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Death of the Generalist Broker in Retirement Plans

By Thomas B. Bastin, JD, LLM, AIF, CEBS


Specialization is the future of the financial services industry. The day of the generalist broker is quickly coming to an end. Complex financial products and legislation have made it difficult if not impossible for one-stop shopping in which a single broker can meet all of a client's personal and professional needs. No where will you find this more evident than in the ERISA plans such as 401k and 403(b).

In the past a stockbroker or insurance agent would develop an individual relationship with a company executive assisting them with a personal financial portfolio. The broker would then inquire as to what that executive's company was doing with their qualified retirement plan. The executive would agree to allow the broker to make a pitch for the business. The broker would call Joe Recordkeeper, who took him to lunch the week before, and together they would show up with Joe selling the plan sponsor on why their product was best suited to meet participant needs. There would be no independent analysis of product, services or costs. The product decision by the broker would come down to whether the product was approved by his broker-dealer and which wholesaler with an approved product was there when he needed to sell the client. This was (and in most cases still is) your typical retirement plan sales process: A conflicted recordkeeper pushing their proprietary investments and a glorified appointment setting secretary masquerading as a knowledgeable advisor.

If a plan sponsor asked their broker how many qualified ERISA retirement plans they personally manage the answer would probably be shocking to them. In my non-scientific quiz of third party administrators the overwhelming majority of their plans come from brokers with three or less retirement plan sponsor customers. If you needed brain surgery what would your first question be? I can tell you what mine would be: "How many of these have you done before?" Given a choice I would never trust my future to a 30 year old surgeon anxious to gain experience practicing with my brain. Yet thousands upon thousands of companies across America trust complete amateurs with their employee's life savings by hiring brokers who couldn't tell you the difference between Section 404(c) and Section 3(38). If you really want to be shocked just ask your broker what the acronym ERISA stands for (as well as the year passed). By the way you may want to ask that question before plaintiff's counsel does when cross examining your expert broker on the witness stand!

The most amazing aspect of this industry is how long these generalist brokers have been able to hang onto business. I am continuously shocked when speaking with prospects that they can neither describe the services provided nor the fee received by their current broker. This has been true of all size plans including those with tens of millions in assets.

How Are They Hanging Onto Business?

There is a group of very talented and knowledgeable professionals that have aided and abetted these generalist brokers. They are called third party administrators or TPA's for short. These firms do have the requisite expertise to assist with all non-investment related matters. Many of them perform an excellent service for clients and bring value to the process. A lot will serve as the main contact for plan sponsors covering for the broker's lack of knowledge. Unfortunately most of them can attribute their growth to working with the very generalist brokers that now jeopardize their business.

The question will become how long can TPA's afford to stand behind the broker that brought them to the dance? How many good clients will they let walk out the door because the broker could not compete to retain the business? Expediting the TPA crisis is the fact they are being squeezed as well by recordkeepers that have bundled administrative services via technology. This has effectively commoditized TPA activities at much lower pricing. Eventually TPA's will have to recognize their old business model is dead and their best bet is to adapt to the new market realities by partnering with true retirement plan professionals. Instead of being brought business by the amateurs they will have to consider bringing business to the professionals.

Congress Brings Nails for the Coffin

Luckily Congress is acting to make it virtually impossible for a broker or vendor to get paid for performing little to no service. Congress has proposed Section 408(b)(2) regulations that will require plan sponsors to have written contracts with all vendors detailing the services provided. New Form 5500 disclosures will work to notify plan sponsors on an annual basis exactly what they are paying to vendors. In addition, the 2006 Pension Protection Act created the Qualified Fiduciary Advisor (QFA) provisions that brokers and advisors must comply with in order to offer participant advice without increasing the plan sponsors fiduciary liability. This legislation should assist in removing the majority of generalist brokers from the industry. Your typical stock broker and insurance agent can basically do nothing of value for ERISA plans. Most are prohibited by their E&O carriers from serving as named ERISA fiduciaries and thus can perform no fiduciary act. This means they can neither advise the plan nor the participants on what to do. No advice equals zero value. Reducing services to writing forces a plan sponsor to evaluate whether the fee is reasonable. There is nothing worse than having a written document that can be used against you in a court of law. Honestly, I'm not quite sure what a reasonable fee would be.

In my discussions with plan sponsors I am finding at best the generalist brokers will print out a conflicted investment analysis (from the recordkeeper that pimped proprietary funds), makes copies for the investment committee, read it to members of the committee like they were fifth graders and then cheer the committee on while they make all of the decisions. No written advice, no recommendations in writing and basically no independent due diligence to protect the plan sponsor. Just hand holding and cheerleading! I have heard the Miami Dolphin Cheerleaders get $50 per game and a free lunch but that is probably a poor analogy as the cheerleaders actually have to do three hours of work to get paid. Although I must admit that $50 per meeting does seem far more reasonable than 50 basis points of participant assets! The real question is not whether we are looking at the death of the generalist broker but rather how long before plan sponsors wake up to reality?

Thomas B. Bastin, J.D., LL.M., AIF®, CEBS® is the President & General Counsel of ERISA Fiduciary Advisors, Inc., an independent Registered Investment Advisory Firm. As both a former practicing ERISA attorney and owner of a third party administration firm, he brings a unique background, knowledge & set of experiences to his clients. Mr. Bastin can be reached via email (tom@efadvisor.com) or telephone (866.606.4015). This article is protected by copyright laws © 2009.


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