Investment Oversight Partners

With more plan sponsors looking to avoid litigation by hiring a 3(38) fiduciary, advisers increasingly need to determine whether, and how, to implement 3(38) offerings in their practice. Their decision may be to join an aggregator firm or wirehouse that centralizes investment management oversight, or to turn to a third party to handle the 3(38) function, industry insiders say.

Those advisers in particular who want to offer the services but hand off the duties will enjoy many benefits from doing so, most notably stronger relationships, better retirement readiness outcomes and a growing book of business.

“A fair number of advisers who come to us don’t want to serve [as a 3(38)],” says Ben Thomason, executive vice president, revenue, at recordkeeper Vestwell, in New York City. “Advisers are starting to look at the entire value chain and say to themselves, ‘Do I want to hire a CFA [certified financial adviser] team, or is it much more economical and time efficient to work with a larger group to build the portfolios?’ Initially, some advisers would view investment management as so integral to what they do, they might feel strange about turning oversight over to a turnkey solution. But the more they think about it, they realize they can’t watch the market 24/7.”

Likewise, TAG Resources LLC of Knoxville, Tennessee, hires and monitors 3(38) fiduciaries for adviser clients. “There’s a growing trend among advisers to offer 3(38) services, and I don’t view that as such a great thing,” says Troy Tisue, TAG president. “Yes, some practices have the backing and the resources to handle this, but, increasingly, more advisers see the value in partnering with a national 3(38) firm that can specialize in that.”

Ten years ago, Tisue notes, there were only a handful of national 3(38) firms. Today, he estimates there to be 100, not to mention almost all of the registered investment adviser (RIA) and broker/dealer (B/D) firms that offer their advisers centralized 3(38) oversight.

Pensionmark Financial Group, with main offices in Santa Barbara, California, is an aggregator firm that offers 3(38) oversight, says its CEO, Troy Hammond. Advisers affiliated with Pensionmark may act as either a 3(21) or a 3(38) fiduciary. Those who want to supply 3(38) services may do it themselves or outsource to the Pensionmark home office—most do the latter, he says.

Advantages to outsourcing the 3(38) work are numerous. “One, when you start to get into the complexity of being a 3(38), you go beyond your typical investment analytics,” Hammond says. Herein is an advantage of working at an aggregator firm such as Pensionmark, he says. “Our analysts conduct quarterly calls with investment firms and analyze investments both on a quantitative and qualitative basis, which is beyond the scope of most advisers.

“This frees them up to interact with sponsors and participants more, to do more detailed work on plan design, recordkeeper benchmarking, financial wellness, creating new client relationships, expanding on existing client relationships, etc.,” Hammond continues. “We see many advisers embracing the 3(38) model because, when they act as a 3(21), it’s not the most effective use of everyone’s time. Plan sponsors can’t add intellectual capital to the decisions [of which investments to select]. This helps advisers to be much more effective and to focus on the things that can add the most value to the plan.”

Plus, when the adviser brings 3(38) services to bear, the plan menu can be addressed with “significantly faster execution time,” Hammond says. With a 3(21) model, retirement plan committees typically meet only twice a year, so a plan would have to wait until its next meeting to discuss underperforming funds and get approval from the board to replace them. “We can be agile, as a 3(38) fiduciary,” he says.

SageView Advisory Group LLC, headquartered in Irvine, California, has a centralized investment committee, made up of advisers from its satellite offices. The group has developed, and periodically updates, a select list of funds in each asset class to recommend to all of SageView’s advisers, says Randy Long, CEO. “This absolutely creates tremendous efficiencies for advisers as well as consistent client experience across the board,” Long says. “It creates better results and outcomes for clients, which is better for the participant.”

Similar to the model at Pensionmark, CAPTRUST has a centralized investment management research team, composed of 45 analysts who do “extreme due diligence and monitoring,” says Steve Wilt, senior vice president, based in Akron, Ohio. The chief investment officer (CIO) from each of CAPTRUST’s acquired firms presents recommendations, which this group of peers then discuss.

CAPTRUST reviews each client’s investment goals individually and, acting either as a 3(21) or 3(38) fiduciary, makes investment recommendations specifically targeted to each client, Wilt adds.

CAPTRUST’s centralized investment management and service model, comprising “vast resources,” Wilt says, is precisely why he joined the firm, a decade ago. This centralized approach frees up its advisers to focus on improving participants’ retirement readiness and outcomes. It also lets them work more closely with the participant and sponsor than was possible before, he says.

CAPTRUST notes an increase in sponsor requests for proposals (RFPs) asking it to price out both its 3(21) and 3(38) services, Wilt says. “Sometimes, after being with us for six to 12 months, [sponsors] decide to turn over the keys and move to our 3(38) services,” he says.

Thomason says advisers have been doing the math when it comes to client demands. “When you think about the large number of investment options out there, it starts to add up to significant human capital,” he says.

Model Portfolios

A recent report from Broadridge Financial Solutions Inc., “Distribution in a Model-Driven Age,” found that a growing number of advisers are turning to model portfolios. Their home office likes these models: They give it greater control over investment processes, helping it boost the portfolio’s performance, retain client assets and lower its own fiduciary risk. For advisers, offloading investment management responsibility frees them up to strengthen customer relationships and grow their business.

Broadridge says, between 2016 and 2018, the compound annual growth rate for retail portfolios was 21% and for model portfolios it was 37%, the result being $1 trillion in vested model portfolios and over 10,000 different models on the market.

Ninety-one percent of advisers said using a model portfolio gives them more time for client-facing activities; 83% said it gives them more time for financial planning; and 78% said clients care more about planning, service and support than they do about outperforming the market. Ninety-three percent of advisers who use a model portfolio are happy with the decision, and 91% said it gives them more client-facing time.

The top five reasons advisers gave for using a model portfolio, Broadridge found, are: business scalability, access to investment management expertise, more time to focus on client acquisition and retention, more ability to address compliance and regulations, and more stringent investment manager due diligence. —Lee Barney

Art by Paige Mehrer