The Rosenbaum Law Firm P.C. Blog

In a move that will shake the broker-dealer and retirement plan industries, Merrill Lynch’s decided to end its commission individual retirement account (IRA) business to comply with the Department of Labor’s (DOL) new fiduciary rule

Merrill Lynch with more than 14,000 advisers, will no longer offer new, advised commission-based individual retirement accounts beginning April 10, 2017 which is the day the Fiduciary Rule goes into effect. After April 10, Merrill will migrate clients to its advisory platform, self-directed brokerage or robo advisory service.

While many broker-dealers will still continue to offer commissioned based IRAs such as LPL, which announced its intention to continue that business and many Merrill brokers may decide to leave if they want to continue a commissioned based business, I believe that other large broker-dealers will follow. This is a bold move and it always takes one person to make a bold move and then others will follow.

Offering a commissioned based IRA can be attractive to the brokers who love the trails, the new fiduciary rule and the best interest exemption contract may make the continued offering of such commission based IRAs as a landmine.

While I believe that smaller broker-dealers may decide to ditch the IRA business because of the fiduciary rule, Merrill’s decision may gave their competitors both large and small competitors to think how they can live in an IRA world without commissions.

A Florida optometry practice with a 401(k) plan with only $300,000 in assets is the latest plan to be sued for 401(k) mismanagement, with a newly filed lawsuit accusing the practice of over-investing in alleged “patent troll” VirnetX.

The proposed class action lawsuit alleges that the founder of Emerald Coast Eye Institute LLC, managed the company’s 401(k) investments, despite having no background or qualifications in investment management. There clearly was no financial advisor on the plan.

The founder, Dr. Samuel Poppell directed a significant portion of the plan’s assets into the stock of VirnetX, a company that allegedly specialized in acquiring patents and attempting to bring litigation against violators of those patents.

Supposedly the founder of the practice only learned of VirnetX through online message boards and blogs, not exactly the best place to get sound investment advice.

The 401(k) plan had fewer than 30 participants during the past year and ended 2015 with just over $300,000 in assets.

More than half of the Plan’s assets were invested in VirnetX stock, with the remaining assets invested in cash equivalents. The complaint states that VirnetX’s poor performance caused the plan to suffer actual losses of more than $600,000.

Before you start jumping up and down about a micro 401(k) plan being sued, it should be noted that Plan participants weren’t able to direct their own investments, so the founder of the practice dictated the investments as plan trustee. While this type of investment wouldn’t happen with participant directed 401(k) plans, it does show the lack of fiduciary responsibility by a trustee investing most of the plan’s assets in one stock.

If you know about a thing or two about plan administration, you know about the top-heavy rules. The top-heavy rules generally ensure that the lower paid employees receive a minimum benefit if the plan is top-heavy. A plan is top-heavy when, as of the last day of the prior plan year, the total value of the plan accounts of key employees is more than 60% of the total value of the plan assets.

This article isn’t actually about the top-heavy rules, but it deals with a different form of top-heavy, it’s the problems of organization that are top-heavy in the fact that they have too many generals on top and not enough soldiers to do the work of the organization.

I once belonged to a not-for-profit organization, where there were 25 core members who worked hard and the problem was that there was about 36 positions of power in the organization. The problem is that you have too many people interested in the power of the position or just the title of the position and not enough people who would actually help in the work of organizing events or fundraising. Being someone that was heavily involved in organizing events, this was problematic when dealing with people who want the honor and the glory, but don’t want to do the work to justify it.

Positions of power can be a problem for those who want the title and don’t want to do any of the work that they think is too menial for their position. It reminds me of a woman that the first third party administration form (TPA) I ever worked with, hired as a plan administrator. This administrator came in on her first day of work and there was nothing for her to do. So another administrator asked her to make copies of some plan documents and reports The woman quit that day, apparently making copies was too much to ask of a plan administrator. Organizations that have too many people in leadership and not enough day-to-day employees will recognize many times that the leadership doesn’t want to get their hands dirty and do the work necessary to keep the organization moving.

That TPA was a failure as a stand alone business and was a failure again after being purchased by a national consulting firm because it had 6 owners who became senior management upon the sale to a national consulting firm and only about half of them had a strong work ethic to be there everyday from 9-5 pm. The problem with too much leadership is not only are they top-heavy in titles, they’re also top-heavy in salaries. A TPA that had 70 employees didn’t have enough revenue to pay those 6 “managing directors” and have that national consulting firm pay off the financing used to purchase that business. It’s a lot like the law firms I was a member of that had way too many partners when compared to the number of associates it had. It creates a financial problem when you have too little associates to support the work of the partners and the billable hours need to be churned out to support those at the top. That’s why mid-sized law firms never do as well as larger firms who have much more associates than partners.

For an organization in the retirement plan business, you need enough people to do the heavy lifting to help the people at the top manage the business and grow it. Top-heavy organizations have a tough time making ends meet because their overhead supporting all these generals has a huge price to pay.

