In financial services, perhaps the most powerful trend of modern times has been the growth of objective financial advice. Among evidence supporting that claim is a research study published by LIMRA International earlier this year, based on a survey of 708 affluent households. Entitled Financial Advisors and Institutions Serving the Affluent, the survey asked these households to identify their "Primary Financial Advisors." Of the 45% of households that identified a professional (instead of family, friends or self), the leading providers were as follows:

  • Certified Financial Planners (CFPs) were named by 43% (of the 45%).
  • Stockbrokers were named by 30%.
  • CPAs were named by 16%.
  • The remaining 11% divided among personal bankers, insurance agents, trust officers and lawyers.

Some perspective is useful. Stockbrokers and CPAs have been around a long time, and both professions have spent vast amounts of money to convince consumers why they should be chosen as advisors. CFPs have only existed for 28 years-and for most of that time they worked in the proverbial "cottage industry." Yet, almost as many affluent households now call CFPs their primary advisors as mention stockbrokers and CPAs combined.

Since 1982, the life insurance industry has worked to create its own version of the CFP designation, the Chartered Financial Consultant (ChFC). But even with 40,000 professionals holding the ChFC designation, affluent households rarely mention any insurance professionals (much less ChFCs) when identifying primary advisors.

Two Faces of Objective Advice

I think there are two important reasons why the CFP designation has grown from obscurity into the 800-pound gorilla of financial advice. The first reason was a decision made two decades ago that this designation's education program would not be owned or controlled by any institution or industry. Today, CFP education is taught by more than 200 accredited institutions in the U.S. and Canada, all of which are independent of industry influence. This is in contrast to the ChFC, which is still controlled by the American College and affiliated with the life insurance industry.

Recommended For You

The second reason is that the financial press has always believed that the CFP stood for objective financial advice-at least in comparison to industry-specific alternatives. Time after time, the press has told consumers that if they want unbiased advice, they should look for a CFP-and consumers have listened.

A New Advice Opportunity

The financial advice industry is still in its infancy, and now a huge new frontier is about to open. This opportunity comprises an estimated 70 million U.S. investors holding participant-directed retirement plan accounts in 401(k)s, 403(b)s, 457(b)s and SIMPLEs. Soon, many of these people may have the freedom to choose personal advice-providers just as they choose plan investments, from a menu of approved choices. Also, plan participants may soon be able pay for advice the same way they make "deferrals," in lieu of taxable compensation, using pre-tax dollars. That proposal has now passed the U.S. House of Representatives twice, in April of 2002, as part of the Pension Security Act of 2002 (H.R. 3762) and in May of 2003, as part of the Pension Security Act of 2003 (H.R. 1000). The U.S. Senate has not taken action on either proposal.

Underlying the proposal is a debate that may shape the future of financial advice in the United States, while also determining how billions of dollars in fees paid by plan participants are divided. If you understand the issues in this debate, you will be in position to get your share of a potentially huge market. Those issues involve who will be able to offer fee-based advice to plan participants and what standards they must meet. In a nutshell, the issues boil down to one word-objectivity. The battle lines in this debate are now being drawn between mutual fund companies and financial planners on the one hand, and between Republicans and Democrats on the other.

First, I'll give you the background you need to understand the issues. Then, I'll offer recommendations on how to position yourself as an advice-provider to plan participants, regardless how the debate goes.

Background

Under ERISA's prohibited transaction rule (Section 406), a "Chinese Wall" exists between retirement plan investment advice and investment management services. For example, a company that provides the investment choices for a 401(k) can't be the provider of fee-based investment advice to the same plan. Likewise, a registered representative who distributes investments to a plan can't offer its participants fee-based plan advice. This rule is designed to ensure that objective advice is delivered solely for the benefit of participants by an ERISA fiduciary, and that the advice does not influence participants to purchase specific investments in which the advisor has an interest.

Responding to an application on behalf of SunAmerica Retirement Markets in 2001, the Department of Labor offered a narrow interpretation of how an investment management firm may offer advice to plan participants. But this case (Department of Labor Advisory Opinion 2001-09A) was so narrowly focused that it only frustrated investment providers. You can read it here:

The mutual fund industry, which controls about half of 401(k) plan assets, has lobbied for legislation that would clarify and broaden this interpretation. In short, the industry believes that: 1) Too few plan participants are receiving the advice they need; 2) The fund groups that serve plans, and advisors who distribute shares to them, are often in the best position to provide this advice; and 3) There are enough existing safeguards to protect plan participants from skewed advice, including those built into ERISA fiduciary responsibilities.

