WASHINGTON - The Boehner bill - which passed the House Nov. 15 - could push defined contribution investment advice providers closer to profitability, consultants and industry insiders say.
"I think what's interesting about the bill is that it creates the opportunity to potentially offer a lower-cost product because it could create a house brand," said Joshua Dietch, consultant with Cerulli Associates, Boston.
If this happens, advice providers could offer a set of different solutions: financial planning, for example, for those who have more money and would buy it anyway; cheaper online investment advice; and/or "near advice" at minimal cost, Mr. Dietch said.
The bill, sponsored by Rep. John Boehner, R-Ohio, allows investment advice to be offered by "fiduciary advisers" such as registered investment advisers, registered broker-dealers, insurance companies and banks as long as they disclose any fees or potential conflicts.
So far, the bill has not found a sponsor in the Senate and probably won't until the first of the year, according to Kevin Smith, senior communications adviser for the Education & the Workforce Committee, which is chaired by Mr. Boehner. The bill also will have to stand against the Independent Investment Advice Act of 2001, a bill introduced two weeks ago by Sen Jeff Bingaman, D-N.M. Unlike the Boehner bill, Mr. Bingaman's bill would not allow money managers to offer investment advice to participants.
Advice providers generally favor the new Senate bill over the Boehner bill.
Mike Scarborough, president and chief executive officer of The Scarborough Group, an Annapolis, Md., firm that provides one-on-one advice, said the Senate bill is more likely to have some effect on his firm, though it would be small.
And while mPower Inc., San Francisco, has not been vocal about its position on the bills, executives clearly favor the Bingaman bill.
"We think it's a prudent and more appropriate piece of legislation because it does not completely remove the prohibition against biased advice as long as you disclose the bias," said Michelle Farmer, mPower general counsel.
The Boehner bill would allow potentially biased advice, Ms. Farmer said. However, if passed, the Boehner bill "would not kill" mPower's business because it does lay out plan sponsors' fiduciary responsibilities, which could give sponsors a degree of comfort, Ms. Farmer said.
However, the new Senate bill also clarifies plan sponsors' fiduciary liability, Ms. Farmer said. "We think it's a nice piece of legislation," she added.
In the past, independent advice providers have fought hard against any effort allowing money managers and record keepers to offer investment advice to defined contribution participants because they saw it as a threat. But things have changed.
"I think those firms have moved past the 401(k) market. They have broadened their strategies as to where their services could be used" Mr. Dietch said. "I think their response would have been a lot more vocal two years ago."
So far, there has been no big fight because most of the online providers have a number of alliances with defined contribution record keepers and money management firms. Thus, their fortunes can rise and fall with their partners, Mr. Dietch said. Overall, most of the record keepers and money managers favor the Boehner bill because it allows them to offer advice and spells out how a plan sponsor can escape fiduciary responsibility for the advice that is given.
"There is a big gap between the Senate and the House (Boehner) bills," said Bob O'Connor, president and chief operating officer of INVESCO Retirement Inc., Atlanta. "We think investment advice is very instrumental in the business that we're in. We think that it is very good that there will be legislation that clarifies this."
"The Boehner bill will help clarify some of the issues that our plan sponsors have been uncomfortable with," said Virginia Persons, head of INVESCO's individual retirement group, who has been tracking the legislation. "If they offer their employees investment advice, it states exactly what their fiduciary responsibilities are ... and what steps they have to take so they do not have to be fiduciarily liable for the advice."
Nick of time
Should either bill pass this session, some observers say it will come in the nick of time for online providers.
"Fifty dollars for advice is cheap," said Mike Henkel, president of Ibbotson Associates, Chicago. "You could cut the price to a nickel and people still won't use it. You're building solutions that require active participation by a participant."
By and large most participants don't want to do the work.
"You have to hold their hands. At the end of the day, people want to pick up the phone and have someone do it for them," Mr. Henkel said.
According to Hewitt Associates LLC's 2001 401(k) plan survey, only 18% of plan sponsors offer advice of any kind to their 401(k) participants. Of plans that do not offer advice, 28% of the sponsors surveyed mentioned unclear regulations about advice.
"What we have generally experienced is our clients are offering advice, but the acceptance rate varies," said Lori Lucas, consultant with Hewitt, Lincolnshire, Ill.
The rate that plan participants are accepting the advice ranges widely from 20% to 80%, Ms. Lucas said. Some participants use it as a tool; others are using it more for education and information, Ms. Lucas said.
Should a law be enacted or the Department of Labor issue a statement that clearly allows sponsors to offer advice without fear of additional fiduciary liability, the burden will shift, with employers forced to show why they don't provide investment advice, said William J. Arnone, partner with Ernst & Young LLP, New York.
Some 30.9% of participants with access to advice use it, according to Chicago-based Profit Sharing/401(k) Council of America's 2001 plan survey, which included this section for the first time this year. However, the PSCA did not gather a significant sample size for plans with more than 5,000 participants.
The survey found that at companies with fewer than 50 participants, 50.3%, offer advice; at plans with 5,000 or more participants, only 18.1% offer advice.
Of plan sponsors offering advice, 53.5% use one-on-one counseling, compared with 34.2% that offer Internet-based advice and 24.8% that provide advice by telephone. Smaller companies are more likely to use one-on-one counseling (78.6%), while larger companies tend to use Internet providers (47.4%), the PSCA study indicated.
Still, online advice providers have been expanding their business models beyond 401(k) plans.
A year or two ago, online advice providers realized the 401(k) market was not the Holy Grail that would lead them to fabulous riches. Instead, they expanded their offerings to other defined contribution markets, individual investors and financial planners.
"Clearly they are not going to achieve their hopes, dreams and aspirations solely in the 401(k) market," Mr. Dietch said.
Online investment providers have come farther afield of the 401(k) market to more financial planning, he said. For example, providers are now marketing general financial planning to individuals and through brokers, who are looking for a more efficient delivery process, Mr. Dietch said.
While officials at two of the most popular online investment advice providers - Financial Engines, Palo Alto, Calif., and mPower - say they do not know what percentage of participants who have access to advice actually act on it, industry insiders say it is low.
Financial Engines recently released the results of a survey of 14 plan sponsors it conducted this year. The survey showed that 46.6% of all employees who are eligible to participate in a plan signed on to use the advice service, and 52% of employees who participate and have Internet access signed on to use the service. While Financial Engines knows how many employees have logged on, its executives do not know how many employees applied the advice.
According to the survey, nearly half of participants who worked their way through the advice service said they received recommendations to change their portfolios, and 54% of those who received recommendations said they made all or some of the changes.
"The only way to guarantee people are acting on advice is to have someone else do it for them," Mr. Dietch said.
"We're in the early stages of the evolution over a number of years," said Chris Jones, executive vice president of financial research and strategies with Financial Engines. "We're in the second inning of a pretty long game."
Who should pay?
Baby boomers desperately need the service, but the question of who should pay for it keeps coming up, Mr. Jones said.
"Participants view their employers as an outlet for this type of information," he said. They look to employers to pay for it, and more participants use the service when employers pay for it.
At the same time, there is a credible argument that investment advice is a financial product, and in the end, participants will have to pay for it.
Right now, one-on-one counseling and Internet-based products are most commonly paid for by the company. Telephone hotlines are most commonly paid through plan assets.
"How much will you compress the margins in this 401(k) thing,' Mr. Dietch said. "There just will be rationalization in the pricing."