Larry Crocker, chief executive officer of Fiduciary Consulting Group, has a pretty simple message for financial industry professionals still holding out in opposition to the Department of Labor’s (DOL) fiduciary standard reform.
“The history of the ERISA [Employee Retirement Income Security Act] industry has shown that any time there’s real change there is also real opportunity that comes along with it,” he tells PLANADVISER. “I’m not the best technical expert out there on fiduciary liability—but I can tell you just how valuable it is to know the background of ERISA and how, exactly, we got to this point where a major shift in the fiduciary standard is needed. This story goes all the way back to 1975 and the first creation of ERISA—what is going to happen in April.”
Crocker, for his part, knows the history because he runs a business that is entirely dedicated to mapping out and delivering fiduciary plan administration in a 3(16) capacity, along with 402 Named Fiduciary services. In addition, his background prior to founding the fiduciary consulting practice has also provided valuable understanding, he says.
“I got into the business coming out of being a banking officer,” Crocker explains. “I enjoyed serving people and so I thought I wanted to be a fee-based investment adviser—which was pretty unusual back in the early 1990s, I think. I started working with employee benefit clients, doing medical, dental and some retirement plans too.”
Crocker “enjoyed working with qualified retirement plans, and one thing led to another,” which allowed him to really come to an appreciation for how important ERISA is for the qualified retirement plan industry.
“The more I learned about the background of ERISA and the fiduciary standard—I came to believe that our industry was producing too many generalists and too much overlap,” he says. “Bankers were looking to make money selling insurance and investments; investment firms were looking to do mortgages; insurers were starting to offer banking products. Everything wanted to be everyone to everyone.”
In the end plan participants were not being wronged, necessarily, but they were not getting the best service they could get in many circumstances. “Add to this the emerging concerns around investment fees and the push towards improved transparency and the new fiduciary rule makes sense as a next-step for regulators and the industry.”
NEXT: A shifting role for outside fiduciaries
Crocker says that even the first few months’ time spent servicing defined contribution (DC) plans as a fee-based adviser very quickly taught him that “one can’t be a generalist if they really want to be good in the ERISA context.”
“That’s the short story of how I transitioned to my current business model—from banker to adviser to starting Fiduciary Consulting Group,” he adds. “The point in telling this story is to argue that the challenges we face today in the ERISA industry have been brewing for a long time, since at least the early 1990s, and that there are real solutions available for advisers moving forward.”
Crocker suspects that, in terms of protecting yourself and guiding your business processes for compliance under the new fiduciary rule, “wanting to do the right thing is every bit as important as having the technical understanding of what it means to be a flat-fee fiduciary.”
“It’s equally important to have that grounding and to be plugged into that sentiment of wanting to do the right thing,” Crocker says. “Most people focus on doing things right in order to be efficient, but it’s more than that. In this industry, especially after the new rule is fully established, you have to do things right in order to be effective and in order to even stick around.”
Crocker continues: “I’ll be completely honest, I have had people look at our business model and say, that’s not a particularly efficient way to do business because it’s too hands-on and too labor-intensive for each client. A lot of people don’t want to do what we do for that reason. When you take on this responsibility to manage a plan for a client and you’re doing all of these things, it’s not going to be 100% efficient. It’s a lot of work to run a complaint plan.”
Crocker says this is why the firm bills for hours worked, rather than basing the consulting fee on the size of the assets serviced.
“We bill for the work we do and we bill for the risk we take—there is no real reason for it to be a strictly asset-based kind of a thing,” he concludes. “A lot of advisers might look at this type of a model and worry that they’re going to do this great work, but that it will go over the sponsors’ head. We cannot let that happen. The value has to be understood. And ultimately not everyone is willing to pay the price, of course. Our flat fee, depending on the complexity of the plan, could be anywhere from $25,000 up to, say, $32,000. So you can see that we’re very competitive on price.”
NEXT: Adviser fiduciary support market flourishes
Another provider squarely focused on improving fiduciary protection for advisers is Stadion Money Management, which focuses in part on distributing managed accounts in the adviser-sold small 401(k) plan market. Sitting down recently with PLANADVISER, Tim McCabe, senior vice president and national sales manager, observed that it’s not easy to argue against the fact that new solutions “are going to have to be fiduciary friendly if you want to deploy them for DC ERISA plans.”
He says that Stadion has long served as a 3(38) fiduciary investment management provider and will continue to do so under the new fiduciary rule—but the way the firm thinks about such services has undoubtedly changed.
“We always thought about 3(38) service as primarily having a focus on plan sponsor protection,” McCabe observes. “But now, from our position, we view this as being as much about protecting our adviser partners and the broker/dealer home offices. Up and down the product distribution chain providers are having to assess and control their ERISA fiduciary exposure in a new way.
“We very firmly believe advisers are going to be selling more pre-packaged fiduciary protection as a result of the rulemaking,” he adds. “There will be flexibility to some extent in the products but for the sake of efficiency and scalability there will be have to be more rigid fiduciary guardrails set up.”
Obviously it would benefit firms like Stadion to see this come to pass, but McCabe says that shouldn’t cast doubt on the judgement. His colleague, Jud Doherty, CEO of Stadion, agrees, adding that “one other lesson we see coming out of the fiduciary rule is that services delivered to participants, and the costs going into them, are going to have to be simplified and made more transparent.”
“Longer term what I think we will see is broker/dealers pushing advisers to use more products with fiduciary guiderails around them—where you’ll have to either go with the 3(21) or 3(38) model,” Doherty predicts. “And you’ll have a managed account type solution on the other side as an additional fiduciary bumper, so to speak.”
Doherty and the others conclude that advisory firms are not going to have people stop selling product, but they are going to have to bring a new level of scrutiny to the products they do sell.