Further Discussion on the Opportunities and Challenges for PPA Fiduciary Advisers
The PPA allows fiduciary advisers to charge reasonable fees for helping participants select specific funds within their employer-sponsored plans. The fees are deducted from plan assets or paid by the participant. Careful consideration should be given to the desired “pick-up” rate of participant advice based upon the nature of the plan being serviced. For example, in plans where the majority of employees are making substantial contributions (i.e., hospitals, law firms, etc.) the fiduciary adviser should seek to have fees deducted from the plan, which will encourage more participants to opt for individual advice. In plans where the average balance is, for example, less than $50,000 and default investments are preferred, we recommended that fees be paid for by the individual participants such that only those with significant assets are likely to engage the fiduciary adviser.
Depending upon the extent of the services offered, reasonable fees are expected to range from $300 - $1,500 per participant. Consequently, business generated from fees alone has the potential to create significant revenues. A projection developed by DALBAR, Inc. and published on www.FiduciaryAdviser.com estimates that an adviser could earn $50,000 annually from just one employer with 100 employees. A fiduciary adviser going it alone could reasonably expect to service roughly 600 employees and receive $300,000 in fiduciary fee revenue. Moreover, these revenues are easily scalable to the extent the fiduciary adviser recruits and trains advisers to additional plans.
The PPA also opens the door to additional growth through the ability to reach participants’ household and rollover assets and via referrals. An estimated one in ten employees that will use a fiduciary adviser has household assets averaging $150,000, and one in twenty will be in a position to rollover plan assets averaging $500,000. Common sense dictates that employees will seek to consolidate their finances and deal with a single investment professional. Thus, not only will fiduciary advisers and their firms benefit by establishing a presence in this newly-created market, we expect that those who fail to do so will see a measurable degree of attrition from employees who, for lack of a better term, “gave at the office.”
As with most opportunities, there are certain pitfalls that must be addressed prior to entering this market. First, the PPA requires that any advice be rendered by a qualified “fiduciary adviser” that is fully regulated by applicable banking, insurance, and securities laws. Fiduciary advisers are also subject to civil and criminal penalties by the DOL, the IRS and could be held civilly liable to the participant. Existing supervisory and compliance procedures must, therefore, be examined and updated upon the release of ongoing guidance from regulators.
The PPA further requires that the proffered advice be made pursuant to an “eligible investment advice arrangement” (“EIAA”) that is either fee neutral or based on a computer model under an “investment advice program” such as that addressed in the Department of Labor’s (“DOL”) advisory opinion 2001-09A (the SunAmerica Letter). Under the fee neutral arrangement, the adviser’s total compensation, including indirect compensation derived from the purchase or sale of securities in reliance on the proffered advice, cannot vary based on the advice given.
Recent guidance from the DOL (Field Assistance Bulletin No. 2007-01) makes clear that registered investment advisers and broker-dealers must be PPA compliant if their advisers/reps become PPA fiduciary advisers. Consequently, these firms are subject to the level compensation requirement as well. This provision is problematic to the degree that a fiduciary adviser firm shares revenues with and/or is otherwise compensated by affiliates. Although affiliates are subject to the level compensation requirement only to the extent they provide investment advice to participants, because firms must ultimately accept fiduciary liability for participant accounts, affiliated RIAs and broker-dealers seeking to enter this market should establish a separate RIA to guarantee that compensation does not vary among investment options.
Because the PPA requires advisers to act as fiduciaries, firms must scrutinize their supervisory procedures to help ensure that the proffered advice is dispensed prudently, objectively, and is being rendered for the exclusive purpose of providing benefits to the plan's participants and beneficiaries. Given that many broker-dealers have taken the position that a stockbroker is never a fiduciary and have, therefore, failed to define an appropriate standard of care, amendments to compliance materials and service agreements may also be necessary. Even where a firm has previously allowed advisers to act as fiduciaries, enhanced fiduciary-related due diligence procedures for selecting and monitoring investment options should be established. Again, we stongly recommend creating a separate PPA-compliant RIA.
The PPA also requires fiduciary advisers to provide participants with exhaustive disclosures concerning, among others, fees charged, services to be rendered, past performance and historical returns of investment options, potential conflicts, and the participant’s ability to seek advice from an independent adviser. These disclosures must be written in plain, easy-to-understand language, and are required to be made when advice is first given, and at least annually thereafter. Disclosures must also be provided upon the request of the participant and whenever there is a material change to the adviser’s fees or affiliations. Given the increased focus on excessive fees and revenue sharing (due to a flood of lawsuits against 401(k) providers), particular attention should be paid to the extent and specificity of the disclosures.
