Fulfilling the fiduciary duty for managed accounts
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by CHRIS KARAM, CIMA®
Chief Investment Officer
As Published in InvestmentNews – RPA Convergence
(See publication here: https://www.rpaconvergence.com/)
Are plan sponsors flying blindly into managed accounts? And are RPAs prepared to fulfill their fiduciary role of either managing or measuring managed account performance?
These may sound like loaded questions with a plethora of evocative answers and opinions, but they warrant examination, as the managed account train has left the station.
Let’s tackle the first question. Thus far, managed accounts have a participant-driven decision where the record-keeper-affiliated investment advisory firm offers primarily a digital asset management service for an annualized fee, traditionally 0.25% to 0.50%. The output is a personalized portfolio based on a multitude of time, risk, asset, liability and income-needs assessments.
These “algorithms” arguably ideally place each engaged participant into an appropriate path towards retirement security.
Sounds good, right? It can be a favorable, cost-effective compromise for a participant seeking personalization beyond that of a target-date solution, while not having to pay an investment adviser a larger fee, with little opportunity for connectivity into the record-keeping system.
You then mix in a recurring revenue sweetener for record keepers, and, voila, plan sponsors have lower fees. Those fees could run even lower should the managed accounts be selected as the qualified default investment option.
Everybody wins in this scenario. Participants access professional portfolio management, to which they may not have access otherwise. Plan sponsors control fees. And record keepers improve profitability to reinvest in a better client experience.
So, what’s the catch? Plan sponsors now have a complicated array of participant results to measure and monitor. Even if an asset manager assumes ERISA section 3(38) participant advice duties, plan sponsors must select and monitor investment advice providers. Are RPAs truly ready to help plan sponsors fulfill their duty to monitor?
On the surface, RPAs are the logical helping hand for plan sponsors selecting and monitoring 3(38) fiduciary investment managers that offer participant advice. However, unlike with target-date funds, a database of managed account results may not be accessible or available for an RPA to perform a traditional comparison to a peer group.
Loading hundreds or thousands of customized portfolio outcomes into a scoring system may not be realistic either. Comparing the methodologies and asset classes utilized in one managed account program, relative to others, is yet another measurement consideration. This would be similar to running a target-date comparison report and evaluating the asset classes inside the various glide paths.
The element we have not yet explored in this piece is when the RPA is the advice provider and implementing a version of adviser managed accounts as a default. In that scenario, should the plan sponsor hire a third party to help evaluate the merits of the RPA being an advice provider?
Technology is aiding asset managers, plan sponsors and participants in their collective pursuit of a more personalized approach to portfolio management. The outlook is exciting, and the early returns from managed account programs are beginning to roll in. RPAs should be prepared to help plan sponsors fulfill their fiduciary duty to select and monitor investment advice providers.
Important Disclosures:
The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and it advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.