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

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

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

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

Opponents of the rule within industry and on Capitol Hill are lobbying newly seated Labor Secretary Alexander Acosta to delay implementation of the impartial conduct standard until the review of the rule ordered by President Trump is completed.

Jones is among the many in industry that are skeptical of the so-called Deep State theory, which holds that federal employees throughout the government are actively working to suborn initiatives to roll back Obama-era regulations.

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

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

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

Jones maintains those claims could not be further from the truth.

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

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

“We’re most concerned that the rule gets watered down so much that it’s just a best interest standard in name only. I’d rather have no rule than something like that. That would benefit our business, but ultimately it would be bad for consumers,” he said.

Rolling into the rollover business

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

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

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

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

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

To that end, the company purchased The Mutual Fund Store in 2015, a retail registered investment advisory with 125 locations across the country. The unit has been rebranded as Financial Engines Advisor Center.

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

Financial Engines is betting that its relationship with plan sponsors and participants will stoke its nascent retail advisory arm. Participants in plans that use the Financial Engines platform will have access to individual fiduciary advisory services at fee levels they wouldn’t be able to find in the retail market, said Jones.

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

Some sponsors are apt to question the need to be involved in the financial lives of their employees outside of 401(k) plans. But others are assuming a more paternalistic role in guiding the retirement and financial security of employees, explained Jones.

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

Need for an enforceable fiduciary standard

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

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

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

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

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

As the rule is written, the private right of action provision, which allows investors to bring class action claims under the Best Interest Contract Exemption, will be the main enforcement mechanism. Opponents of the rule have made revising that provision a top priority, under the argument that it will lead to costly and frivolous litigation.

Jones is not entirely unsympathetic to that position.

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

Jones says there are ways to enforce a fiduciary standard without a private right of action, citing more resources for the Securities and Exchange Commission and FINRA as one alternative.

While that position aligns him with the rule’s most ardent critics, Jones sees industry’s stand against the private right of action as being cover for the desire to not have an enforceable rule.

“The legitimate question for industry now is what are your ideas on enforcement,” said Jones. “Whatever comes out of the rule, it must protect consumers—first and foremost. Simply requiring more disclosure, while helpful, isn’t enough, because it would be difficult for investors to understand.”

Instant Insights /

Talking 'Deep State' and fiduciary enforcement with Financial Engines CIO Chris Jones

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