The PPA expressly places the burden of establishing compliance with the foregoing provisions on the firm and anticipates that such compliance will be reviewed as part of the required annual audit. For additional information concerning the PPA, the DOL Bulletin, or for assistance with developing procedures to ensure your firm’s compliance with the requirements set forth therein, please contact Jason Roberts by phone at (310) 937-2066 or email at jroberts@edgertonweaver.com.
Depending upon the extent of the services offered, reasonable fees are expected to range from $300 - $1,500 per participant. Consequently, business generated from fees alone has the potential to create significant revenues. A projection developed by DALBAR, Inc. and published on www.FiduciaryAdviser.com estimates that an adviser could earn $50,000 annually from just one employer with 100 employees. A fiduciary adviser going it alone could reasonably expect to service roughly 600 employees and receive $300,000 in fiduciary fee revenue. Moreover, these revenues are easily scalable to the extent the fiduciary adviser recruits and trains advisers to additional plans.
The PPA also opens the door to additional growth through the ability to reach participants’ household and rollover assets and via referrals. An estimated one in ten employees that will use a fiduciary adviser has household assets averaging $150,000, and one in twenty will be in a position to rollover plan assets averaging $500,000. Common sense dictates that employees will seek to consolidate their finances and deal with a single investment professional. Thus, not only will fiduciary advisers and their firms benefit by establishing a presence in this newly-created market, we expect that those who fail to do so will see a measurable degree of attrition from employees who, for lack of a better term, “gave at the office.”
As with most opportunities, there are certain pitfalls that must be addressed prior to entering this market. First, the PPA requires that any advice be rendered by a qualified “fiduciary adviser” that is fully regulated by applicable banking, insurance, and securities laws. Fiduciary advisers are also subject to civil and criminal penalties by the DOL, the IRS and could be held civilly liable to the participant. Existing supervisory and compliance procedures must, therefore, be examined and updated upon the release of ongoing guidance from regulators.
The PPA further requires that the proffered advice be made pursuant to an “eligible investment advice arrangement” (“EIAA”) that is either fee neutral or based on a computer model under an “investment advice program” such as that addressed in the Department of Labor’s (“DOL”) advisory opinion 2001-09A (the SunAmerica Letter). Under the fee neutral arrangement, the adviser’s total compensation, including indirect compensation derived from the purchase or sale of securities in reliance on the proffered advice, cannot vary based on the advice given.
Recent guidance from the DOL (Field Assistance Bulletin No. 2007-01) makes clear that registered investment advisers and broker-dealers must be PPA compliant if their advisers/reps become PPA fiduciary advisers. Consequently, these firms are subject to the level compensation requirement as well. This provision is problematic to the degree that a fiduciary adviser firm shares revenues with and/or is otherwise compensated by affiliates. Although affiliates are subject to the level compensation requirement only to the extent they provide investment advice to participants, because firms must ultimately accept fiduciary liability for participant accounts, affiliated RIAs and broker-dealers seeking to enter this market should establish a separate RIA to guarantee that compensation does not vary among investment options.
Because the PPA requires advisers to act as fiduciaries, firms must scrutinize their supervisory procedures to help ensure that the proffered advice is dispensed prudently, objectively, and is being rendered for the exclusive purpose of providing benefits to the plan's participants and beneficiaries. Given that many broker-dealers have taken the position that a stockbroker is never a fiduciary and have, therefore, failed to define an appropriate standard of care, amendments to compliance materials and service agreements may also be necessary. Even where a firm has previously allowed advisers to act as fiduciaries, enhanced fiduciary-related due diligence procedures for selecting and monitoring investment options should be established. Again, we stongly recommend creating a separate PPA-compliant RIA.
The PPA also requires fiduciary advisers to provide participants with exhaustive disclosures concerning, among others, fees charged, services to be rendered, past performance and historical returns of investment options, potential conflicts, and the participant’s ability to seek advice from an independent adviser. These disclosures must be written in plain, easy-to-understand language, and are required to be made when advice is first given, and at least annually thereafter. Disclosures must also be provided upon the request of the participant and whenever there is a material change to the adviser’s fees or affiliations. Given the increased focus on excessive fees and revenue sharing (due to a flood of lawsuits against 401(k) providers), particular attention should be paid to the extent and specificity of the disclosures.
The PPA expressly places the burden of establishing compliance with the foregoing provisions on the firm and anticipates that such compliance will be reviewed as part of the required annual audit. For additional information concerning the PPA, the DOL Bulletin, or for assistance with developing procedures to ensure your firm’s compliance with the requirements set forth therein, please contact Jason Roberts by phone at (310) 937-2066 or email at jroberts@edgertonweaver.com.
posted by Jason C. Roberts, Esq. at
3:09 PM
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