Consider this scenario: After some due diligence, an advisor determines that a universe of 250 funds are appropriate for almost all clients. That advisor then suggests a lineup of 12-15 investments for a client, although the client has the choice of selecting its own lineup – as long as it’s from the universe of 250 funds. By the way, some of those funds are either managed by the advisor or their firm gets paid an additional fee.
Is the advisor acting as a fiduciary? Are there conflicts? Aren’t they allowing and even advocating that the plan sponsor make the ultimate decision?
The answer is obvious, perhaps even under the current fiduciary definition, never mind the expanded one under the new DOL fiduciary rule.
Because of revenue sharing, record keepers, especially in smaller DC plans, suggest a menu of funds during an RFP process which may have more to do with pricing than understanding which investments might be right for that plan. Most providers limit the universe of investments offered. So if an advisor doing exactly the same thing is considered a fiduciary, then why not the record keeper?
Today, many advisors on smaller plans do not officially act as fiduciaries. But even if there is a fiduciary advisor on a plan helping the client select and monitor investments, is the record keeper limiting the universe of funds relieved of fiduciary liability?
It gets better. More and more record keepers are moving to proprietary funds to get more revenue, whether target date or stable value funds. Any conflicts here? And if the real determinant of whether a party should be considered a fiduciary is whether they have influence over what decisions are made, then why do high-revenue-share funds seem to dominate which funds are actually selected?
One possible solution: Eliminate revenue sharing or equalize it, thus eliminating conflicts. But what about proprietary funds?
And with more large advisor groups offering custom collective investment trusts (CITs), beyond the question of potential conflicts, how many advisors will be likely to fire themselves or their own firm if the funds tank?
I’m just asking.
Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.
