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Level Comp Would Complicate IRA Rollovers by Plan Advisors

One of the big issues for plan advisors, and perhaps an unintended consequence of the DOL’s proposed conflict of interest rule, is that advisors that work on a DC plan will not be able to charge participants who want help with their IRA rollovers more than they charge the plan.

Arguably, there’s more work on the IRA and less assets. Additionally, an advisor that the employee does not know and may not be as competent can swoop in without those fee limitations. Seems unfair and untenable.

At a recent dinner with a large OSJ and one of the principals at their BD, the issue of IRA rollovers and the DOL came up in a rather emotional discussion. The advisor with a lot of IRA rollover clients in plans his firm manages could not believe that he might only be able to charge 25 BPs, for example, to a client that he would normally charge 100 BPs, making it potentially infeasible to work in the IRA rollover market, a big reason some advisors work on DC plans.

The BD principal, a longtime industry vet, was calmer, recommending that the advisor take the 25 BPs and wait. Perhaps, by offering additional services in a year or so, the fee arrangement could be changed. And 25 BPs is better than 0 BPs.

Here’s something else to consider: Most advisory fees include the cost of client acquisition. Isn’t it arguably easier and less costly to win an IRA rollover from a participant in a plan that the advisor manages, has been endorsed by the employer and with whom the advisor has had meaningful contact? Aren’t a vast majority of rollovers under $250,000, for which a robo or canned solution is often used anyway, rather than customized wealth management?

It’s easy and sometimes temporarily gratifying to understand and argue our side of the discussion, but it’s often more enlightening and fruitful to understand the other side. When working at a plan level, fiduciary advisors receiving levelized comp are true consultants, helping the employer and employee select the best funds and services from third parties in an arm’s length relationship and in a completely unbiased manner.

But when it comes to rollovers, isn’t the advisor selecting its own solution and therefore, isn’t there a chance that the participant will not realize that the relationship is different? And though most IRA solutions offered by experienced and principled plan advisors are better than what a participant can get on the street or from another advisor, regulators have to rely on principles, not personalities.

Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.

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