The Department of Labor is poised to toughen rules for consultants and advisors that serve retirement plans, as past industry practices have fallen under new scrutiny.
The DOL's fiduciary standard initiative is similar to one that pertains to retail financial advisors currently unfolding at the Securities and Exchange Commission.
The initiative would create a single standard governing how advisors and brokers give advice to their clients. The result is expected to be a common fiduciary standard, and will be released early this year.
Denise Valentine, senior analyst research and advisory firm Aite Group, says the DOL's proposed new rules specific to retirement plans are a very big event.
"In layman's terms, it means [retirement plan providers] can sue more people and have a leg to stand on," she explains.
Critics contend that brokers who present themselves as advisors -under the current system- are able to get away with things like steering clients into investment products that pay higher sales commissions.
The DOL's proposal would expand the number of consultants and advisors that are legally liable for their advice to retirement plan providers, and would correct what critics say is a system that can hurt investors.
With regard to retirement plans, firms that offer their clients investment advice would be held to a more stringent "fiduciary standard."
Broadly, a fiduciary standard compels firms to act as if a client's interests are their own. That, says Paul Klauder, vice president and managing director of SEI's institutional group, is often not the case today.
Klauder notes that in extreme cases consultants sometimes accept payment from asset management firms whose products they are in a position to recommend.
Less egregious examples of non-fiduciary behavior include presenting a short list of investment managers to a pension plan without recommending one above the others. Klauder explains that if the client picks a manager that does a poor job, the consultant again presents four firms to choose from. "The plan ultimately picks from the short list, and they ultimately have fiduciary responsibility," Klauder says.
Aite Group's Valentine adds, however, that under the new fiduciary standard, those companies would have to clearly disclose such potential conflicts of interest.
No More Conflicts
Because of the "conflict-prone" nature of doling out advice, SEI ceased offering consulting services to retirement plans over a decade ago.
But, Klauder says, the company offers manager-of-managers services to retirement plan sponsors and serves as a co-fiduciary in the overall investment management in clients' plans. The company also has complete fiduciary responsibility in the hiring and dismissal of money managers.
"We have a process for vetting managers," Klauder says. "You hold us responsible for the results."
At present, most of the large advisory firms have a two-tier model: one, which serves as a non-fiduciary entity, while the other is a more expensive fiduciary model.
Should the DOL's new rules go into effect, however, all consultants and advisors will be fiduciaries. Facing a tougher set of rules, consultants would likely take extra steps to protect themselves, Valentine says.
Those steps might include additional regulatory reporting and the use of very specific contract language about what is expected from the consultant and client, she says.
"Consultants will do what they've always done, although they may be crossing their T's and dotting their I's more," Valentine says. "But they would not have survived in this business if they didn't have proper processes and due diligence," she says.