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Guest Commentary

Welcoming the Fox Into the Henhouse

By Jeb Graham CEBS, CIMA® of CapTrust Financial Advisors, an independent consulting/advisory practice focused on the institutional retirement plan market, serving corporate, closely held, non-profit and governmental organizations. You may contact Jeb at 813.218.5008 or jeb.graham@captrustadv.com.

Someone once told me, "There are two things you don't want to watch being made. One is sausage, and the other is tax legislation." Perhaps the same person, while closing their eyes, said, "If you didn't see it, then it didn't happen." These two axioms can be applied to the investment advice segment of proposed pension legislation currently being debated on Capitol Hill.

Since 1997, Rep. John Boehner has championed a bill that would remove current ERISA provisions that prohibit conflicted advice and would allow mutual fund companies, banks and brokerage firms to provide advice on their own investments. Each time the bill passed the House, the Senate rebuffed it. Once again, conflicted advice is being discussed, this time as part of a broad pension bill that contains numerous very positive provisions.

Fiduciary Conflict of Interest

One might wonder after Enron, WorldCom and other such corporate malfeasance brought about Sarbanes-Oxley, and mutual fund scandals resulted in increased SEC governance, how any legislator could vote in favor of conflicted advice to retirement plans. Very simply, the mutual fund and brokerage industries are heavily lobbying legislators to close their eyes while the sausage is being made.

If you can get past the obvious conflict of interest of a mutual fund or brokerage firm getting paid to give advice on proprietary funds that also drive revenue for investment management and or execution of transactions, the proponents of conflicted advice have a reasonable argument. Both the plan fiduciaries and the participants need advice.

How badly can participants be harmed by conflicted advice? That depends on your perspective. A former high ranking government official was recently quoted as saying, "Conflicted advice is better than none at all." Perhaps proponents of conflicted advice really don't think participants would be better off, rather that they would not be harmed to the extent that opponents of the bill claim they would be. And maybe the fox is a vegetarian, too.

For many years, the prohibited transaction rules under ERISA have protected participants against self dealing conflicts of interest. Getting paid to provide advice is a fiduciary act. Investment firms with conflicts of interest can't become fiduciaries. Only independent advisory firms can accept a fiduciary role for providing investment advice.

Independent Advisors in the Marketplace

Proponents of conflicted advice argue that there are no independent advisors to speak of. That is simply not true. There is no shortage of independent advisors, but being independent means not employed by an organization that can spend big dollars to lobby legislators in favor of conflicted advice. In fact, advisory firms that specialize exclusively in providing institutional advice to retirement plan sponsors are, by the nature of that singular focus, all independent firms and small in comparison to the mutual fund and brokerage industry giants. If there is a reason independent advice is not more prevalent in the marketplace, it is competition from large firms that don't actually provide advice, but lead many clients to think advice is being provided. If independent advice were mandated by legislation, there would be no shortage of supply.

Two Levels of Advice

A point worth noting is that this proposed legislation makes no distinction between plan level advice and participant level advice, yet there is a significant difference between the two. The legislative intent of the Boehner bill has always been focused on participant advice, but the mutual fund and brokerage firms want to treat all advice the same.

Contrary to what one might think, conflicted advice at the plan level is potentially much more harmful than at the participant level. The plan level is where investment committees and plan fiduciaries must establish investment policy and select a fund menu. There is simply not any logical argument for allowing conflicted advice to plan fiduciaries. On the other hand, if an investment committee received advice from an independent party in selecting the fund menu, we believe the potential harm of conflicted advice at the participant level is greatly minimized.


Be it advice on retirement plans, your health or home repair, conflict of interest is not a positive, rather it is a degree of negative. A quick review of recent scandals in the financial world, along with a dose of common sense should be enough to make a compelling argument against the removal of prohibited transaction rules under ERISA that have protected participants from conflicts of interest for over thirty years.

This material is distributed solely for information purposes and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy. The views contained herein are the opinions of the author. It is not intended as legal or tax advice. CapTrust Advisors, LLC is a Registered Investment Advisor with the SEC. CapTrust is not a legal or tax advisor.

Other articles by Jeb Graham: Looking Under the Hood of Your 401k to Understand the Real Costs, Does Your Organization's Retirement Plan Measure Up? and The Importance of Legal Counsel Review.


401khelpcenter.com is not affiliated with the author of this article nor responsible for its content. The opinions expressed here are those of the author and do not necessarily reflect the positions of 401khelpcenter.com. This article is for informational and educational purposes only and doesn't constitute legal, tax or investment advise.

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