Almost all advisors who have worked in the DC market for even a few years acknowledge that they are functional fiduciaries, even if their broker dealer or insurance policy does not allow them to be so named. It is nearly impossible for advisors to effectively help employers manage their DC plans without doing what it takes to make them a functional fiduciary.
Realizing that many advisors — or those who were traditionally called brokers — could not become named fiduciaries, those who could used it as a weapon in head-to-head competition for business. Other advisors have used the “F” word to scare employers. And the regulators seem to be trying to mandate fiduciary status without really understanding how the DC world works, especially when it comes to working with both employers and employees.
The Concept of Stewardship
Like many things in the DC world, “fiduciary” has become a commodity that providers are offering — in some cases, for as little as three basis points. Clearly there is massive confusion and misuse of a term that was intended to distinguish well-intentioned advisors and help improve outcomes. I’m not advocating that the industry drop the term, but I do think it’s time to move to a more holistic, less technical term that does not come with baggage for advisors that do the right thing for clients. To that end, I suggest we adopt “steward” or “stewardship.”
Recently, Morningstar moved to new stewardship ratings of companies based on less quantitative criteria like corporate governance and more holistic measures like capital allocation or how companies are treating shareholders. A “steward” can be many things, from the most banal (like a steward on a ship) to ones with religious implications. When applied to the financial services industry, Dictionary.com defines steward as “a person who manages another’s property or financial affairs; one who administers anything as the agent of another or others.”
The concept of stewardship is even more important in corporate-directed retirement plans, where there are two clients whose interests may not be aligned. Most plan sponsors want “nothing,” or as close to it as possible — that is, no cost, no work and limited liability. Participants want (or should want) their DC plan to replace as much income as possible when they retire. Ideally, advisors who want to be good stewards should focus on the participants’ interest, but they must first satisfy the needs of the plan sponsor, who ultimately determines whether that advisor gets hired. This is the problem with the technical definition of a fiduciary — an advisor can fulfill the legal obligations of a fiduciary to plan sponsors but fall short when it comes to being a good steward for participants.
A Meaningful Definition
So what defines a good steward? Though it is tempting, we cannot judge advisors solely based on results, for two reasons. First, a bad steward can achieve good results over a short period of time. And second, because there is no objective measurement to indicate which advisors are actually delivering better outcomes for the participants in their plans.
Technical definitions of a fiduciary taken from other contexts do not necessarily apply to the DC world, and the fact that some advisors are willing to take on fiduciary responsibility without appropriate assets to back them up if something goes awry is not going to resolve anything.
Activities that define a good steward in the context of DC plans might include:
• compensation (level and reasonable)
• transparency
• free of conflicts of interest
• training
• experience in the market and in the types of plans serviced, either by size or type
• due diligence performed on the partners and products they recommend
But even assuming that we could agree on the elements that make up good stewardship for a DC advisor, we are still left with the question of who should measure them like Morningstar does for stocks.
Improved Outcomes
While it may be simplistic to use the same criteria for stewardship that the U.S. Supreme Court uses in determining pornography — basically, “I know it when I see it” — there needs to be some overarching theme, like “good stewards put the interest of their clients first, and often at their own expense.” And though we do not want to judge good stewards based solely on results, it would be equally unrealistic to think that the market will embrace stewardship unless there are improved results.
If advisors want to be able to charge clients a premium, or at least avoid being priced like a commodity, they need to go beyond the 3 “F’s” – fees, funds and fiduciary. Just by calling themselves fiduciaries or fulfilling the technical requirements will not elevate advisors in the minds of their clients any longer. The new elite DC advisors will act like stewards through a whole series of activities that show they are putting their clients’ interests first. Best case, the results will include improved participant outcomes — thus proverbially “doing well by doing good.” Until then, we will continue to be bombarded by “F” bombs — especially from regulators.
