Rich and Co.

Are the Worlds of Pension Plans and Brokerage Compatible – Probably Not

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Two worlds that are being forced together in the new 401(k) retirement markets.  Conflicts are inevitable.   But can the two worlds coexist?  Probably not.

Good boundaries make good business and in the world of pension the boundary between retail brokerage and institutional pension plan business practices and cultures is best strengthened not merged.

Take Aways:

  • Being an individual/retail oriented advisors/insurance agent/broker/banker is a whole different world from the pension plan world
  • The two worlds don’t mix really mix.  Slapping a “fiduciary” label on everything won’t fix this.
  • Individual-oriented advisors are better off sticking with serving individuals and the vast amount of assets rolling out of plans than pension plans themselves

Now individual/retail-advisors and the firms that want them selling their products to retirement plans are going to howl — but there is, effectively, no money and untold headaches and risk for the retail advisors in the pension plan market.

Retail?  Retirement?  Individual?  Institutional? — Can’t Have It Both Ways
The business cultures and practices of the commissioned-driven and brokerage part of the financial services industry are probably never going to really fit the world of pensions and managing people’s life savings.

We aren’t making a moral judgment but just acknowledging that they are very different worlds and sets of behaviors.  One isn’t better than the others – they’re just different.

This will not be a problem for the brokerage industry since it controls vastly more assets than ERISA governed advisors and will only grow from here.  And, in fact, ERISA business is getting more complicated and less profitable – no loss.

Retail Brokerage and Insurance Regulations are Forgiving – ERISA Is Not
Here’s a good story to illustrate.  Recently we discovered that the two principals of BrightScope, the 401(k) retirement plan website had been fined for selling a variable annuity to a 529 plan that was accused of being “…unsuitable, irresponsible, not reasonably needed and lacking a strategy for risk management.”

We reported this recently online and to the industry press.  The response?  No big deal and it wasn’t felt to be newsworthy!
We report some of this experience in more detail here.

This struck us as a great example of how different expectations and behaviors are judged to be appropriate in a retail vs and institutional culture and business.  In the retail advisor world, what the Ryan’s did was a “ding” on their record.  A youthful indiscretion.  However, in the retirement world this is a serious and permanent indicator of future risk.  If a professional were to engage the Ryans or BrightScope they may be held in legal jeopardy, knowing this history.

How can we have such different perspectives around the same event.  The explanation is because the world or retail and retirement are very different.

Apples and Footballs
Now let’s assume that everyone’s response is rational – from where they “work and live.”  Honestly, we assume everyone and both sides are” right.”

In the brokerage business a “minor” fine can be explained a youthful transgression and isn’t noteworthy.

However, in the pension business any proven case of self-dealing can end a career.  There is no appeal or remediation of this kind of transgression.  When we are talking about safe-keeping people’s lifesavings there is a zero-tolerance policy – and the DOL and IRS to enforce it.

This case also highlights of the fundamental contradictions and challenges of defined contribution plans and thus the current retirement investment industry and market – the insti-individual disintermediation of people’s retirement assets and life savings.

It is a very tough paradox that people’s life savings no lie in the “no man’s land” of both institutional and retail investing.

Now there are good things and bad things about this hybrid.

  • Brokerage and retail practices brings flexibility, responsiveness, personal service and much-needed new and creative approaches.  Since, effectively, all retirement assets end up in retail brokerage accounts, via roll-overs, this is the future of people’s life savings.
  • The retirement and institutional markets and business practices have been forged over long decades of trial and error in accumulating and protecting people’s life savings.  ERISA evolved for a reason.  It may be imperfect but it is the best we have – so far.  The same with fiduciary standards of conduct.

So while retirees and retirement investors need, and will all get eventually,  brokerage services without the stodgy propriety, cautiousness and rules-based practices of ERISA and fiduciary practices the assets would not exist nor protected.

Retirement Plans are a Low Return Market: The Brokerage World Has Bigger “Fish” To Land
Being students of human nature and organizations, we don’t see how these two world’s can coexist.  They haven’t too well so far.  The whole fiduciary movement is really bogged down in seemingly insoluble complexities and differing interests.

In fact,

  • The number of brokers knowledgeable about 401(k) plans and serving them is very small and likely to get smaller
  • Brokerage firms, not seeing either growth or profitability, are also cutting support staff for 401(k) related support for brokers.  All understandable

Now nobody wants to be honest about the minimal returns available for them in the retirement plan market because the product manufacturers want every broker in American out selling their product.  Problem is — it just ain’t so.   The fact is that the reitrement plan business is:

  • Shrinking in terms of new plan formation and plans closing
  • Getting far less profitable as fees shrink.  Only the fund companies really make money on retirement plans — not advisors
  • Legal risk and regulatory demands are accelerating in complexity and exposure

There is  a Great “Retirement” Market for Advisors — Roll-Overs
It seems best if brokers immediately focus on the roll-over business that is coming. 
It will be a tidal wave.  Those are clearly retail brokerage accounts and thus fit the brokerage world.  Retirement plans really do not.

Now a (very) few brokers believe that getting plan business is key to roll-overs but there is no evidence supporting that hope.  In fact, it seems pretty clear that acting as a plan “fiduciary” precludes a broker from taking roll-over business.  That will benefit no one.

Like fences – god business boundaries make good neighbors.


Written by Rich and Co.

May 19, 2011 at 7:30 pm

Posted in Uncategorized

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