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Regulation and Compliance > Federal Regulation > DOL

Under DOL rule, fee-only RIA plan advisors in driver’s seat

By Nick Thornton

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The steady flow of migration from the brokerage model of retirement services to the fee-based model over the past decade will clearly continue after the Department of Labor releases its finalized fiduciary rule this week, said Skip Schweiss, managing director at TD Ameritrade.

Schweiss oversees the firm’s Retirement Plan program, which offers RIA plan advisors turnkey tools — recordkeeping, asset custody, non-proprietary open architecture investment and trading platforms, and supporting education products for participants.

Launched in 2014, TD Ameritrade has seen the number of RIA retirement plan specialists competing for business increase 94 percent over the past year. The average RIA firm using the program has $350 million in assets under advisement.

Schweiss said the vast majority of RIAs using the platform are strictly compensated by fees on plan assets, and not the 12b-1 fees and other revenue-sharing agreements fiduciaries are allowed to accept, so long as those fees are disclosed to sponsors and participants.

As proposed, the DOL rule does not outlaw revenue sharing, but Schweiss says the finalized rule is likely to make the practices more difficult to execute going forward, echoing other stakeholders’ expectation of the rule’s consequences.

“We’ve felt for some time there is room for revenue sharing to go down, and eventually go away,” said Schweiss. “The rule will be a healthy nudge in that direction.”

Schweiss cautions that it’s not just the brokerage model of retirement advice that will be transformed by the final rule.

RIAs too will be impacted, he said.

“A lot of RIAs don’t think the rule will apply to them because they are already fiduciaries,” said Schweiss. “But many have been operating as fiduciaries on the ’40 act (Investment Advisors Act of 1940), and not ERISA.”

ERISA fiduciaries to retirement plans operate under strict self-dealing prohibited transactions, which require advisors to act in plan participants’ best interest.

In expanding that standard to anyone advising on a retirement plan or IRA, be them existing RIAs or brokers, the DOL rule is expected to dramatically impact the $7.4 trillion IRA rollover market.

Just how much is impossible to know, said Schweiss. In the DOL’s proposal, any advisor recommending a rollover of 401(k) assets to an IRA will be subject to ERISA’s fiduciary standard going forward.

Language in the final rule is expected to clarify how much in fees advisors can charge on assets rolled into IRAs.

The rule could create simple language that prohibits advisors from charging any more in fees on IRAs than participants paid in 401(k) plans — what Schweiss calls the “apples to apples” comparison.

Such language requiring level fee assessments on rolled-over assets would address what regulators believe is the often-conflicted advice in the IRA market. But a rule that simple could create complications, noted Schweiss, as many participants in 401(k) plans have access to institutional shares of mutual funds that won’t be available in IRAs.

Another potential outcome of the final rule is that more participants will leave assets in 401(k) plans at retirement.

That could be a boon for RIA 401(k) specialists. “Some advisors will find a way to get paid on the assets that stay in plan, but they are relatively few. In that scenario, the RIA plan specialist will be in the drivers seat.”

That incentive — for RIA plan specialists to advise participants to leave assets in plan — has the potential to create its own conflict, as fee-based RIAs are paid on a percentage of plan assets.

RIAs could avoid that potential by taking a strict, educational approach on the question of rollovers, which is to say communicating clearly all of the options and consequences of leaving assets in plan or rolling them over, and leaving the ultimate decision to participants.

Schweiss and other stakeholders are holding out hope that the final rule will clearly differentiate education from advice, as in many cases, rolling assets over will be in participants’ best interest, he said.

Some 401(k) plans are not designed to handle participants’ specific decumulation needs. Also, questions remain about the functionality of leaving assets in plan and then annuitizing a portion of savings, noted Schweiss.

In the long run, the DOL rule, coupled with the emergence of digital advice platforms, will put downward pressure on the fees RIAs charge, said Schweiss.

And it will also insist higher levels of service on RIA advisors that do recommend rolling assets into an IRAs, as holistic financial advice including trust and tax expertise will be expected to rationalize more rollovers going forward.

“Many RIAs already do that and are well positioned to deliver holistic advice, but many are not,” said Schweiss.

See also:

Advisory firms face headwinds from DOL fiduciary rule

5 things to know about the DOL fiduciary rule

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