PANC 2015: Adding Wealth Management to Your Practice

Executives provide practical and legal tips for adding wealth management to your practice.

Asked whether advisers still look to add wealth management and rollover business to their practice, in light of the proposed fiduciary rule, David Kaleda, principal at Groom Law Group, said, “For plan advisers moving into wealth management, that’s always been a tricky area. Under the proposal, it will become even trickier because it broadens the definition of those who are fiduciaries and includes rollovers.” Kaleda was speaking at the 2015 PLANADVISER National Conference in Orlando, Florida, on the panel “Practical and Legal Tips for Adding Wealth Management and Rollover Solutions to Your Practice.”

“Under current law, there are exemptions that do allow you to be paid, but they aren’t suited for rollovers,” Kaleda said. The new proposal allows for a best interest contract exemption (BIC), but as it is now structured, “almost no one can comply with it. This will certainly change in the next six months to a year.”

As for cross-selling to participants, “Everyone is looking for a way to monetize their relationship with participants through an IRA [individual retirement account], and, due to the sheer number of Baby Boomers retiring over the coming years, it is certainly going to happen,” said George Revoir, senior vice president, distribution, at John Hancock Financial Services. “You can make it an easier conversation, depending on how you look at it. The majority of John Hancock’s retirement plans in the smaller end of the market allow for lump-sum distributions, so it is not hard to have a conversation about an income option in an IRA rollover.”

The other option is for an adviser to suggest including lifetime income options in a plan to keep retired participants invested, Kaleda said.

In the years ahead, this is an option that advisers will need to consider, particularly for large plans, Revoir observed.

NEXT: The appeal of wealth management

“People in the plan with high balances will be attractive to you,” Kaleda said. “Lower and middle balances could also be attractive if you have some scale. But you need to remember that managing a 401(k) is very different than managing an IRA. These are taxable accounts and are subject to the prohibitive transaction rule with regard to compensation. If you are a fiduciary to the plan, you are precluded from increasing your compensation, so most folks very carefully present their retirement plan practice and their wealth management practices as two distinct services.”

It is also important for advisers that are affiliated with a broker/dealer (B/D) to “consider the compensation to the B/D that is a custodian of the IRA. Even if you aren’t making more money, if the B/D is, it’s a prohibitive transaction,” Revoir said.

At all times, advisers are expected to consider participants’ best interests, Kaleda said. “Other than the key question about compensation, if I am a fiduciary to the plan participants and to the plan, am I conflicted?” he said. “Take the case of a small business where the owner has sizable assets and wants the advisers to place certain funds in the plan. The adviser is obligated to have all plan participants’ best interest in mind.”

NEXT: How to conduct rollovers

Rollovers will be critical for advisers looking to build out a wealth management practice, Kaleda said. “If you are a fiduciary at the plan level and recommend a rollover, you have to act in the participant’s best interest and make sure you aren’t getting additional compensation. If you aren’t a fiduciary, you can recommend a rollover, but if you are affiliated with a B/D, remember, FINRA will scrutinize you,” he said.

As for your management of investment decisions in the IRA, those currently are not subject to the Employee Retirement Income Security Act (ERISA), but the new rules will make them subject to it, Kaleda said.

While arguably all advisers want to act in their participants’ best interest, the BIC will make you “contractually obligated to do so and therefore subject to lawsuits,” Kaleda said. “The DOL [Department of Labor] is using this threat of lawsuits by plaintiffs and class actions as a threat.”

It is also a good idea for advisers to embrace the lifetime income concept in rollovers, if it is not available in the plan, Kaleda said. “That will help your argument, because the DOL is very much in favor of lifetime income.”