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Wealth managers, broker-dealers and other financial services companies lobbied against the Department of Labor’s now-defunct fiduciary rule using several arguments, but often returned to a single point: it would prevent advisers from taking on small plans.
They said the extra supervision and compliance work needed to comply with the regulation, which required retirement advisers and broker-dealers to demonstrate how they operate in the best interest of their clients, would force the industry to focus its efforts on larger and more profitable retirement plans.
Now, with the regulation nullified, advisers that specialise in smaller plans say the fiduciary mindset has irreversibly changed the marketplace — for the better.
“The DoL did us all a favour,” says Thom Shumosic, of MidAtlantic Retirement Planning Specialists. “It brought to the forefront the idea that the guy who sits in my seat is a fiduciary.” Advisers remain subject to pre-existing, less onerous fiduciary obligations.
Some 60 per cent of the defined contribution assets Mr Shumosic advises on are in plans between $2m and $10m in size. Almost a third (30 per cent) are in plans with less than $2m.
“The conversation around fiduciary responsibilities ended up in the business market,” says John Steiger, an adviser with Wealth Planning Resources. He says sponsors are now aware they are fiduciaries — under 1974 regulations — and are looking for help.
Nearly all (98 per cent) of his practice’s assets are in plans smaller than $10m. “We felt that changed the business model for us. I never saw the fiduciary rule as a hindrance, it was only going to help us because of our model.”
The service provided to small plans are often slimmed down. “Maybe we don’t need to do a quarterly review of the investment line-up, maybe it turns into a twice-a-year event,” says John Keenan, an adviser at Signature Estate & Investment Advisors in Virginia.
Mr Keenan’s business has also been speaking with new micro plans — with less than $1m in assets. The practice is considering bringing on a flat fee of about $5,000 to make sure the adviser is breaking even. “We have conversations all the time about what services are needed, too, so it’s a two-way street with the plan sponsor,” he says.
“You may not have as many face-to-face meetings with an eight-person dental team as you would with an 80-person accounting practice.” But that smaller group has service expectations, too, adds Mr Shumosic, and “cares deeply about the money they are investing with you.”
Steven Wilkinson, an adviser based in Los Angeles, says his company has a minimum charge of $2,500 that was implemented a couple years ago for plans at start-ups.
Mr Wilkinson says his practice, Monarch Plan Advisors, has been able to be profitable with 90 per cent of his assets in plans of less than $10m because it is highly automated.
“The only way to survive in the small market space is through technology,” Mr Wilkinson says, noting how his business has automated reviews on retirement plans’ investment options that the adviser is then able to send directly to plan sponsors.
Texas-based adviser Neal Weaver says “a lot has changed, and a lot hasn’t changed at the same time” after the fiduciary rule’s rise and fall. The problem that many of the bigger wealth managers had, Mr Weaver says, is that their advisers were not 401(k) specialists.
“Their broker-dealers were uncomfortable with them giving advice in an area that they weren’t really specialists in and that now had much higher stakes,” he says.
Companies like Mr Weaver’s LeafHouse Financial, called “338” shops after a section of the regulation governing retirement plans, take on the fiduciary responsibility from company sponsors while allowing partnering advisers to focus on providing more holistic financial advice.
Mr Weaver says larger advisers moving away from small plans was an opportunity. “We kind of thought, everyone is running out of a burning house, we should run in.” Partnering means “you don’t have to charge as much”, he adds, making smaller plans more viable for companies and advisers.
For Mr Steiger, plans with assets between $2m and $5m, with 20 to 50 employees, are his practice’s sweet spot. “Those are very profitable plans for us, and we don’t have to deal with the same level of competition or fee pressure that advisers going after larger plans deal with,” he says.
For Mr Shumosic, the doomsday predictions about small plans — employed by many in the industry to lobby against the Department of Labor regulation — were always overblown.
When advisers say small plans are not profitable, “what they are really saying is it is a pain in the ass”, he says.
“This whole idea of ‘small plans aren’t profitable’ isn’t the case. It’s about an adviser’s ego and laziness on the adviser’s part.”
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