How Advisors Can Up Their Game in the Current Fiduciary Environment

Some days, it seems like the motto of the current fiduciary rule landscape is “hurry up and wait.”

The Department of Labor has filed another extension to the rule’s full implementation, placing its new effective date at July 1, 2019. However, the agency still obligates advisors to comply with the impartial conduct standards, the consumer protections ensuring that advisors adhere to fiduciary norms and basic standards of fair dealing.

How can advisors be ready for business in today’s fiduciary environment? First, it’s important to understand the current state of fiduciary activity.

“There are basically two realities,” says Todd Timmerman, managing director of Retirement Plan Analytics, a firm specializing in fiduciary process and solutions.

“The regulatory reality is that some of the most concerning aspects of the fiduciary rule are being delayed until mid-2019. But the marketplace reality is that fiduciary responsibilities are the number one item that prospects and clients are asking about.”

Timmerman adds that broker/dealers were experiencing a “white-hot intensity” 18 months ago as the regulatory guidelines came into focus. Now, that intensity has shifted and advisors who have fiduciary processes in place are the ones best positioned to take advantage of a competitive marketplace.

Lisa Petronio agrees that advisors are continuing to operate in a fiduciary manner, but she sees a heightened sense of fiduciary awareness with plan sponsors. As managing director of Strategic Retirement Partners for the upstate New York region, she notes advisors are answering more fiduciary-related questions from clients than ever before. According to Petronio, advisors working on retirement plans need to clearly define their role and the services they provide.

“This is a great opportunity for specialist advisors prospecting for new client engagements,” says Petronio. “Plan sponsors are becoming more aware of the differences between fiduciary and non-fiduciary advisors.”

Petronio has also seen an uptick in plan sponsors asking about 3(38) fiduciary services versus 3(21), and this could point to a more sophisticated understanding about who they are hiring to manage their plan.

Leah Emkin, managing director of Los Angeles-based Wilshire Associates, agrees and says that more and more, financial advisors are tapping into firms like hers that provide 3(21) services.

“Advisors want to use the deep resources from an objective third party, especially one that provides investment advice to the largest plan sponsors in the country,” she notes.

“They can leverage and take advantage of firms like ours for screening and recommendation without having to give up their plan investment activities. This is crucial to the value proposition for many advisors.”

Mesirow Financial’s Mike Annin underscores the need for generalist advisors to outsource 3(38) duties that can provide “guardrails” around ERISA rules.

“We make it easier for them to do their job and leave the primary interaction with the plan sponsor to the advisor. It’s a new world and generalist advisors need to figure out how they fit in,” he says.

“Advisors need to pick a lane,” agrees Petronio, “and make sure you are working with firms who can accommodate what they are trying to accomplish in their business model.”

Timmerman notes that according to Fidelity’s latest Plan Sponsor Attitudes survey, 38 percent of companies are looking to make an advisor change in the next 12 months, which is an all-time high. Advisors should be proactive about how they communicate their services and value proposition.

“Saying ‘I manage your plan’ isn’t enough,” notes Timmerman. “Advisors need to show how they support the investment committee as a fiduciary and how they partner with the recordkeeper to help plan participants make informed decisions.”

Advisors also need to get more specific. “You need to think through your processes because you can’t fake something that you don’t have. Identifying and communicating a process is the first step in demonstrating procedural prudence,” he adds.

According to the Department of Labor, the “impartial conduct standard” will “require fiduciaries to adhere to basic fiduciary norms and standards of fair dealing (act in the best interest of customers, charge no more than reasonable compensation, and avoid misleading statements).”

“The impartial conduct standard will elevate advisors,” says Timmerman. “You’ll see plan sponsors have an increased focus on understanding the services of the plan advisor. This will result in companies hiring specialists or advisors who partner with specialists.”

Mesirow’s Annin points out that even if advisors bring on 3(38) specialist to add a stronger fiduciary layer, they need to be aware of what the indemnification says in the contract. Some only indemnify the plan sponsor whereas his firm covers both the plan sponsor and advisor.

“The indemnification provision is the key to any outsourced fiduciary contract. Both who is covered under that provision and what limitations are delineated are crucial for any advisor using a third party fiduciary,” says Annin.

Petronio also sees opportunities in reports that fiduciary awareness among plan sponsors has deteriorated somewhat in recent years.

“In some ways, I’m not surprised because there has always been plan sponsor misconception regarding their role as it relates to the plan.” She says that the advisor’s opportunity is to explain who is or is not serving in a fiduciary role in terms of the retirement committee, record keepers and other vendors, especially those providing advice directly to participants.

Plan sponsors are asking more questions and becoming increasingly aware of the importance of 3(21) and 3(38), says Emkin. Additionally, plan litigation and newsworthy settlements have also brought the potential risk to the forefront.

“Plan sponsors must educate themselves and this transition has been difficult for some because it’s a huge shift in their thinking.”

Concludes Emkin, “it’s good that this is coming to light. Knowledge is power and the advisors who can help guide plan sponsors through the shifting landscape will really differentiate themselves.”