional context, readers may recall it was just about a year ago that high-level staffing changes were announced at LPL, to the effect that David Reich, former head of the Retirement Partners Group, was leaving the firm. His duties were taken over by Steve Lank.

Before that point, LPL had structured its specialized clients (including retirement plans), high-net worth, insurance, and trust businesses in a way that delivered direct support to advisers serving these niche markets. Coinciding with Reich’s departure, the firm began an effort to unify these groups into one common entity that would provide sales and support to all advisers and institutional clients.

At the time, Hoyt-Williams told PLANADVISER that doing so would “create increased awareness and greater access to the depth and breadth of resources and expertise LPL has available to support advisers.”

“We believe unifying these business units to deliver a full suite of specialized services and resources will help our advisers grow their businesses and will be a differentiator in the market,” she said. “We remain fully committed to each of these areas of business. The integrated approach enables us to move our business forward in a way that aligns with the direction of the industry, and provides us the opportunity to deepen the value we deliver to our advisers.”

Compliance June 18, 2018

Lessons from Litigation: Process Matters Most

When it comes to fiduciary liability insurance, having the broadest possible statement of coverage is generally best; this is because it is a functional test for determining whether any given plan official or company officer is a fiduciary.
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The final day of the 2018 PLANSPONSOR National Conference (PSNC), in Washington, D.C., featured a panel of experienced Employee Retirement Income Security Act (ERISA) attorneys and fiduciary insurance experts—who all warned attendees about the increasing frequency of litigation in all segments of the retirement planning marketplace.   

The speakers included Emily Costin, partner at Alston and Bird; Jamie Fleckner, partner at Goodwin Procter; and new to the PSNC audience, Rhonda Prussack, senior vice president and head of fiduciary and employment practices liability, Berkshire Hathaway Specialty Insurance.

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Asked flat out why there has been so much proliferation in retirement plan litigation, the panel agreed the trend has been a long time coming, though steam has clearly picked up in recent years thanks to a highly active plaintiffs’ bar. As Costin put it, the roots of current litigation trends go back to at least 2005 and the start of a new regulatory focus on fee and conflict of interest disclosures.

“Then came the financial crisis of 2008, which ushered in a wave of stock drop litigation,” she explained. “At this stage, those early stock drop cases have largely been litigated or settled and have faded as we get further away from 2008. In addition, the Supreme Court’s influential decision in Fifth-Third Bank vs. Dudenhoeffer has made it a lot more difficult for plaintiffs in stock drop cases to prove standing.”

As Fleckner, Costin and Prussack outlined, with stock drop cases fading to the background, the new hot topic for litigators has become self-dealing by providers and conflicts of interest in recordkeeping and investment management arrangements. All of the cases center on the deceptively simple question of whether a tax-qualified retirement plan is profiting the company (directly or indirectly) to the expense of participants. The attorneys and insurance expert noted that federal court judges have tended to allow more of these self-dealing type cases to move forward compared with the earlier stock drop wave, and plaintiffs have also had some success getting beyond the summary pleading and dismissal stage in cases focused on reasonableness of fees for recordkeepers.

“These cases are still very early on in the process,” Fleckner noted. “But they tend to have success when the fiduciary plan committees cannot answer some straightforward process questions. How often have the fees been negotiated? Who is minding the fees? Have they been pushed down as the plan grows? These are core questions in the current wave of litigation.”

After a question from the audience, the speakers agreed that it can be hard for small and mid-sized retirement plans to negotiate big cuts in their fees without sacrificing service quality. With that in mind, the more important matter for preventing and responding to litigation is to show that plan fiduciaries have done what they can to study, understand and push for lower fees across the board. The worst thing that can happen is for the plan committee to appear that it was either asleep at the wheel or consciously neglecting its duty to ensure plan participants pay only reasonable fees.

With this in mind, Costin pointed to the litigation unfolding against the 403(b) retirement plan of New York University as being particularly illustrative.

“The matter just went to trial so I would encourage plan fiduciaries to read up on that one, because there are crucial lessons to learn,” she explained. “The judge on the bench trial was very active and she seemed to be taken with the question of whether the individual committee members really understood the depth and scope of their responsibilities. Of course, we don’t know at this stage what her decision will be, but in my opinion she was clearly struck by how uninformed many of the top-level committee members seemed to be.”

Turning to the subject of fiduciary liability insurance, Prussack noted that, at the core, such insurance is designed to protect directors, officers and other individual fiduciaries in a broad variety of potential litigation matters.

“Simply put, your policy should cover everything that Emily and Jamie are talking about—most importantly it covers the defense and damages,” Prussack explained. “Assuming you have sufficient coverage is not enough. You must investigate your policies and the potential shortfalls in your coverage. We see many clients that choose to stack coverage from one or multiple providers, to ensure they have enough coverage.”

One counterintuitive tip Prussack shared was to not list individuals on the policy who are to be covered. Instead, having the broadest possible statement of coverage is generally best.

“This is because it is a functional, not nominal, test for determining whether you are a fiduciary,” she said. “In many of the cases we have seen, all the current and former members of plan committees are named as defendants. Also named are the members of the company’s boards of directors who have selected and approved the committee, and potentially many others. The chances that you will miss somebody if you attempt to name everyone in your policy is high.”

A related tip Prussack shared is that fiduciary insurance companies should not require listing of individual plans or trusts that are to be covered, “with certain necessary exceptions in the governmental or the multiemployer pension plan environment.”

“It’s the same idea at work,” she noted. “You want to make sure you’re not missing anything. It’s not just DC, DB and ESOP plans that need coverage. It should also touch on welfare plans, for example. The point is that you don’t want coverage limited to ERISA, either. Your policies should range across employee benefits laws and include coverage for ministerial mistakes as well—covering the day to day information sharing and plan management.”

Prussack said her firm, as the insurer, is asking for more detail than ever from plan fiduciaries in terms of learning about a potential clients’ ongoing management and monitoring process. Is it diligent? Is it documented? Is it robust? And just as important, is it actually being effectuated? Is it a stable and proven process?

Concluding the panel discussion, Fleckner shared an anecdote based on a recent conversation he had with a retired district court judge who now works as a mediator in these cases.

“He told me clearly that, as a mediator with power to help determine liability and settlements in these cases, he is most concerned with what the contemporaneous documents say about what the plan committee did at the time of the actions that are being questioned,” he explained. “The documents carry much more weight than testimony collected today from the committee members, for example. Witness testimony years down the road is interesting, but the deliberation documentation from back when the decisions were made really carries the most weight.”

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