The End of The Line For Small Potato Retirement Plan Advisors and Brokers?

A few years back, I met a broker from my area and I developed a networking relationship with him in the hope of getting some ERISA related work when I was an associate at a Long island law firm.  I helped the broker out with questions he had, but business never came my way which was fine by me.

As a broker, he had very few plans on the books and they all tended to be south of $1 million. Being part of a broker-dealer with few agreements with mutual fund companies, he was relegated to use some of the bundled, insurance company providers. For small plans, these providers are a great fit. However in a discussion with him, I was rather surprised when he swore that the funds he picked within one of the bundled programs were no load. I told him the concept of a wrap fee and how these wrap fees are what makes the insurance company money on its platform. Clearly, he had no idea as to how 401(k) plans paid an insurance company provider.

I really believe that as time passes, brokers and financial advisors that I just described will disappear from the retirement plan industry. Brokers and advisors who fail to get the needed retirement plan background or surround themselves with the professionals that do, will be at a great disadvantage with the changing times.

I believe that the Department of Labor and the Securities and Exchange Commission changing the fiduciary standard may have the impact of many brokers leaving the industry because many of the small broker dealers may not want to deal with the added liability of their brokers serving as co-fiduciaries of retirement plans.

Fee disclosure requirements of service providers may also have force some of the smaller advisors and brokers out of the industry because of the added regulatory burden, as well as the fact that plan sponsors may get sticker shock from some of the expensive retirement plan programs that an unsophisticated broker or advisor placed the plan with.

In addition, greater regulatory burdens for plan sponsors and advisors will also have smaller brokers and advisors to  deal with larger advisors who are more sophisticated and knowledgeable about how the retirement plan industry works, especially those that serve as ERISA 3(21) and 3(38) fiduciaries.

How can a small potatoes retirement planbroker and advisor survive in a changing environment? Pretty simple. If a broker or advisor wants to look retirement plan smart, that broker or advisor needs to surround themselves with smart retirement plan people such as supporting third party administration firms (TPAs) and ERISA attorneys. Picking out a menu of funds and the development of an investment policy statement are important roles of a retirement plan advisor, but a retirement plan advisor will need to have the background or those that support him or her to understand plan design, costs, and proper plan administration.

As an ERISA attorney, whether it was working for a TPA or out on my own, one of my important roles has always been devoted to help advisors and brokers develop and maintain a retirement plan book of business. That is why I was the very first ERISA attorney to sponsor and partake in 401(k)Rekon seminars because of their support of retirement plan advisors, as well as my open door policy of answering questions and providing support to brokers and advisors around the country at no cost.

Whether it’s Brightscope, Fiduciary Benchmarks, f1360, rj20, Advisors Access, 401(k)Rekon, TPAs, ERISA attorneys, and consultants like Sheree Tallerman of PlanPerfect Retirement, there are enough support for advisors and brokers who want to be sophisticated and major players in the retirement plan industry. At the end of the day, only the sophisticated brokers and advisors will survive, as the small potatoes retirement plan brokers and advisors will likely leave the industry.