As explained by Bing Waldert, director at Cerulli, even before the Department of Labor (DOL) proposed reforms to the fiduciary advice standard under the Employee Retirement Income Security Act (ERISA), broker/dealers (B/Ds) with large adviser forces were already adapting their businesses away from commissions and proprietary products.
Producing advisers today have already moved significantly towards fee-based, fiduciary business models, Waldert says. “The industry may continue to see low-end consolidation of advisers and B/Ds not equipped to deal with sweeping regulatory changes,” he predicts, “but firms of scale will continue their business with relatively little disruption.”
The findings are from the latest issue of The Cerulli Edge – Retirement Edition, which argues many DC plans are not designed to accommodate partial withdrawals from separated or retired participants. “Therefore, at retirement, it may be in an investor’s best interest to roll over their accumulated retirement balances to maintain maximum flexibility in retirement income planning,” Waldert explains. “The current inflexibility regarding withdrawals in some DC plans for retired participants is one more reason Cerulli is optimistic about future rollover activity.”
Jessica Sclafani, associate director at Cerulli adds that until retirement income options become more readily available inside DC plans, IRAs “will continue to be the primary consolidation vehicle for retirees, regardless of an evolving regulatory environment.” The Cerulli research shows that just 21% of large 401(k) plan sponsors report having adopted an in-plan retirement income product. While interest and willingness to discuss in-plan retirement income products are growing, obstacles remain to more widespread adoption.
NEXT: An increase in fiduciary advisers
Cerulli says questions of which entities act as fiduciaries and which activities fall under the fiduciary umbrella “have consumed the retirement industry since the Department of Labor issued its proposed Conflict of Interest Rule in April 2015.” If adopted in a version close to its present form, Cerulli predicts the rule “would broaden the fiduciary definition to cover individual retirement account assets and could hasten consolidation among broker/dealers.”
One likely result of a strengthened fiduciary standard, Cerulli says, is increased engagement of ERISA 3(21), 3(38), and 3(16) fiduciary providers. Formalizing the fiduciary duty of an adviser will not eliminate litigation exposure for plan sponsors or advisers, Cerulli says, but these services can reduce potential liability associated with a retirement plan by bringing the appropriate expertise and resources to bear—and by encouraging a teamwork approach and strong communication.
Cerulli finds almost half (45%) of retirement specialist advisers strive to forgo any fiduciary capacity.
“This will change under the proposed rule, which will turn many advisers into fiduciaries overnight,” Cerulli warns. “The fiduciary proposal includes the Best Interest Contract Exemption, a contract that the investment advice provider must present to a potential client if there is potential for conflicted advice. Industry players have expressed concern about the operational requirements to comply with the BICE, especially as it relates to disclosing compensation.”
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