The DOL + Tibble = You re a Fiduciary; Now What?

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2 The DOL + Tibble = You re a Fiduciary; Now What? Fred Reish, Partner, DrinkerBiddle Dr. Greg Kasten, CEO, Unified Trust Blaine Aikin, Executive Chairman, fi360

3 Tibble v. Edison International The case involves the inclusion of retail shares in the investment lineup, when lower cost institutional share classes were available. Most of the challenged decisions were made more than six years before the suit was filed. ERISA generally imposes a six-year statute of limitations in fiduciary breach cases. The Supreme Court held that there was an independent duty to monitor. continued... Litigation PPts 3

4 Tibble v. Edison International Continued... The DOL in its amicus brief stated its position that it was a fiduciary breach to waste participant money. Ramifications: Continued litigation on investment expenses. Issue of appropriate share class. Issue of revenue sharing. Litigation PPts 4

5 The Beesley v. International Paper lawsuit was settled for $30 million. There were several claims, including excessive administrative fees and imprudent investments. However, the terms of the settlement were interesting: The plan will no longer offer retail mutual funds. The plan will not pay the recordkeeper a percent of assets. Ramifications: Appropriate share class. Recordkeeper fees: Percent, dollar amount, cost/participant? Litigation PPts 5

6 The Nolte v. CIGNA lawsuit was settled for $35 million. The terms of the settlement were interesting: The plan will institute a competitive bidding process for recordkeeping services. The plan will no longer offer retail mutual funds. The plan will evaluate investment and recordkeeping services separately (to obtain unbundled pricing). Ramifications: Appropriate share class. Offsets for revenue sharing and proprietary credits. Litigation PPts 6

7 At the end of a lengthy trial, in the case of Tussey v. ABB, the court found: ABB Defendants violated their fiduciary duties to the Plan when they: failed to monitor recordkeeping costs, failed to negotiate rebates for the Plan from either Fidelity or the other investment companies..., selected more expensive share classes...when less expensive share classes were available,... Note: Issue of failure to follow IPS. Litigation PPts 7

8 Failure to Monitor Recordkeeping Costs. Failure to Negotiate Rebates. This duty flows from conclusions under 404(a) and/or 408(b)(2) that the compensation of a service provider is unreasonable. Ramifications: Determination of reasonable costs and fees. Response to high costs and fees. Query: How is reasonable determined? Litigation PPts 8

9 Additional Cases to Consider: Bell v. Anthem, Inc.: Complaint filed. The plan was primarily invested in Vanguard funds. Spano v. Boeing Company: Settled for $57 million. Allegations that should have been invested in separately managed accounts and collective trusts. Troudt v. Oracle Corp.: Complaint filed. Allegations that plan paid Fidelity, as recordkeeper, $68 to $140 per participant rather than reasonable fee of $25/participant. Litigation PPts 9

10 Perez v. Ramsay Ramsay provided investment advisory services to ERISA-covered plans through a company he owned and operated, and also owned and operated a TPA that administered the plans: DOL alleges that Ramsay caused himself and his companies to be paid fees and commissions which were not properly disclosed to the plans or authorized by the plans; continued... Litigation PPts 10

11 Perez v. Ramsay Continued... DOL also alleges that Ramsay failed to use the fees he received to offset fees the plans would otherwise have to pay and used his fiduciary authority as investment adviser to cause the plans to remain invested in a higher fee fund when the same fund portfolio was available in a lower fee class. Ramifications: Use of fiduciary authority for benefit. Prohibited transactions and fiduciary breach. Litigation PPts 11

12 The DOL Has the New Fiduciary Standard

13 What Does This Mean? What does this mean for B/D firms today? Perhaps the greatest concern of BDs we spoke to likely because it is the area with the greatest inherent uncertainties is the potential costs of litigation. While the proposed rule allows for arbitration of individual disputes, it also exposes firms to potential class-action liability. 13

14 Non- Fiduciary New Duties Higher Risks Changing (Reduced) Compensation Lost Business from Compliance Dept. 14

15 What Does This Mean? What does this mean for RIAs today? Likely the greatest risk to current fiduciary RIAs will be a loss of differentiation because all players will be a fiduciary Fees will become transparent and compressed. This is likely the first stage of greater fee compression. Soon all fees will be easily searchable from the DOL master database with the electronic

16 Fiduciary Differentiation Loss Value Proposition Lost Business from New Competition Fee Compression 16

17 New Competitors? Exempt? The further erosion of the value proposition 17

18 Jerry Schlichter Has Perfected a Machine for Fee Litigation 18

19 Fee Litigation Risk 1. Class action will move downstream to RIAs and B/Ds 2. Question WILL NOT be: Are You at the Median? 3. Question will be: Why are you not at the floor? 4. If not at the floor: Show us what the extra fees purchased in view of effort and outcomes? 5. NOTE Large platforms and vendors are exempt 6. Could an RIA be sued for offering an expensive vendor even if the RIA s fee was reasonable? 19

20 Historically Costs Were Very Opaque 20

21 Now the DOL Will Make All Costs Transparent Plan Cost 50 bps is better than 100 bps 30 bps is better than 50 bps 21

22 The Surviving Firms Must Make Three Points Connect Cost Effort Outcomes What if fees are 20% higher, but outcomes are 30% better? 22

23 Beyond Compliance: The Professionalization of Advice

24 Individual Professional Organizations Employer State Regulators Federal Regulators (SEC, DOL., etc.) and Self Regulatory Organizations (FINRA)

25 Four questions Every prospect wants answered: 1. Results: How will I be better off working with you? 2. Process: What about your approach sets you apart? 3. Implementation: How do I know you will deliver? 4. Credibility: What about you is different and better? Source: Richards, Dan 'Horsesmouth'. Horsesmouth.Com. Accessed August questions every prospect wantsanswered.

26 Top Recommendations: 1. Results: Focus more on outcomes goal readiness 2. Process: Engrain professional practice standards and fiduciary processes in your business 3. Implementation: Focus on the client experience communications calendar, deliverables, and progress 4. Credibility: Specialize, pursue credentials, become active in member organizations, publish, teach, get CEFEX certified 5. Legacy: Paint the picture of multi generational impacts

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28 fi360 s Prudent Investment Practices Define an Investment Fiduciary Standard of Excellence Written by fi360, substantiated in law, regulations, and best practices Technical Review by the AICPA Gather, grow, and protect investor assets through better investment and business decision making. Align advisor and investor interests

29 Expertise Continuity Tools Credibility Business Acumen

30 Questions and Discussion