Through its trade association, the Investment Company Institute, the mutual fund industry made this case to Congress in testimony submitted to a House subcommittee relating to the Pension Security Act of 2003. You can access that transcript here:

Well before that, the financial planning profession weighed in on this issue through its primary trade group, the Financial Planning Association (FPA). In 2001, the FPA submitted to Congress a statement relating to the Retirement Security Advice Act of 2001 (H.R. 2269), another proposal that passed the House but not the Senate. The FPA's Director of Government Relations, Duane Thompson, argued that any legislation governing investment advice for plan participants should not be weaker than the law covering advice to the general public, the Investment Advisers Act. You can read the FPA's statement here:

In essence, the FPA believes that Registered Investment Advisors (RIAs) are the professionals best equipped to provide advice to plan participants, because they already are subject to strong regulation and disclosure requirements. While the mutual fund industry has emphasized that plan advice-providers should be objective and act solely in the interest of participants, it has not lobbied to award the advice franchise exclusively to RIAs. Many registered reps who distribute fund shares to plans are not registered as RIAs, and some don't want the regulatory burdens. Also, mutual funds want to form advice-based alliances with non-RIA channels, including broker-dealers, banks and insurance companies.

Earlier this year, the debate took on a partisan flavor as Democrats rallied to protest several provisions of the Pension Security Act of 2003, including those involving advice. (The bill that passed the House in May is known as the "Bush/Boehner Bill," because it was backed by the President and John Boehner, R-OH and Chairman of the House Education and the Workforce Committee.)

According to a background paper prepared by Democrats on the same committee: "It is amazing that after Enron employees lost over $1 billion dollars of their nest eggs through a quagmire of conflicts of interest and self-dealing by company officials, that the Bush Administration has proposed legislation to open a dangerous loophole in our pension laws that allows self-interested investment firms to be the principal financial advisors to employees." You can download the backgrounder at:

In summary, the issue is not whether Americans should be able to "check a box" that selects their plan advice-provider, and then pay the advisor's fee with pre-tax dollars. That idea is "apple-pie popular" among both political parties and all segments of the financial services industry. The issue is whether companies that sell plan investments, specifically mutual funds, will be allowed to create a new profit center by enticing millions of participants to check their boxes. The mutual funds propose to then hire objective advisors and pay them a portion of their advisory fee flow. But would fund groups respect your objectivity, when their primary goal is to maintain and grow retirement plan assets and asset management fees? That's the real issue in this debate-and your opinion counts.

Recommendations

How can you position yourself to capture this opportunity, regardless how the debate goes? Here is my best thinking:

  • First, keep retirement plans in your market abreast of what is happening. Use FreeERISA to identify those plans. (See related article.) Use the links in this article to educate plan decision-makers about the proposals.
  • Second, offer investment advice to retirement plans and their fiduciaries, along with individual participants. Nothing in the current law prohibits you from offering plans in your market fee-based advice, provided that you: 1) are an RIA; 2) don't represent investment providers to the same plan; and 3) adhere to ERISA fiduciary requirements. By offering plan advice now, you will be in the best position to benefit from any new legislation that passes.
  • Third, keep your eye on the ball. The big reward in this market comes when plan participants leave work with large amounts of money to transfer or roll over. The fee-based advisor is in strong position to guide the transfer or rollover, and there is no conflict-of-interest in doing so, provided proper disclosures are made.
  • Fourth, talk to plans in your market about how they feel about objectivity in regard to plan advice. To heck with the Republicans or Democrats. What really matters is the standards of each plan and ultimately each participant. If a plan feels uncomfortable having its participants receive advice from the same company that delivers investments, it won't happen.
  • Finally, if the Bush/Boehner proposal passes, don't rush to become an advisor affiliated with an investment provider before giving it careful thought. What you are most likely to obtain by working through the provider isn't an exclusive advice franchise but rather one check-off box among several. In other words, you will have an opportunity to convince each participant that you are the best advice provider among those approved by the plan.

Learn from History

History tells you two important things:

  1. In retirement plans, participants demand choices. It happened with investment menus, and it will happen with advice providers. Some advisors may succeed as specialists advising niche groups of participants-e.g., socially-conscious investors-across many plans.
  2. The high ground ultimately wins. Look how far the CFP designation has come in a short time, because it is widely perceived to be more objective than alternative sources of advice. It may benefit mutual fund groups to add you to their rosters as an advice-provider to their plans. But will it really help your reputation to distribute investments and deliver fee-based advice to the same plans?
NOT FOR REPRINT

© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.