Swell in 401(k) specialists’ seeking out ‘progressive’ broker-dealers
by Darla Mercado and featured in Investment News
Advisers lining up new home bases ahead of reg changes
Advisers who specialize in the 401(k) market have been switching broker-dealers in search of firms they feel are better equipped to handle their growing business — and new government pension regulations.
Proposed rules from the Labor Department, including heightened fee disclosures and restrictions on who can provide advice to plan participants, are placing additional regulatory scrutiny on advisers and brokers who work with retirement plans.
Some major broker-dealers and wirehouses have started to accommodate advisers who want to be fiduciaries. Meanwhile, Goldman Sachs Group Inc. has entered the fray, promoting alternative-asset funds and designing target date funds that provide guaranteed income to grab a bigger piece of the $2.7 trillion 401(k) market.
Nevertheless, recruiters say 401(k) specialists continue to seek out new home bases ahead of the expected rule changes. Recruiter Jon Henschen pointed out that advisers who specialize in the 401(k) business work with third-party administrators and handle record keeping — tasks that many broker-dealers neither cater to nor understand. The record keeping is likely to become even more onerous with the coming of any ramped up DOL regulations — making firms that specialize in retirement plans more attractive to advisers.
United Planners Financial Services, for example, added 49 advisers last year, picking up talent from independent broker-dealers and wirehouses.
“A big factor in their transition to United Planners was the level in which we embraced fiduciary standards,” said Tom Oliver, president and chief executive. “It’s a major portion of their business and a key factor in where they wanted to go.”
At Goldman, the firm’s asset management division – which includes its defined-contribution unit — does operate under a fiduciary duty to its clients, whereas the sales and trading division doesn’t.
“When a client gives us their money and their assets to manage, we are 100% their fiduciary; we must manage their money in the most prudent fashion possible using our best judgment possible,” Goldman president Gary Cohn said May 11 at an investor conference in New York
It’s hard to predict how much business a financial giant like Goldman will pick up in the defined-contribution sector. But smaller firms that are particularly accommodating to (401)k specialists continue to receive inquiries from wirehouse brokers. Mid Atlantic Capital Group Inc., is receiving inquiries from 10 to 15 prospects a week, noted Timothy Friday, the firm’s chief executive. That’s a big jump from the one or two calls the firm used to receive. Many of the potential new recruits work with a combination of high-net-worth clients and 401(k) plans.
The new reps — 16 have joined in the last 12 months — are averaging about $400,000 to $500,000 in production.
Mr. Friday attributed the new blood to other broker-dealers’ inability to properly manage 401(k) assets. Wirehouses have to give reps access to external platforms, either via a trust company or a clearing firm, to hold 401(k) assets. But firms aren’t making those accommodations, Mr. Friday say, putting those reps in a bind.
“The wirehouse rep doing 401(k) business isn’t willing to give up that book,” he said. “And in many cases, their sponsoring broker-dealer who doesn’t understand the space is forcing them to unwind the books or look for a new home,” he added.
For Gerald Wernette, director of retirement plan services and a principal at Rehmann Financial, the decision to join Royal Alliance Associates Inc. in March stemmed from his practice outgrowing its old broker-dealer, Triad Advisors Inc.
Rehmann, which manages $1.5 billion in assets, provides investment advisory services to 300 plans and third-party administration services to another 950 plans. Aside from a retirement practice that manages $350 million, the firm also has a wealth management practice and its own investment research department.
“We needed a broker-dealer that would be able to handle our progressiveness and support us as we continue to grow the business beyond traditional retirement and wealth management,” said Mr. Wernette.
Managers at Rehmann considered taking the firm fully independent. But in the end, they felt the money it would take to build a whole new broker-dealer would be better spent on product development and ways to improve internally.
With the latest round of regulatory developments in the pension world, and with 401(k) participants on the rise, other advisers might start sniffing around for more-accommodating firms.
“Because of all the retirement-related issues out there, advisers with a retirement business of any substance want to be with a broker-dealer that’s progressive,” Mr. Wernette said. “In the past it was an afterthought, but now it’s something that advisers are putting on the front line when they make considerations.”