A Step in a New Direction
Defined contribution plan participants have continued amassing wealth over the past decade, making them an increasingly appealing target for the broader financial services industry. As the recordkeepers have quested after the participant to offer auxiliary services, many advisers have begun to do the same.
Now, many retirement plan advisories are offering wealth management services alongside what was once purely retirement plan guidance to plan sponsors. In addition to meeting a plan participant’s need, the shift reflects several broader trends within the industry, one being the consolidation that is often bringing wealth management and advisory firms under one roof.
The industry’s embrace of financial wellness, which recognizes that successful retirement outcomes require that a participant’s full financial picture be in order, is another important trend driving the rise of wealth management alongside retirement plans.
“As the industry has moved toward this more holistic approach, it makes sense that advisers would be in both the space of advising the employer and the plan as a whole on its investments and how to run it, while also having a facet of the practice that works with individuals both inside and outside of the plan,” says David Kaleda, a principal in Groom Law Group Chartered, in Washington, D.C., who specializes in the Employee Retirement Income Security Act.
Advisory firms are taking several different approaches to their wealth management offerings. For example, some provide participant services to high-net-worth participants and partner with recordkeepers to support the smaller-balance participants. Others offer services to all participants.
Varying Levels of Compliance
Whichever model they choose, advisory firms must be careful to avoid perceived or real conflicts of interest, since many wealth management services can create new financial incentives for the firms. Regulation Best Interest requires that firms document, identify and disclose conflicts of interest to retail investors and regularly review their policies and procedures to ensure they remain compliant.
“The level of compliance really varies by firm,” Kaleda says. “Some are more rigorous than others, while some are just trying to take more of a disclosure-only approach.”
SageView Advisory Group LLC, for one, has grown its wealth advisory side and includes those with up to $1 million in net worth—a group less apt to get help from financial professionals because they may not meet minimum thresholds. The firm now has about the same number of staff offering such services as it does plan advisers. Plan participants have access to point-in-time advice, digital tools and group meetings within their plan, while they may purchase broader wealth management services outside the plan if interested.
Kerry Woods, SageView vice president of participant education and engagement, in Denver, says the firm minimizes potential conflict by offering no in-house annuities or funds. “We’re acutely aware of living up to all of our fiduciary responsibilities,” Woods says. “If that means folks who have made a recent job change are better off staying in the plan, that’s an easy solution for us. We have always truly believed in doing the right thing by the participant, and that has served us well in the form of both organic growth and inorganic-growth. Additional firms—including wealth management firms—join SageView.”
“If that means folks who have made a recent job change are better off staying in the plan, that’s an easy solution for us.”
—Kerry Woods
A Focus on the C-suite
Fiducient Advisors has also expanded its wealth management offerings but concentrates primarily on C-suite executives and firm owners potentially looking to exit the business. However, Fiducient also makes basic financial planning tools and advice available to all plan participants.
“We offer that as just part of the plan features, and we’ve seen a lot of demand for it,” says Michael Goss, managing partner, in Fiducient’s Hartford, Connecticut, office. “We’ve seen a lot of demand for it from human resources professionals and companies that want a solution that goes beyond retirement planning, and they want to talk to employees about HSAs [health savings accounts] and college planning.”
Higher-level, out-of-plan wealth management services are offered through a direct, contractual relationship outside of the plan. Fiducient had previously broken away from UBS to become a registered-investment-adviser-only firm, but, a year ago March, the firm joined NFP, which recently reorganized to better connect its retirement and wealth businesses.
Goss says Fiducient believes it differentiates itself from competitors and minimizes potential conflicts of interest by not targeting rollovers. “Often, we’ve done a great job with the plan and fees, and that participant is better off staying in it,” he says. “When we work with participants on the wealth side, we’re looking at non-retirement assets, like stock options or other wealth. If [this is done] outside of the plan we’re advising, we’ve eliminated that conflict of interest.”
At Cetera Financial Group, a network of independent advisers—including many who work with wealthy business owners—the focus is on expanding offerings in the opposite direction, helping those business owners implement and put retirement plans in place for their businesses and employees. Such services allow existing wealth advisers to provide more services and connect with “HENRYs”—i.e., employees who are “high-earners not rich yet”—who could use more tools and platforms to improve their retirement security, says Adeline Wong, Cetera senior vice president, head of retirement plan programs and strategy, in San Diego, California.
If the independent adviser has a business-owner client and is not working as a plan adviser, that person is “leaving money on the table,” Wong says. This is especially true amid new governmental pushes, she says, citing the SECURE—for Setting Every Community Up for Retirement Enhancement — 2.0 Act and state mandates for retirement plans.
“If the independent adviser has a business-owner client and is not working as a plan adviser,
that person is “leaving money on the table.”
