At a recent TPSU training program, a plan without an advisor asked the panel how to find one. The provider who answered fumbled, and no one had a good answer, perhaps not wanting to offend the advisor. But more interesting was the question by another plan sponsor about whether she can trust her advisor.
Specifically, she asked how she could know if the advisor was not tied to or beholden to a record keeper, provider or asset manager in some way. I tried to answer, but there are no easy answers. Simply saying they are a fiduciary, as popular advisor ads would have us believe, is not enough. Fiduciaries are rules-based, which can easily be manipulated.
The real question that plan sponsor was asking was, “Who can I trust?”
The people administering smaller and mid-size organizations’ retirement plans, and even some larger ones, are often thrown into their position with little or no training, which is why the reliance on independent advisors and consultants has grown. Record keepers and asset managers do not hold themselves out to be fiduciaries and cannot reliably conduct due diligence or RFPs on themselves, a role the RPA plays.
But advisors and consultants come in many flavors, with few if any completely conflict-free. Beyond selling proprietary products or being paid extra for offering some services, the home office of many firms receives sizable stipends from third-party products and services, sometimes in the form of conference sponsorships, something the SEC investigated in the 2000s. These products and services end up on preferred lists, and in some cases, advisors cannot sell any other products or services in that category.
While the use of revenue sharing is waning, it is still prevalent and certainly does not engender trust.
Even more prevalent is the move to cross-sell financial services to participants as advisors, like record keepers, seek additional revenue as plan fees decline, which, while not inherently conflicted, require additional oversight. Eliminating all potential conflicts of interest may be a pipe dream, but just saying an advisor is a fiduciary does not resolve the issue.
Trust is built through transparency, consistent effort, honesty, reliability, not preaching and a willingness to sacrifice and appear vulnerable. Real knowledge cannot be replaced by the growing number of cookie-cutter certifications, which require no experience and little to no learning.
Trust takes years to build and minutes to lose. Being inconsistent, not doing what you promise or being hypocritical, talking badly of others while building yourself up without proof points are trust destroyers.
The growing number of wealth advisors moving into the 401(k) market, as more clients are asking for help due to the explosion of plan formation, may be better positioned than experienced RPAs. They have earned the trust of clients over many years, even though they do not have technical expertise, which can be outsourced with their oversight.
And though independent RPAs may not have scale or the same resources as larger advisory firms, there is a case for that they have less conflicts outlined recently by RPA Nate Moody.
As a growing number of plans are seeking assistance from independent third parties to help review and find a new advisor, some industry experts are warning about pushbacks from RPAs who would rather have prospects just hire them directly without a process and benchmark themselves without an RFP.
But the greatest way for RPAs to build and demonstrate trust with clients and prospects is to recommend they use an independent and credible third party to conduct advisor due diligence. Though many advisors may not like it, I have never heard a good argument why plans should not, other than perhaps smaller plans that do not need a full RFP process and can make do with an RFI or just a recommendation to a few advisors.
How to build trust? Do trustworthy things and be transparent about conflicts.
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