In less than a month, advisors on retirement assets will berequired to act as fiduciaries. Is the “Deep State” to blame for that?

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Chris Jones, the Chief Investment Officer at Financial Engines,chuckles at the proposition.

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Much of industry was taken by surprise when thefiduciary rule’s impartial conduct standards were kept in placeafter the Labor Department delayed implementation of the rule inApril, Jones told BenefitsPro. Those standards require advisors togive non-conflicted advice on qualified retirement accounts,beginning June 9.

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Labor’s decision to implement the impartial conduct standard wasthe result of a coordinated effort by career bureaucrats at theDepartment to resist the Trump Admiration, according to an op-ed in the Wall Street Journal and theTrump administration and its supporters.

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Opponents of the rule within industry and on Capitol Hill arelobbying newly seated Labor Secretary AlexanderAcosta to delay implementation of the impartial conductstandard until the review of the rule ordered by President Trump iscompleted.

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Jones is among the many in industry that are skeptical of theso-called Deep State theory, which holds that federal employeesthroughout the government are actively working to suborninitiatives to roll back Obama-era regulations.

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“The reality here is that it’s hard for anyone, inside oroutside of government, to know who is driving the bus on this issuein the administration,” Jones said. “It’s not clear at all if therule will stay in place, or if it will be delayed—no one knowswhere it’s going.”

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As industry’s largest independent fiduciary investment advisory,Financial Engines—which was applying automated investmentstrategies long before the term "robo-advisor" was coined—has beena staunch advocate for the fiduciary rule.

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According to Jones, some opponents of the rule have insinuatedthat Financial Engines’ support for the rule is more about thecompany’s and its shareholders’ best interests than what is bestfor retirement investors.

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Jones maintains those claims could not be further from thetruth.

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“Our support of the rule has never been about competitiveadvantage,” said Jones. “If it had been fully implemented on theoriginal schedule, that would have been a challenge for us becauseit would have forced a lot of firms to clean up their business andmade it harder for us to differentiate from them.”

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The company continues to bang the drum for a strong, enforceablerule, which Jones insists would create new competitive tension forthe Sunnyvale, California-based firm.

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“We’re most concerned that the rule gets watered down so muchthat it’s just a best interest standard in name only. I’d ratherhave no rule than something like that. That would benefit ourbusiness, but ultimately it would be bad for consumers,” hesaid.

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Rolling into the rollover business

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In its latest earnings call, Financial Engines reported $144.4billion in assets under management, all but $11 billion of whichwere in defined contribution plans.

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As of the end of the first quarter, 721 plans sponsors had madethe firm’s managed account program available to more than 9.6million plan participants. About 30 percent of Fortune 500companies have contracted with Financial Engines. More than onemillion participants utilize the managed account platform.

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But secular demographic trends threaten Financial Engines’ coremodel of servicing participants in employer-sponsored plans.

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According to its earnings report, the company lost about $2.7billion in AUM due to “involuntary cancellations,” most of whichresulted from participants rolling assets out of 401(k) accounts.Since 2014, 401(k) asset distributions have outpaced contributionsindustry-wide, a phenomenon explained by the first wave of retiringbaby boomers.

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While growing plan sponsor clients will continue to be a coreobjective of the company, “the real opportunity lies in retainingthe individuals who roll their assets out of the workplace plan,”said Larry Raffone, Financial Engines’ CEO, in the quarterlyearnings call.

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To that end, the company purchased The Mutual Fund Store in2015, a retail registered investment advisory with 125 locationsacross the country. The unit has been rebranded as FinancialEngines Advisor Center.

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Now the company has a deeper retail capability to complement itsbread-and-butter 401(k) managed account business as trillions ofdollars are expected to roll out of defined contribution plans inthe coming years.

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Financial Engines is betting that its relationship with plansponsors and participants will stoke its nascent retail advisoryarm. Participants in plans that use the Financial Engines platformwill have access to individual fiduciary advisory services at feelevels they wouldn’t be able to find in the retail market, saidJones.

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“So far employers have been open to the pitch,” said Jones.

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Some sponsors are apt to question the need to be involved in thefinancial lives of their employees outside of 401(k) plans. Butothers are assuming a more paternalistic role in guiding theretirement and financial security of employees, explainedJones.

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“There is an increasing awareness among plan sponsors that theyhave a need to ensure that people have a fair shot of realizing thebenefits of their savings once they leave the plan,” he said.

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Need for an enforceable fiduciary standard

A recent study commissioned by Financial Engines showsinvestors overwhelmingly favor the intent of the fiduciary rule.While respondents’ understanding of what differentiates a fiduciaryadvisor has improved a bit, most still don’t know the differencebetween fiduciaries and brokers.

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“There is clearly a sense that consumers want the protections inthe rule,” Jones said. “The ongoing debate in the media hasdefinitely influenced the public’s consciousness, but there isstill a significant lack of understanding of the differentstandards that apply to advisors.”

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The most surprising result of the survey was investors’willingness to take action if they discovered their financialadvisor was not a fiduciary, said Jones. Almost a quarter ofrespondents said they would switch advisors, or stop working withone altogether.

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“That’s significant. Changing advisors is not a decision peopletake lightly,” he said.

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Notwithstanding the public’s growing awareness of fiduciariesand their requirement to put investors’ interests first, Jones andFinancial Engines are not yielding in their belief that the marketneeds a uniform best interest standard that is enforceable.

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As the rule is written, the private right of action provision,which allows investors to bring class action claims under the BestInterest Contract Exemption, will be the main enforcementmechanism. Opponents of the rule have made revising that provisiona top priority, under the argument that it will lead to costly andfrivolous litigation.

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Jones is not entirely unsympathetic to that position.

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“I think there is merit to the argument that there will be somefrivolous lawsuits,” he said. “The private right of action is ablunt instrument, albeit a powerful one. Getting sued is anunpleasant experience. But acting in the best interests of clientsis one way to avoid litigation in the long run.”

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Jones says there are ways to enforce a fiduciary standardwithout a private right of action, citing more resources for theSecurities and Exchange Commission and FINRA as onealternative.

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While that position aligns him with the rule’s most ardentcritics, Jones sees industry’s stand against the private right ofaction as being cover for the desire to not have an enforceablerule.

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“The legitimate question for industry now is what are your ideason enforcement,” said Jones. “Whatever comes out of the rule, itmust protect consumers—first and foremost. Simply requiring moredisclosure, while helpful, isn’t enough, because it would bedifficult for investors to understand.”

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.