Compliance January 17, 2018

New Plaintiff Adds Claims to University of Chicago 403(b) Suit

While a federal district judge had dismissed some claims last fall, the introduction of a new plaintiff in the case adds them back.

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What the University of Chicago may have seen as a small win in the lawsuit alleging fiduciary violations of the Employee Retirement Income Security Act (ERISA) in the administration of its 403(b) plans was short-lived, based on a new federal district court decision.

The original case alleged violations for both the University of Chicago Retirement Income Plan for Employees (ERIP), a plan for faculty and staff members, and the University of Chicago Contributory Retirement Plan (CRP), a plan for non-academic employees. In addition to various counts regarding excessive fees, the complaint accused the university of approving a TIAA loan program that required excessive collateral as security for repayment of the loan, charged grossly excessive fees for administration of the loan, and violated U.S. Department of Labor (DOL) rules for participant loan programs.

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However, last fall, U.S. Chief District Court Judge Ruben Castillo dismissed claims related to the CRP and the TIAA loan program because the plaintiffs were not participants in the CRP plan nor did they participate in the TIAA loan program. The judge also at the time dismissed the claims for failure in the duty of loyalty under ERISA, saying the plaintiffs did not show that the defendant engaged in any self-dealing or failure to communicate material information.

The plaintiffs filed an amended complaint, introducing Walter R. James as a plaintiff. James participated in the CRP and invested in funds challenged by the complaint. He alleged breaches of fiduciary duty by the defendant related to the selection and retention and failure to monitor CRP investments. However, University of Chicago moved to dismiss James’ claims, saying he failed to allege an injury-in-fact. The defendant says an independent calculation showed James “may have paid approximately $37 per year” in recordkeeping and administrative fees. It argues that this is not excessive or unreasonable based on the plaintiffs’ allegation that the industry benchmark for these fees is $35 per year.

Castillo disagreed. “Accepting as true the allegations that CRP incurs excessive administrative expenses and Defendant failed to monitor CRP’s investment offerings, coupled with the allegations James is a CRP participant and has suffered direct economic loss, the Court concludes that James sufficiently alleges as to Count I that he personally suffered and injury-in-fact in the form of a concrete and particularized ‘direct economic loss’ due to Defendant’s alleged conduct,” he wrote in his latest opinion.

The plaintiffs argued that the University of Chicago’s calculation of fees James “may have paid” does not account for the fact that each participant pays a different amount of administrative fees, and that each participant is invested in a wide variety of funds, not just the funds on which the university based its calculation.

“Defendant’s independent calculation merely underscores a factual dispute concerning the amount of administrative fees that James paid, which is a point of contention the Court cannot resolve on a motion to dismiss,” Castillo wrote.
In Practice January 17, 2018

Diverse Buyers Capitalize on ‘Fragmented, Dispersed’ RIA Market

Cerulli categorizes consolidator firms into three segments, and “The merits and drawbacks of each segment’s business model will often depend on the adviser’s motivations for affiliating with a larger partner.”

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The latest research shared by Cerulli Associates suggests the registered investment adviser (RIA) channel is “ripe for consolidation and enjoying fast growth.”

“From 2011 to 2016, three major consolidators grew affiliated assets under management by a five-year compound annual growth rate of more than 45%,” reports Marina Shtyrkov, research analyst for Cerulli. “During this timeframe, all independent RIAs grew assets by only 11.7%, and hybrid RIAs by 10.7%.”

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According to the Cerulli analysis, based on data from the first quarter 2018 issue of The Cerulli Edge – U.S. Adviser Edition, “succession solutions, infrastructure support, acquisition capital, and aggregated buying power are all common motivators that can be attributed to advisers’ increased interest in affiliating with consolidators.”

Naturally, the reasons why advisers choose to partner with a given consolidator will vary depending on the practice’s size and growth stage, Shtyrkov says. And given the recent momentum behind aggregators and platforms, and the demand for operational and financing support, it is crucial for advisers to remain aware that not all consolidators are created equal, she says.

“Cerulli categorizes consolidator firms into three segments, including platforms, financial acquirers, and strategic acquirers,” Shtyrkov explains. “The merits and drawbacks of each segment’s business model will often depend on the adviser’s motivations for affiliating with a larger partner.”

The Cerulli analysis suggests that the traditional channel lines in the advisory and investment distribution business are blurring. Yet, as channel lines are blurring, certain segments, such as national and regional broker/dealers (B/Ds), are still growing faster than others, “indicating fingers on the pulse of advisers’ needs.”

“The national and regional B/D channel grew assets at a 9.1% rate in 2016, eclipsing the industry’s overall expansion of 7.2% and outpacing the registered investment advisor (RIA) channel,” Cerulli finds.

Despite strong momentum, Cerulli finds that advisers have “limited knowledge about the differences between consolidators’ business models and value propositions.”

“This is an advantage for broker/dealers, who can capitalize on advisers’ tendencies to generalize all major consolidators by clearly articulating their own services,” Cerulli reports.

“Platforms allow RIAs to ‘rent’ an end-to-end operating and support platform and do not take an equity stake in affiliates,” Cerulli explains. “Financial acquirers systematically acquire RIAs to aggregate individual firms in a fragmented market and realize financial gains through a liquidity event or cash flow distributions. We define strategic acquirers as large RIAs that systematically acquire advisory firms to grow market share, enter new geographic regions, and achieve other growth-oriented strategic objectives.”

Working with platform consolidators, advisers gain access to branded platforms that offer rented services, such as technology, finance, investment support, marketing, and compliance. This could be an advantage for advisers who are wary of giving up equity.

“For platform providers, the risk of attrition becomes more acute as advisers gain autonomy and choose to forgo paying the platform fee,” Cerulli explains. “As they achieve greater scale, practices can replicate the infrastructure that platforms provide and their proposition of enterprise pricing becomes less alluring.”

Turning to financial acquirers, Cerulli says this group offers cash and stock deals with long-term upside potential. “After multiple infusions of private equity funding, advisers who sold into the aggregator model early may be impatient to receive the financial upside that a public offering promises,” Cerulli warns. “Aggregators appeal to advisers nearing retirement and searching for succession options … but this threatens to overweight the firm with older advisers and poses a risk of future demographic challenges.”

Concerning strategic acquirers, Cerulli says the aim “to build a cohesive national brand by implementing standardized processes and leveraging efficiencies via centralization.” These firms “offer the best key-account distribution opportunities for asset managers because of their highly centralized nature and advisers’ greater reliance on those home-office resources.”

Cerulli warns that full integration into the strategic acquirer’s model “not only requires operational adherence, but cultural fit and philosophical buy-in. These firms cultivate a like-minded community above all else.”

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