The head of a $12 billion RIA spars with UBS and LPL execs on the great fiduciary debate

Retirement-plan leaders grapple with different degrees of fiduciary and how best to address advisors and clients

Friday 10.21.11 by Lisa Shidler

It should come as no surprise that when retirement plan heavy-hitters from an IBD, a wirehouse, and a massive RIA take center stage in front of an audience comprised mostly of financial advisors, that a few jabs will be thrown – all in the spirit of collegial competition, of course.

The Tuesday breakaway session at this week’s Center for Due Diligence Conference in Chicago brought together Bill Chetney, executive vice president of LPL; Pat Oberlander, head of retirement plans with UBS; and Randy Long, founder and managing principal for SageView Advisory Group, LLC, an RIA with more than $12 billion in assets, for a lively discussion about how to handle tricky fiduciary and compliance issues facing retirement plan advisors.

The great fiduciary debate

The hottest topic concerned fiduciary standards. Advisors aren’t required to take on fiduciary responsibility for the 401(k) plans they oversee, but a select few choose to do so. Right now, just a fraction of LPL and UBS retirement advisors have fiduciary status. At UBS, 400 of 6,500 advisors can act in fiduciary capacity, Oberlander says. At LPL, it’s 400 to 500 out of 12,000 advisors, according to Chetney.

Under a new regulation from the Department of Labor – 408(b)(2) – advisors are required to present clients with a written agreement of services, fees, compensation and any conflicts of interest. The rules go into effect on April 1, 2012. The issue of whether or not the advisor is serving as a fiduciary is also to be addressed in these disclosures.

No biggie

Both the UBS and LPL chiefs are confident they won’t lose business when the notifications go out, as most clients understand that their advisors are not fiduciaries.

“We don’t think it’ll be a huge event,” said Oberlander, but “in a number of situations it’ll be news. We’re trying to prepare advisors to get ready so they won’t be surprised when the clients say, you’re not a fiduciary.”

Watch your back

At that point, the SageView founder saw his opening and took it.

“You notice how they didn’t ask me the question,” said Long, addressing the audience. “I’ll be calling all of their clients…For those of you advisors in the room, you need to specialize in retirement plans and get your hands around being a fiduciary.”

The LPL and UBS chiefs were silent as chuckles were heard from the audience.

Fiduciary aspirations

Chetney and Oberlander say that it’s their advisors, more so than their clients, who are putting pressure on them to gain fiduciary status.

“Our advisors want to be at the forefront and want to be able to differentiate their services,” Oberlander said.

Chetney said the same was true at LPL, adding that the company’s new recruits are particularly interested in the fiduciary model.

“The people who are looking to change and are shopping around – they’re the ones who are forcing us to look for this type of solution.”

Same difference?

Many 401(k) advisors are actively debating the benefits and drawbacks of serving as an investment advisor to ERISA qualified plans under section 3(21) or as an investment manager under section 3(38). While the definitions get murky, the differences can be significant. Advisors acting under 3(38) must assume a greater level of fiduciary responsibility, including taking on more legal liability for the selection and monitoring of the investments. Advisors who accept 3(38) status can’t accept revenue-sharing payments or have conflicts of interest.

Bill Chetney: Our group looked at this and we don't feel there's a lot of risk. We want to roll it out in the fourth quarter.
Bill Chetney: Our group looked at
this and we don’t feel there’s
a lot of risk. We want
to roll it out in the
fourth quarter.

These rules aren’t new, but have been in the spotlight recently, in part because employers are increasingly worried about lawsuits from their 401(k) plans.

The three retirement leaders launched into a cheerful, spirited debate about which way to go. All have had their lawyers scrutinize the language and, in some cases, have come to the conclusion that there’s not a huge difference between the two categories of fiduciary.

Finding the right path

Chetney says his firm is rolling out options so that clients can become investment managers under 3(38). He says the solution would be a compromise in which LPL, not advisors, would bear the responsibility of selecting the investment funds.

“Our group looked at this and we don’t feel there’s a lot of risk. We want to roll it out in the fourth quarter.”

Oberlander says UBS retirement advisors have asked the firm to craft language saying they’d be willing to be investment managers under 3(38).

“Our advisors are asking us to develop something,” he says. “It doesn’t seem like it’s much different than things are now. However, trying to supervise it and trying to put processes around all of the record-keeping platforms is something we’ll struggle with.”

Loving the littler plans

Long says that his firm frequently takes on fiduciary responsibilities under 3(38), adding that SageView actually charges 15% to 20% more to plan sponsors for these services.

“You need to make sure you have everything well-documented,” Long said, “But it’s a way to distinguish yourself.”

Long also offered a surprising insight on his biggest accounts.

“Probably our least-profitable plans are ones more than $1 billion. That’s not the business you want to focus on. Your fee gets capped. I love $20 million to $50 million plans,” he says.

Extinction event?

When asked to predict the state of 401(k)s five years from now, the retirement executives agreed that advisors whose plans make up just a portion of their practice won’t last as the industry will continue to seek out specialists.

Long said that those who don’t act as fiduciaries will likely face extinction. He also predicted that more consolidation of advisory firms working with 401(k) plans will occur.

Oberlander and Chetney say that regulators will be keeping their eyes on the 401(k) plans for the foreseeable future.

Some politicians have suggested that providers include statements showing the amount of income that participants will earn in retirement based on their savings. See: The advisor-to-401(k) business could be set back by Democrats and Republicans. Oberlander says that predicting such financial outcomes will be a difficult, if worthy, undertaking.

“While that’s a very noble goal and easy to talk about, it’s very hard to deliver,” he said.

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