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FAs Warned: Stay Out of Harm’s Way

By Grace Williams March 27, 2018

A good advisor’s primary objectives should include never knowingly putting a client’s investments into harm’s way. Yet it’s possible you are doing just that, and it’s happening without your awareness. This particular bit of alarm-sounding comes courtesy of Ron Surz, president of Target Date Solutions. Surz goes so far as to say 401(k) fiduciaries are “breaching their duty of care.”

One key contribution to the breach, according to Surz, is that advisors often default to the “Big Three” (Fidelity, Schwab, and Vanguard) as their bundled service providers. Reliance on the Big Three is not always a result of a fiduciary’s research or satisfaction with the specific organizations, according to Surz. Rather, it is a move of familiarity and convenience.

In addition, Surz continues, fiduciaries are under the mistaken belief that any qualified default investment alternative (QDIA) will serve the purpose, but a firm’s popularity doesn’t always translate to its prudence.

This is a move “that would be OK if these TDFs were safe at the target date, but they are not,” writes Surz in a recent article. “Beneficiaries stand to suffer the most as they near retirement because losses can wipe out a lifetime of savings.”

Because the crystal ball is elusive, parking investments with the herd makes sense, on the surface. “What’s going on there is a fiduciary or advisor talks to a [Big Three firm] and they tell them they are very comfortable, and why it’s good, that there are [X amount of dollars] in TDFs and it’s a big name [so] people don’t look at other TDFs,” says Surz in an interview with FA-IQ. Comparing a fiduciary’s duty of care to a parent’s obligation to protect a child, he adds, “You can choose anything if safety doesn’t matter.”

But this is not the case, according to Surz, who notes that in 2008 when the Great Recession hit there was roughly $200 billion in TDFs, but a decade later the amount has skyrocketed to nearly $1.5 trillion. Surz compares the investors’ exposure to risk with parachute jumping, where there is a good chance you’ll be OK, but failure is possible. “Baby boomers are all in the risk zone,” he says. “People in TDFs and IRAs are taking more risk than they realize.”

John Lohr, who works in ERISA law, agrees with some of Surz’s sentiments. His experience led him to create an organization that provides consumers with free financial educational tools. Lohr notes that over time, the general public’s overall lack of investment knowledge has made them perfect prey. Lohr also feels that regulators don’t do all that much to protect individuals and that Wall Street “doesn’t want an educated consumer.”

“I’m not sure that it’s a breach to sell the Fidelitys of the world,” he says, However, “If clients knew where to go they could save money on a lot of fees and come up with at least as good of an allocation process as they could from a financial advisor recommending the supermarkets of the world.”

Richard Kahler, president of Kahler Financial Group, a firm in Rapid City, S.D., with $130 million in assets under management, disagrees overall with Surz. For Kahler, Surz slips into the school of thought that avoiding a loss in the portfolio is desired and even feasible while earning real returns. Kahler writes in a note to FA-IQ, “Investors can’t have low volatility and guarantees against downturns and expect to garner enough in real returns to grow their portfolio. And, I don’t have a retired investor that comes anywhere near to having a 25/75 portfolio.”

Meanwhile, the rise in investor sophistication is top-of-mind for Chris Bertelsen, CIO of Aviance Capital Management. Over the past handful of years robos burst onto the scene and there was concern that they might put some advisors out of business. With the robo dust settling, Bertelsen continues to believe good advisors will always have work thanks to two key factors: human connection and constant change.

“I agree that having a contrary look at whatever you’re doing on the investment side makes a lot of sense,” says Bertelsen, whose Sarasota, Fla. firm has $2.3 billion in assets under management. “You’re much better off building a portfolio that’s comfortable by taking an uncomfortable approach.” For Bertelsen, this could mean considering areas that are hated or oversold.

“We have to be very conscious of what governments are doing and never underestimate the power of a government to make or ruin a business,” he says. “We are very agnostic and check our political opinions at the door.”

But in the end, Surz believes meaningful change could come with a steep price tag in the form of potential lawsuits, similar to the heat surrounding 401(k) fees. “We have carrots and sticks,” he says. “Carrots don’t work well, but sticks do.”