At almost every meeting I attend with DC plan advisors, the question of whether their fees will continue to decline comes up. Unfortunately, the answer is usually the same.
Advisory fees continue to decline, which has led some advisors to look to custom funds for revenue. But are there fiduciary pitfalls?
There are three main sources of revenue from DC plans:
- Record keeping and administrative fees
- Advisory fees
- Investment management fees
Unlike the first two, investment fees have held steady, not accounting for a shift in market share to index funds. One can argue that the move to institutional share classes has lowered investment fees but, in reality, the reduction affects providers and advisors more than the money managers. Some experts argue that the firms closest to the clients (employers and employees) should get a greater share of the overall revenue.
So some advisory firms, especially larger specialty groups, have created custom funds where they either advise on the glide path or the underlying holdings for which they get paid. One could also argue that the move to 3(38) solutions is an attempt to shift more revenue from money managers to advisors, making up the potentially increased cost by using more index funds. And one specialty group is negotiating lower fees from active managers, passing along the savings to advisors within their ranks.
Is There a Problem?
So what’s the problem? If an advisor is recommending funds for which they receive additional revenue, even if disclosed, that could violate the level comp rule, assuming most of these advisors are acting as fiduciaries. Some try to get around this issue because only the specialty group or their broker dealer is getting the additional comp, not the advisor acting as the plan fiduciary. Others try to skirt the issue by charging a flat fee.
So if an advisor’s group or broker dealer is getting additional payments, is an advisor at risk? Maybe not technically, in the same sense that the use of a record keeper’s proprietary target-date fund which offers lower admin fees is not a violation. But both require extensive due diligence. And does the advisor get additional marketing support from their group or BD for using their custom funds? Haven’t most BDs sold off investment products to avoid this conflict?
