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Financial Advisor conflict ?


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I'm paraphrasing here so no jokes if this is to simple or stupid of a question:

Financial advisor has an RIA agreement with the trustees and plan sponsor as the 401k plan advisor. He is now being told that due to this relationship, that he cannot use that foothold with the plan to approach the participants with an investment relationship outside the plan.

Agree/Disagree?

Thanks

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I'm paraphrasing here so no jokes if this is to simple or stupid of a question:

Financial advisor has an RIA agreement with the trustees and plan sponsor as the 401k plan advisor. He is now being told that due to this relationship, that he cannot use that foothold with the plan to approach the participants with an investment relationship outside the plan.

Agree/Disagree?

Thanks

What does the RIA's agreeement with the plan say about limitiing his advice to the fiduciaries?

I can see that the fiduciaries would be concerned that his relationship to the plan would give him an unfair advantage in soliciting participants and could create a potential conflict with the advice he gives to the plan.

mjb

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  • 3 months later...
I'm paraphrasing here so no jokes if this is to simple or stupid of a question:

Financial advisor has an RIA agreement with the trustees and plan sponsor as the 401k plan advisor. He is now being told that due to this relationship, that he cannot use that foothold with the plan to approach the participants with an investment relationship outside the plan.

Agree/Disagree?

Thanks

We've heard that this is a conflict. If you provide fiduciary-level consultation to the sponsor, you cross the wall when you start working with the employees where the introduction came from your services with the sponsor...as that wouldn't be arms-length from a technical perspective. I know you said "outside the plan", but you may be aware of the risk to the plan if this situation is actually happening presently and then rolls over funds from the plan to an IRA and the IRA's expenses are higher. I know this isn't your question, but it is a risk management issue threatening the plan and the sponsor if this were to happen.

So if this situation has inherent problems in it, why shouldn't the advice be to just avoid this in the first place? We've seen where current situations like this where the financial advisor wants the rollovers, resigns their fiduciary status to another fiduciary plan consultant, has an independent participant fiduciary advisor to help participants, and the financial advisor can then serve as the product resource to help participants as in that capacity they truly are a B/D representative who's specialty is implementing products to advice.

Thoughts?

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  • 6 months later...

Brining this thread up in lieu of a new one. We are working our way through the maze of plan level and participant level fiduciary advisors working for the same employer and providing services to qualified plan sponsrs, and the potential conflicts of interest.

PPA said that there was a statutory exemption if a 3(21) advisor engaged in level fees or the use of a certified computer model. DOL issued new regulations, then pulled them in the transition from Bush to Obama administrations. New regs issued, with similar language etc but also references back to the original 1996 interpretative bulletin on what constituted "participant education." Sorry for being long winded.

We may have a situation where we use a computer model designed by XYZ where XYZ certifies that it is a fiduciary, and XYZ provides a website for participants to go look at the options, plug in their personal information and generate a report with recommended investment strategies. If we have an employee of the plan level investment advisor actually meet with the participants to help them enter data etc and review the report, is this employee within the exemption of the new rules, or is he "educating" the participants? He is NOT adding to the recommended strategies presented in the XYZ report.

PPA's creation of 408(g)(10) gives a "pass" to the plan sponsors who have a participant level advisor within the statutory exemption with regard to not being required to monitor the investment advice. So the sponsor does not have to monitor the XYZ reports. And if the investment advisor's employee is not giving investment advice, is there any sort of issue what we are not seeing??? Thanks, and apologies in advance for lack of clarity.....

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I meant "bringing" not "brining" (which is good for turkeys..). I don't think I was clear. The participant level advisor is still advising within the options in the plan for the participant to invest within the plan, not on the outside, not trying to create outside brokerage accounts etc. Does that change your thinking? I know I responded to a thread that was started on the topic of inside/outside advice, but this seemed to be heading in the directiion of my questions. Maybe I should repost as a new topic. But thanks!

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While I understand that the relationship is due to the plan, I am at a loss as to what advantage there is to the participant to be required to use a separate advisor if they are already comfortable with someone they met through a plan. What am I missing?

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I don't think you missed anything, I think I am a muddle of a mess.

Plan sponsor hires Investment Management RIA firm. It helps select the funds. The RIA investment manager does not meet with participants.

RIA has Employee A, who is licensed to give financial advice etc. He goes to Plan sponsor's site and helps participants invest their plan accounts in plan funds.

Not sure how the money is flowing, if the RIA is paid basis points or whatever, if the Employee A is getting any level fee or basis point. To avoid a prohibited transaction, the RIA wants to use a computer model product developed by XYZ that runs investment models and meets all the new conditions in the regulations. Employee A would be putting in the participant's data (age, retirement age, assets, debt etc) and the computer model would generate the investment scenario for the participant.

Am I overthinking all this? We are trying to make sure that there is no prohibited transaction between the RIA and Employee A, and between either of them and the Plan sponsor.

Does that help?

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What value is being added by having the plan level advisor plug in information that can be completed by the participant and why should he be compensated? How is the advisor helping participants invest their plan accounts if the investment advice is computer generated? Is he going to tell them what funds have the lowest fees?

mjb

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All good questions. The computer models the investment options and strategies based on all the variables the participant wants to consider. The advisor would be pointing out what happens if variables are changed (antcipated retirement age, level of income replacement, increased contributions etc), and explaining the different fund options, including rates of return and fees. The workforce is not necessarily computer savvy. Or has access to the internet. The advisor's fees, as I understand it, are wrapped into the plan level advisor fees...in the future the participant could be charged a flat annual fee for access to the individual advisor. Still in the development and planning phase, hence all the questions. Thanks.

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