By Nathan Fisher
Retirement plan advisors, like professionals in many other industries, spend a lot of time fielding questions and requests from clients and prospective clients as a normal part of doing business. Some of these requests are perfectly reasonable, but others may be questionable or downright unethical. In my experience, these inappropriate requests are few and far between, but they do sometimes come up. Most recently for me, I met with an individual who is starting a relationship with my firm to manage his personal assets. He also happens to be in a position at his medical practice to recommend a 401(K) service provider, and offered to recommend us in exchange for a discount on his personal account.
Of course, under ERISA, fulfilling a request like this constitutes a kickback for the plan sponsor, and it could bring with it some serious penalties. An advisor’s response to this sort of request must be carefully considered, as it can set the tone for the rest of their relationship with this kind of client. The key to any successful business is to have happy clients, and it follows that it’s worth the time and effort to use this sort of a request as a learning experience for the potential client, not to just say “yes” and hope it works out in the long run.
The next time you receive a request that crosses the line, follow these steps to educate your client and arrive at a conclusion that keeps both parties on the right side of the law.
Step One: Acknowledge the request.
The very first response I gave to this doctor was to thank him for valuing our wealth management services, and to express my excitement that he’s considering using us for his practice’s 401(K) needs as well. Then, I did something very important: I acknowledged that in many aspects of business, this sort of desire is perfectly valid. In many industries, clients seek incentives to bring you their business over competitors and that’s perfectly OK. This step was critical in explaining the rest of my response and putting the request in proper context.
Step Two: Explain the rules.
The second step is critical: I made it very clear that while this sort of arrangement might be appropriate for other industries, it’s not acceptable in the retirement industry. I could have told him that my compliance department wouldn’t allow it, but he may have simply tried to find another provider whose compliance department would. Instead, I knew it was important to share information about ERISA, specifically the anti-kickback rule. I invited the doctor to do a quick Google search for the rule, which pulled up a short, five-page report from Groom Law Group, a group I have no connection with, but is generally well-known for its services to retirement plans. The report explained, when plan sponsors receive any kind of gratuity or kickback that causes them to steer their 401(K) plan management one way or another, it’s a violation of ERISA and could potentially result in fines or even jail time. By enabling this doctor to uncover the issue himself, I was able to show, not just tell, that it’s an industry-wide regulation we’d be butting up against.
Step Three: Provide education about fiduciary incentives.
Once I go through the rules, some might say, “Okay, I didn’t understand any of that. I retract my request. We’re fine.” Others may still be processing the information. Either way, my next step is to explain the concept of a fiduciary and outline the responsibility any fiduciary has to make decisions in the best interests of the employees and other participants of the 401(K) plan. Since Fisher Investments 401(K) Solutions acts as a fiduciary, we are obligated to do what’s right not just for our clients, but for their employees.
Step Four: Present options for moving forward.
Finally, it’s important to lay out the options the client has to move forward. In my case, I simply say that I cannot because I’m acting on behalf of my firm, which is a fiduciary. They can choose to work with my firm, setting aside the initial request for a break on their own fees, and know that together we will stick to the right side of the law. I’d end this conversation by adding that I believe the right thing to do is to follow the rules. So, while I’d like for them to be my client, this is ultimately a decision they will have to make if we are going to move forward.
To me, the best client is one who will listen to reason and react to both their own obligations as a plan sponsor and their employees’ best interests in a rational way. Most of the time, when walked through a thoughtful process like this, people will respond rationally and make a good choice to move forward. If not, it’s clear to me that their business is not worth the risk it brings to my company. In either case, I know that following this process helps me focus on my client’s best interests (and their employees’) so I can stay true to my firm’s commitment as a fiduciary.
Nathan Fisher is 401(k) solutions managing director at Fisher Investments