The Pension Protection Act of 2006 (PPA) has been widely described as the most sweeping change in pension law in 30 years, imposing massive accounting and reporting changes on the nation’s private pension system. On its face, this doubtless plays to the advantage of retirement plan advisers. Surely, legislation that broadens access to investment advice, fosters automatically enrolling participants in these programs, sanctions increasing participant deferrals on a systematic basis, and lays the groundwork for the widespread adoption of diversified asset allocation approaches as default investment options encapsulates the best and brightest plan design practices. However, will the widespread adoption of these new provisions simply serve to undermine the role of today’s independent adviser?
Ironically, a provision of the PPA—one of the more controversial and, in some ways, the antithesis of the hands-off automatic plan designs—seeks to broaden participant access to qualified investment advice. However, it broadens that access by lowering some of the prohibited transaction barriers that ERISA has long used to keep “conflicted” advice at bay, a concern of many independent advisers. On the other hand, those provisions of the PPA deal exclusively with participant-level advice and, thus, may have little impact on advisers focused on providing advice to plan sponsors.
“[Devoting a lot of time to individual participants,] it is hard to make money,” says Don Stone, president of Plan Sponsor Advisors LLC, who typically works with plans that have $20 million to several hundred million dollars in assets. “We generate between $40,000 and $80,000 per year from most clients. I would rather spend X number of hours per year with a plan sponsor and generate tens of thousands [of dollars] of revenue than work with participants and generate a few hundred dollars per participant.”
Add to that financial reality the new law’s provision to let investment providers also offer advice, and advisers may face an even more unprofitable battle versus brand-name competitors. All this, as the Labor Department’s recently released proposed rules on default investments (see “Fiduciary Relief”) may also shift some advisers’ businesses, with sponsors relying more on these automatic designs to do the heavy lifting on moving participation rates and diversification.
Despite those concerns, the new rules and regulations “will generate some opportunities for advisers,” says Dave Liebrock, executive vice president at Fidelity Investments Institutional Services. “Plan sponsors are going to be looking for help.” In addition, the law lowers the advice barriers for some providers like Fidelity. While he declined to discuss specifics when asked about Fidelity offering individual investment advice to participants, Liebrock adds, “It is something we are looking at.”
The changes-especially the entry of big players into investment advice, but also the official blessing of automatic enrollment and default investments-also seem likely to generate threats to some advisers. “A less-than-proactive adviser certainly has the potential to be minimized,” says Bob Francis, San Francisco-based executive vice president, operations, at National Retirement Partners, LLC.
“There are a lot of people out there who are getting paid a lot of money and not giving a lot of value,” maintains Fielding Miller, CEO of CAPTRUST Financial Advisors in Raleigh, North Carolina. “As the market gets more competitive, they are going to have to put a more competitive product in front of people. To earn the same fee they were earning before the bill passed, they are going to have to provide more services. If they cannot raise their game, they are going to lose market share.”
Come up with the right business strategy for adapting to these changes, though, and you are likely to thrive. “[The advisory business] is in the process of commoditization,” says Mike Barry, president of Plan Advisory Services Group in Chicago. “What cannot be commoditized, though, are good advice and solutions. People who can bring insight to a sponsor will always be able to charge blue-chip fees.”
That may mean things like fewer 401(k) enrollment meetings with employees and more strategic-planning meetings with sponsors. “You are going to see fewer advisers serving the plan marketplace, but delivering more sophisticated services,” says Ward Harris, CEO of The McHenry Group.