by Skip Schweiss
New rules related to employer-based retirement plans are coming down the pike, and they're creating opportunities for RIAs who advise companies and individual participants in such plans.
The new rules will mandate changes in how advisers can be paid and how compensation is disclosed. They're designed to help decrease and disclose conflicts of interest and serve the plan and its participants' best interests-which the RIA model already does. While not the right service model for every RIA, I think the retirement plan marketplace is a growing opportunity right now in light of these changes.
The Bottom Line on the Proposed Rules
Under the new rules, which are being proposed by the U.S. Department of Labor, investment advisers will be able to provide advice to retirement plan participants in two ways:
A computer model, which must take into consideration generally accepted investment theories, investment management and other fees and is certified by an independent expert, and would select investments based on client information input by the adviser
A level-fee basis, under which the compensation for the investment adviser providing advice would not vary depending on the investment options selected
For advisers recommending investments for a retirement plan participant, this means they can't get compensated more for recommending one investment over another.
The wild card with proposed rules is that there's no certainty about when the rules will be finalized and what the effective date will be, and whether the Department of Labor will make any changes based on the comments received during the public comment period. However, I anticipate that the rules will be finalized sometime before the end of 2010.
Compensation Is the Key Word
There is more certainty around the rules relating to fee disclosure. The Department of Labor has issued final interim rules requiring certain retirement plan service providers, including investment advisers, who receive at least $1,000 in direct or indirect compensation from a retirement plan, to report to the plan about the services they are providing and the compensation received for those services.
Compensation is the key word here. It's important to note that compensation means not just the fees that are being charged for services to the plan, because financial services companies often have other ways of making money besides the fees they charge. So if a brokerage firm, for example, is being compensated by the mutual funds that it offers its customers, that compensation must be included in the calculations and the disclosures.
The RIA Advantage: Fiduciaries by Nature
If the rules are implemented as proposed, I see them providing a huge advantage for RIAs over commissioned brokers, because most brokers that provide investment advice will have to reinvent their commission-based models to take into account these new rules, while RIAs are already positioned within the construct of these rules.
Another key provision of the rules is that investment advisers who provide services to company-sponsored retirement plans such as 401(k)s and 403(b)s must disclose whether or not they are providing services as a fiduciary to the plan. This is a big deal, because there are quite a few service providers who use the word "fiduciary" loosely and infer that they are a fiduciary partner, helping with fiduciary responsibilities. They are now going to have to clarify their position in writing to the plan sponsor.
As with the proposed rules, I believe the interim final rules provide a competitive advantage to RIAs because they are fiduciaries by their very nature. These rules present a big opportunity for RIAs to gain more retirement plan business. I strongly urge RIAs to take a fresh look at the retirement plan market. Although regulations are complex, these new rules can only help RIAs build their business in the retirement plan space.
Skip Schweiss is president of TD Ameritrade Trust Company and managing director of adviser advocacy at TD Ameritrade Institutional.
TD Ameritrade Trust Company is a non-depository trust company, acts as a custodian and/or directed trustee and is not a member of FINRA/SIPC/NFA. Brokerage services provided by TD Ameritrade Institutional, Division of TD Ameritrade Inc., member FINRA/SIPC/NFA. TD Ameritrade Trust Company and TD Ameritrade Inc. are subsidiaries of TD Ameritrade Holding Corporation.