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Ideas From ‘Beyond Fiduciary’ Hint At The Future Of 401k

August 14, 2023

Please read my contribution to an article published in Fiduciary News


Ideas From ‘Beyond Fiduciary’ Hint At The Future Of 401k

by Christopher Carosa, August 08, 2023

The financial research consulting firm of Cerulli Associates suggests advisers need to go “Beyond Fiduciary” by focusing on Separately Managed Accounts (SMAs). The article’s ensuing discussion left many wondering, “Is there something else that really represents the next phase of fiduciary service?”

Indeed, there is no shortage of ideas. Some of them represent a small step, a mere extension from where we are today.

“Personalized Target Date Accounts (PTDAs) are the wave of the future for QDIAs,” says Ron Surz. “They combine SMAs with TDFs because investing is personal and the combination of the 2 approaches is superior to either one separately—the sum of the parts is superior to the parts alone. Several non-oligarchs provide PTDAs but they are all different. One approach will eventually stand out and gain acceptance. It will take a market crash to popularize PTDAs because until then there is no risk in TDFs.”

There’s more to “fiduciary” than investments. There are other avenues service providers can enhance the best interests of the people they serve. For example, Andy Larson, Director of Retirement Education at Retirement Learning Center in Brainerd, Minnesota, says, “Governance support. We see many plans, even large market plans, with good individual fiduciary practices but weak overall governance. The advantage? Control liability and take tasks off the plates of busy committee members.”

The actual interest, however, is what lies further than the current horizon that defines “fiduciary.” This is where the brains start storming. It can be a challenge, but it’s a challenge worth taking. And “worth” is the operative word here.

“Financial Professionals need to put their money where their mouth is,” says Richard Bavetz, investment advisor at Carington Financial in Westlake Village California. “Not every investor that walks through the door will become a client. I believe a Fiduciary is obligated to demonstrate their commitment to creating a relationship with that individual or couple without any expectation of ever earning a fee. Nothing demonstrates the concept of setting aside one’s interests in favor of another’s better than the open-handed approach of giving freely upfront so that a prospective client can experience the philosophy, approach, and work ethic of that prospective advisor’s practice without receiving a bill.”

The easiest way to achieve this is by simply doing what comes naturally. For many investment advisers, this means shifting from focusing exclusively on the needs of the plan sponsor and paying attention to the needs of plan participants.

“The DOL draws a distinction between investment education and investment advice, and perhaps financial advisors can play a role in this regard,” says Marcia Wagner of The Wagner Law Group in Boston, Massachusetts. “A plan sponsor may already be providing some financial education, but the financial advisor, because of its experience with different age groups, might be able to tweak the advice so that it is more responsive to different sectors of the workforce.”

Of course, the urge to “go beyond” isn’t always paved with altruistic intent.

“They will come up with more gimmicks that will confuse and confound the investing public,” says Lawrence (Larry) Starr, Vice President at Cornerstone Retirement, Inc./Qualified Plan Consultants in West Springfield, Massachusetts. “As it is, the poor investor has no idea what being a fiduciary is; they just are getting ‘trained’ to know that they are SUPPOSED to want a fiduciary, for some reason. I don’t know what new wrinkle they will start to promote for the next ‘competitive advantage’ (other than the discussion about SMA).”

Done right, and with honest engagement, fiduciary advisers can help plan participants to understand the different stages of their journey to retirement.

“Fiduciary advice is important for investors in the accumulation of asset phase, and for managing investments,” says Michelle Capezza, Of Counsel at Mintz in New York City. “Beyond this fiduciary advice, many investors seek additional services that can assist them with overall financial planning that will carry them through retirement, estate planning and long-term care planning.”

This doesn’t inevitably require personalized face-to-face advice. It’s often accomplished by sharing templates, checklists, and other tools. These can help plan participants to learn to ask the right questions. One way to think of this is showing plan participants what is in their best interest to measure about themselves. Sometimes this will have nothing to do with what others are measuring about them.

“One thing financial professionals can do that is ‘beyond’ fiduciary is to help plan participants properly prioritize their financial goals,” says Mark S. Nicholas, founder of Transform Retirement in Green Bay, Wisconsin. “Too often, the focus on improving participation rates, contribution rates, and similar plan metrics can create structures that hurt the most vulnerable populations. Helping families figure out where they get the biggest bang for their next buck will go a long way towards improving household net worth, not just retirement balances.”

For the most part, the antiseptic compliance regime spelled out by the DOL and ERISA has to date defined fiduciary services. Perhaps, if we’re going to consider what is “beyond” that sterile definition, we might want to go back to the future. In a sense, rediscovering where “fiduciary” initially came from might suggest where it is headed.

Yes, you might use modern terms like “financial literacy,” but the objectives do not differ from where they were a century ago when trust officers acted as financial guidance counselors to their less sophisticated charges.

“The idea of providing Financial Literacy Counseling in the community is something that’s important and sorely needed,” says Bavetz. “Earning a living is an advisor’s primary interest, so setting that aside and working for free under certain circumstances is not a radical idea but part of the obligation. In general, the average person knows they’ve been kept in the dark with respect to money and finance and they are both hungry for information and are very coachable and willing to learn. Therefore, if I am committed to setting aside my interests in favor of the client, then I should be willing to provide the community with access to a certain level of literacy around finance without any expectation that I will ever earn a fee.”

Therein lies the trick of the trade. How do professionals accomplish this without starving their families?

Christopher Carosa is an award-winning online news producer and journalist. A dynamic speaker, he’s the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, Mid-Atlantic, and Midwestern regions of the United States and in the Toronto region of Canada.