Getting Comfortable with the "F" Word

For advisers, whether you are a fiduciary to a retirement plan remains a continuous question. For many, choosing to sign on to a plan as a fiduciary is a significant business decision while, for others, that decision may be made not by the adviser but by the broker/dealer.

Signing on to a plan as a fiduciary can determine what fees are charged, what processes are used, and the way advisers operate their businesses, said Randy Long, Managing Principal at Sageview Advisory Group. He believes it is a “higher level of calling” since advisers as fiduciaries must approach their businesses with the mindset of putting the best interests of clients and participants ahead of their own.

However, it also can be a big risk. David Kulchar, EVP, Director of Retirement of Oswald Financial Inc., an NRP member firm, said his firm considers itself a fiduciary, but does not put that in writing unless a client specifically asks for the documentation. Whether in writing or not, Kulchar said his firm treats every client equally.

Unless advisers totally remove themselves from involvement in investment decisions, they cannot escape being considered a fiduciary, Kulchar said. For this reason, Long suggested that advisers should have processes in place, contracts ready, and certifications to address their role as fiduciaries.

One risk for advisers as fiduciaries, Kulchar noted, is a client that does not own up to its own fiduciary responsibility. Even if an adviser takes on a co-fiduciary role, the plan sponsor retains its fiduciary responsibility under the Employee Retirement Security Act (ERISA), a point reinforced explicitly by the Department of Labor. If a plan sponsor client hires an adviser assuming that it is outsourcing that fiduciary responsibility, it could create issues down the road. Long suggested using the recent revenue-sharing fee litigation to remind sponsors of the importance of their fiduciary roles.

Long added that being a plan fiduciary is a give and take. The service agreement between a sponsor and adviser should spell out what the adviser will or will not do, and for what he or she will take the credit or blame. For example, Long said his firm had one client that never took action on suggestions on investments, so the firm decided it was not worth the liability to retain the relationship, and resigned from the business. Kulchar’s firm also fires clients for not holding up their end, such as by not letting the adviser do his or her job, or by making late deposits of contributions to the trust.

Long warned that it is important for advisers acting as fiduciaries to get liability insurance. He has errors and omissions insurance through his broker/dealer and an additional policy above and beyond that. He says plan sponsors hiring his firm for investment advisory services today are asking for insurance policy information.

In addition, having a competent staff and partnering with superior providers can mitigate liability, according to Kulchar. Good providers offer materials for plan sponsors discussing their fiduciary roles and liability, the importance of taking their fiduciary responsibility seriously, and the consequences of not doing so, he added.

Although providers can offer significant support, Long said he believes that a provider offering a fiduciary warranty is potentially infringing on the adviser’s role as fiduciary. “How can providers watch themselves?” he asked. “Where is the objectivity?” He said there needs to be an independent third party to monitor providers, such as an adviser. However, Kulchar disagreed, saying that co-fiduciary providers are not a threat, but value added. He agreed, however, that advisers must benchmark plans regularly to ensure each provider is adding value for the client.

Offering fiduciary services is a good value proposition for advisers, said Long. He also noted that large sponsors have investment committees and general counsel and tend to take their own fiduciary duties more seriously, so they do not expect as much on that front from advisers. However, smaller plan sponsors frequently need advisers to establish an investment policy statement (IPS), help select investments, and teach them how to act as fiduciaries. If advisers want to go after large-plan clients, it is good to target those with no previous adviser relationship, according to Long.

Kulchar noted that there is much opportunity now in the mid-market for advisers to grow their businesses, especially with new 403(b) regulations creating the need for those sponsors to step up into fiduciary roles. Advisers also should consider extending current relationships to participants who either retire or leave a plan. He predicted an increase in lawsuits as participants retire and subsequently claim they were not provided good exit strategies by their employer.

Further, Kulchar added that he believes an adviser’s fiduciary responsibility does not end with the plan, especially if plan sponsors recommend advisers to exiting participants.

In addition, advisers should promote their value to entities such as the Better Business Bureau, bar associations, and HR firms, Kulchar said. It provides free publicity because these entities let potential clients know advisers are keeping up with the law and fiduciary roles.

Illustration by Ronald Kurniawan