With the advent of most companies that offer a DC plan using an advisor, the dirty secret is that many providers that currently sell mostly through advisors have “orphaned” cases. So what happens to the DC plans without an advisor, those that receive zero service and the advisor is still getting paid, or plans that will now be abandoned because of the DOL conflict-of-interest rule?
With commissions and the sale of proprietary products questionable after the rule takes effect, some advisors and even broker-dealers may decide that it’s not worth working on DC plans due to the increased fiduciary liability, as well as threats that supporting those accounts could pose to their wealth management and IRA rollover business.
So who takes over these plans? Will broker-dealers reassign them to advisors in the organization who are focused on the DC market? Will the clients protest? Do the specialist advisors want the smaller plans, especially if they have to share revenue? Will providers help assign orphaned cases? How do they choose which advisor and, even if the plan asks for an advisor because their current one is providing no service, do they really want to get involved?
DC specialist advisors could be in a great position to get lots more business, a trend the government did not start but certainly one that will be fueled by the rule (that is, if capacity issues don’t get in the way). Many emerging advisors will probably just ignore the DOL rule, hoping that either their BD will handle all the paperwork or the client will not notice. But experienced ones with many DC plans can’t afford to take either of those approaches. There’s a lot of work just to get their current agreements up to code, never mind the onslaught of potentially new business from providers, their BD, or plan sponsors awakening to the need to hire an experienced plan advisor.
That’s a great problem to have, you might say. But many companies have blown up because of too much business that they’re not prepared to handle. It takes people — expensive people. It takes technology, which is not as readily available in the DC market as it is with wealth management. And it takes business acumen, which is sorely lacking among advisors who have previously been successful because they were good at either making sales or selecting investments.
Just like with record keepers a decade ago and with DCIOs currently, the result will likely be consolidation among advisory firms, with some getting really big or joining larger groups, others staying small, and those in the middle getting crushed. Choose wisely.
Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.
