The Next Big Thing

However, Dalbar has been granted an exception that permits the advisor to make disclosures required by the PPA. This regulatory permission has been incorporated into the fiduciary advisor certification. Advisors with up-to-date certification are permitted to use their past performance as expressed by clients in promotion and advertising, subject to certain rules and disclosures.

Fiduciary advisor certification provides the documentation required for selection and for annual renewal to meet the standards of the Act. The certification permits the advisor to qualify for multiple employers at once instead of repeating the qualification process for each prospective employer client. Details of the certification process are available at http://advicealert.dalbar.com/.

Competitive Threats

The biggest challenge facing the fiduciary advisor is overcoming the easy decision for employers to simply offer a computer model from the current plan provider. There are four main reasons why the employer is better off with the un-conflicted personal advisor.

Fiduciary Relief: Computer models have notoriously low usage so that only very few employees will actually be served. Since the employer only has fiduciary relief for those employees that use the computer model, there is very little advantage.

Conflict of Interest: Compliance with the requirements that fiduciary advisors are prudently selected, reviewed and audited periodically are difficult if not impossible with computer models. These conflicts must be disclosed to all employees.

Unproven Technology: There is no proven way to establish that computer models will produce satisfactory retirement income. While these models have been back-tested, there is no record of actual long-term performance that can be compared.

Where to Turn: The employer is in a no-win situation if employees object when they are informed of the conflict of interest. These objecting employees must remain un-served or the employer will have to secure an un-conflicted advisor.

Taking Responsibility for the Advice That Is Given

For fiduciary advisors, responsibility is a personal guarantee that the advice is competent and in the best interest of the employee being advised. The fiduciary advisor is required to meet standards of:

o Prudence, which requires the fiduciary to act with the care, skill, prudence and diligence that a prudent man acting in a like capacity and familiar with such matters would use. This standard does not hold the fiduciaries responsible for the outcome of the advice but only for the process used in giving the advice.

o Loyalty, which requires that when fiduciaries advise ERISA-regulated retirement plans, advice must always be in the best interests of the participating employees and retirees. This does not exclude loyalty to self or to employers, but it does say that the interest of the employee is primary.

o Diversification, which requires advice to be consistent with the principles of diversification so as to minimize the risk of large losses, unless under the circumstances it is shown to be imprudent to diversify.

o Adherence, which requires advice to be in accordance with the documents governing the plan and consistent with ERISA. This standard requires a good faith effort to follow the plan and forgives an erroneous interpretation if made in good faith.

In Conclusion

The introduction of the un-conflicted fiduciary advisor presents a unique opportunity for advisors to provide a wide range of financial products to a market of over 100 million households. The fiduciary advisor benefits from the introduction by the employer and is paid by retirement plans to be the expert resource for this immense market.

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Louis Harvey is the founder of Dalbar, a Boston-based financial services consulting firm.