For the third time in 11 years, I joined a Synagogue because I’m the wandering Conservative Jew.

So a few days ago, a man rang my doorbell. Since it’s election season, I didn’t answer it. I should have because it was a welcoming member of my new Synagogue with a bottle of my favorite kosher vineyard. Unfortunately, it was a bottle of White Zinfandel. Again, it’s the thought that counts. It’s the thought that counts because the previous Synagogues did what many Synagogues do with new members: they completely ignore them. One top of that, a member of the Sisterhood dropped by a welcoming bag of Challah and grape juice last week.

It’s a big deal to me because they showed the effort and interest in making me feel welcome. I started on the right foot with the new synagogue and it puts me in a good mood when I’m there and when they send me a letter asking for donations. It’s the small stuff that goes a long way and showing new clients and current clients that you actually care and that they actually matter is going to go a long way in retention. I’m not suggesting you buy a new client a bottle of wine, but some token of appreciation or welcoming is going to go a long way in making them feel that they made the right choice in hiring you.

My latest JDSupra.com article can be found here.

We’re closing in on Election Day and no matter what side you’re on, you have to admit that it’s one of the most divisive elections in recent memory. So I’m shocked when I see professionals post their political diatribes on LinkedIn or other business avenues that clients, potential clients, and business partner can see.

Now everyone is entitled to their political opinion and proudly support their candidate, but politics shouldn’t get in the way of being a retirement plan provider. It’s so hard to be a retirement plan provider especially when dealing with potential plan sponsor clients who already have barriers up because they don’t think anything is wrong with their plan. The last thing you need to do is throw up another barrier because the potential client plays on the other political side.

Politics is a lot like religion. There’s nothing wrong with having a certain view, but you’re never going to change anyone’s mind by debating it. So it’s best to keep your political views to your personal Facebook page so business partners and potential partners don’t have to see your political views and get so offended because they are diametrically opposed to you.

So whether you’re supporting Trump or Clinton or someone else, that’s wonderful that you are part of the democratic process, but your views have no role in the process of being a retirement plan provider.

“Fidelity’s 2015 Plan Sponsor Attitudes Survey,” disclosed the satisfaction level of plan sponsors with their advisors improved to 70 percent last year, reflecting a nice increase from 2010 when it was just 57 percent.

While they seem to be happy, the survey also found that 17 percent of plan sponsors are actively looking to switch advisors, which is the highest number since the survey was launched six years ago.

The 17% number is a good place to focus if you’re a financial advisor seeing out new clients because plan sponsors looking to make a change are likelier to make one. That’s just common sense.

I wouldn’t be worried about the 70% satisfaction because many times plan sponsors are satisfied because they think their advisors are doing a good job. I have absolutely no knowledge of construction, so I was happy with a couple of home building contractors before I discovered they weren’t very good. A good chunk of that 70% love their advisor, but don’t know why and don’t know if their advisor is actually doing their job.

The problem is connecting with a lot of plan sponsors who maybe happy with their advisor because they would brush off any type of solicitation by claiming they are happy. Any type of communication should focus on good fiduciary practices and whether the incumbent advisor is doing the job by articulating what you do as an advisor because I believe that any negativity towards the incumbent advisor may get the advisor fired, but it may not get you hired because people hate negativity. I’d focus on what you do and the fees you charge because it may give that “happy” plan sponsor something to be unhappy about.

I always say happy clients never leave, but sometimes clients don’t know when they should be unhappy.

You’ve heard people screaming up and down about the fiduciary rule. They just had someone screaming that the fiduciary rule is a boon for lawyers (thank you) and that 100,000 to 150,000 advisors will leave the 401(k) business. You’ve also heard how plan sponsors won’t be able to find advisors is they have smaller plans and how many will terminate their plan than deal with the new rule. They claim the sky will fall and that the end is coming for the retirement plan business.

The problem with this Chicken Little argument about the sky is falling is because we heard it before. We heard many of these similar arguments when fee disclosure regulations were being implemented in 2012. We were told that compliance was going to be too much for providers, we were told that there would be a race to zero for fees and only low fee providers would get business, and we were told that plan sponsors were going to terminate their plans over it. You know what? The retirement plan industry is in better shape today that it was 5 years ago.

With any type of change, there will be winners and there will be some losers. Registered investment advisors who have always acted in a fiduciary capacity will do well as will broker-dealers who understand the business as they morph into being plan fiduciaries. People in this business will bank on this change, others will go broke. People take advantage of change or they let change take advantage of them. There will be broker-dealers who will leave the 401(k) business as will many advisors, but any change in this business creates change where providers exit and enter the industry.

Regardless, the retirement plan industry will survive. If 100,000 to 150,000 advisors leave the business, there will be a hungry group of advisors that will just pick up the slack. That is the beauty of a competitive business, the retirement plan business will see other days after April 2017, the sky will not fall.

My newsletter geared towards retirement plan providers can be found here.

My latest article on JDSupra.com dedicated to the life and work of Rich Laurita can be found here.