—Adeline Wong
“The opportunity is in enabling advisers who might not even be doing plans today to do one, and, from that point forward, they can springboard into connecting with individual employees to offer wealth services,” she says. “Independent advisers such as ours are in an ideal position to help both business owners and individual employees. The programs we have are very beneficial and key to that bridge between the plan and the individual.”
Cetera advisers minimize potential conflict with a focus on transparency at both firm and individual levels. That means making sure the relationship is at the plan level with a clearly identified scope and services, and that any individual relationships have a separate agreement.
Avoiding Conflict Altogether
Other firms have leaned away from wealth management, finding that serving as a fiduciary to the plan and its participants—without offering wealth management at all—becomes a differentiator for their offerings. That is the case at Francis Investment Counsel LLC in Brookfield, Wisconsin, which charges all clients on a retainer or hourly basis and accepts no asset-based fees or remuneration from investment managers, recordkeepers, trustees or custodians.
“Our clients know they can put us in a room full of their employees, or in a conference room one-on-one with a 40-year employee who’s saved hard and built up a $1 million account balance—and we won’t have a conflict answering their questions about what they should do with their money,” says Michael Francis, the firm’s president and chief investment officer.
When asked why his firm is structured this way, Francis points to a recent Pew Trusts study, which found that retail investors lost out on, in aggregate, over $45 billion in savings by rolling retirement funds from their 401(k) accounts into higher-priced retail individual retirement accounts.
“It doesn’t take a rocket scientist and a bunch of independent studies to recognize that a conflicted adviser will tend to have incentives, built into [his] compensation, that point customers in certain directions that aren’t necessarily in their best interests,” Francis says.
Still, he says, it is hard for advisers to ignore the profitability of wearing both hats, serving the plan and offering wealth management to participants. “That’s how things have evolved,” he says. “It’s like a drug the industry can’t get enough of. So many of the big firms are publicly traded now, so there’s a strong profit motive.”
Francis also believes, he says, that more plan sponsors are aware of the inherent conflict in such models and are looking to firms such as his, vs. those dependent on asset-based fees or product-based compensation.
Others say it is unlikely such a change will happen any time soon. The metrics on wealth management firms appeal to outside investors, and often the market values those firms more than purely retirement plan advisory firms, Goss says.
“They trade at higher valuations, and it’s less of a commoditized business,” he says. “Everyone is trying to solve the same problem that recordkeepers have been trying to solve for years: how to keep participants—from the early stages of their career, through retirement—as clients. The wealth part helps with that.”
Keeping Compliant
As a growing number of advisory firms offer in- and out-of-plan wealth management services to participants, regulators have gotten more explicit regarding best practices for managing the inherent conflicts of interest that accompany such an arrangement.
In January, the Securities and Exchange Commission published a “Risk Alert” encouraging broker/dealers to re-examine their practices and policies as those relate to the agency’s Regulation Best Interest, and, last year, the Department of Labor outlined new standards for advisers to follow when advising participants about rollovers.
“Those provide a path to compliance, where advisers can manage the conflicts, but you really do have to very consciously manage them,” says David Kaleda of Groom Law Group.
Different Approaches
Firms use different methods to manage this conflict. Some have completely independent divisions, with total separation between the teams focused on wealth management and those working on plan advisement.
“That’s one way to approach it, but you still have to be aware of compliance [with the DOL and SEC], to make sure you’re not just using this as an opportunity to get a whole bunch of rollover dollars, but that you’re really taking into account the best interest of the participants, both as individual investors and as plan participants,” Kaleda says.
Other firms are OK with the same individuals or teams serving as both plan advisers and wealth managers but with strict rules and oversight within the firm, including significant documentation.
Under Reg BI, firms need to also regularly review their policies and procedures to ensure they continue to meet the requirements as they relate to conflicts of interest, and regularly train employees on how to identify and mitigate such conflicts.
Documentation Helps
When it comes to rollovers, for example, some firms require documentation that establishes and records that the adviser has shown why it is in the participant’s best interest to move money out of the plan, sometimes including that from third-party services that analyze the effects of such changes.
Another potential area of conflict would be if a firm serves as a wealth manager for a well-to-do business owner who then hires the firm to help with establishing a retirement plan at the business. In its plan adviser capacity, the firm would need to make sure it is choosing investments in the best interest of all plan participants, not just the business-owner client, Kaleda says.
Finally, firms should look closely at their compensation model, to reduce potential conflicts in that area and to avoid any model that provides additional incentive to advisers for selling specific products or services.
“A big driver in this industry is compensation,” Kaleda says. “So if that has incentives that could lead one to not act in the participant’s or individual’s best interest, you need to think about whether there’s a way to eliminate that incentive or manage it in a way that mitigates that conflict.” —BB
Art by Ryan Peltier