Blog Posts

Five Tips for Improving Financial Service Firms’ Website Performance

Web Design Tip #1: Less Talk, More Action

In the early days of the internet, financial services firms, like many other websites, believed that the benchmark for a great user experience was to enthrall site visitors with dynamic elements, and as much content as possible. The thinking, at the time, was that all this information would encourage visitors to linger as long as possible and explore or learn about all that there was to see.

Firms eventually came to the realization that the primary reason most investors come to their site isn’t to "learn", so much as it is to "do". When investors want to learn, they Google it and unless a site's encyclopedic volume of educational content is highly ranked on Google, it will, for the most part go unseen.

Fast forward to today. Content and capabilities are being streamlined to adhere more tightly to meeting users' needs and the "nice to haves", unless serving a quantifiable purpose, are starting to disappear. The layers of random calculators are thinning down and tools are being presented where most relevant and helpful.

Financial services firms have finally begun to abandon the more is more mentality.

Web Design Tip #2: Rethink Education Sections

Whether it’s learning about the markets, retirement planning, asset allocation or the importance of diversification, online investor educational materials are missing the mark.

When we ask firms if they are satisfied with their utilization stats for those materials, with the very occasional exception, they all say, "Not even close". Yet, “Education Centers” remain in existence waiting for the enthusiastic visitor seeking knowledge while in the process of submitting their address change request.

As an improvement, we would like to see fewer "Education Centers", "Resource Centers", "Tools & Resources" and "Investor Education" sections. Although far more sites are placing these materials where relevant and likely to be utilized, far too many continue to relegate content to one area, expecting visitors to seek out the materials and get educated.

Don’t overwhelm your visitors or your website with resources people don’t use.

Web Design Tip #3: Focus on Security

Security resources have improved by leaps and bounds over the years. The unintelligible seas of disclosures about firms' security measures have evolved into Security Centers that contain an impressive array of highly actionable materials.

Case in point, Edward Jones' incredibly robust offering of Fraud Awareness resources that support customers in recognizing and avoiding potential online security threats.

What remains incomprehensible to us is the continued hiding away of security resources.

Firms devote a great deal of effort to providing sophisticated Security Centers, reporting capabilities, checklists, links to 3rd party fraud and security resources, and additional content, but how does one know it exists if the only access to it is from a security link within the page footer?

And, what if there is in fact a current security event of which visitors should be cognizant? Unless they are highly proactive about keeping abreast of existing security threats, they will be completely unaware of them.

We recommend security resources be given more prominence!

Web Design Tip #4: Enable Human Connection

In today’s online environment, the human factor is more important than ever before. One of the major promises of the internet was that it could connect people in ways that weren’t possible. For financial services firms, the opportunity exists to have their digital content connect people in a conversation about financial well-being.

There has been a distinct rise in the emphasis on engagement; social media engagement, inviting engagement with site content, the ability to share content with others, requesting meaningful feedback and suggestions.

We would like to see more flexibility in the content that can be engaged with. The ability to share company details, educational resources and market information has become standard; the ability to share a product page is less of a foregone conclusion.

Coming back to security, what if visitors actually locate the security resources and wish to share that security quiz that they've come across? They should be given the ability to do so.

Don’t just make your content shareable, make it share-worthy!

Web Design Tip #5: Use Data to Drive Effective Design

Websites today can provide owners and design teams with incredibly granular data on traffic patterns and engagement. With so much data available, designing and planning websites involves less guess work. That said, websites don’t exist in a vacuum – it is not only important to know how your own website is working but also that of your peers and competitors. After all, how can design teams truly gauge what an “above average” experience looks like without understanding the landscape of other financial services websites?

Fortunately, DALBAR has the perfect tool for digital teams interested in understanding how to create effective digital experiences for financial services websites.

Coming in Quarter 4-2018, Dalbar's Trends and Best Practices: On the Web report will provide the most in-depth analysis of financial service firms’ web and digital experiences, and what strategies and tactics firms are using to respond to the rapidly changing online environment.  

Using this kind of data as part of the planning, optimization or monitoring phases of a financial services website is crucial to understanding what features or design elements are being used by the industry and how your web presence needs to adjust to respond.

Use data and insight to work smarter and get better results!


For more information about the upcoming Trends and Best Practices: On the Web report or to order your copy, please visit this page: 

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  • By Shelley-Ann Eramo
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  • 6/6/2018
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  • 0
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  • Categories:


The 5th Circuit decision to vacate the DoL Fiduciary Rule (“Rule”) creates a dilemma for the Robo Advice arrangements that depend on the relief granted by that Rule.

Rolling back the Rule means that regulations revert to the 1975 rules[1]. Applying 1975 rules make virtually all Robo advisors to IRAs and defined contribution plans into fiduciaries, without the benefit of an exemption (since the Best Interest Contract Exemption also goes away).

It would appear that institutions that have created/acquired Robos will be unable to use these automated solutions for IRAs or DC Plans, without some additional exemption being created for them.

Presumably, the roll back would include the “no enforcement policy[2]”. Without that policy, Robos may not be permitted to operate.

Financial institutions and advisors must therefore make changes necessary to qualify for an existing exemption or seek a private exemption.

[1] In 1975, the Department issued a regulation, at 29 CFR 2510.3-21(c), defining the circumstances under which a person is treated as providing “investment advice” to an employee benefit plan within the meaning of section 3(21)(A)(ii) of ERISA (the “1975 regulation”), and the Department of the Treasury issued a virtually identical regulation under the Code.[15The regulation narrowed the scope of the statutory definition of fiduciary investment advice by creating a five-part test that must be satisfied before a person can be treated as rendering investment advice for a fee. Under the regulation, for advice to constitute “investment advice,” an adviser who is not a fiduciary under another provision of the statute must—(1) render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property (2) on a regular basis (3) pursuant to a mutual agreement, arrangement, or understanding with the plan or a plan fiduciary that (4) the advice will serve as a primary basis for investment decisions with respect to plan assets, and that (5) the advice will be individualized based on the particular needs of the plan or IRA. The regulation provides that an adviser is a fiduciary with respect to any particular instance of advice only if he or she meets each and every element of the five-part test with respect to the particular advice recipient or plan at issue.

[2] FAB 2017-01…during the phased implementation period ending on January 1, 2018, the Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions.

On March 28, 2017, the Treasury Department and the IRS issued IRS Announcement 2017-4 stating that the IRS will not apply § 4975 (which provides excise taxes relating to prohibited transactions) and related reporting obligations with respect to any transaction or agreement to which the Labor Department’s temporary enforcement policy described in FAB 2017-01, or other subsequent related enforcement guidance, would apply. The Treasury Department and the IRS have confirmed that, for purposes of applying IRS Announcement 2017-4, this FAB 2017-02 constitutes “other subsequent related enforcement guidance.”

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The Do's and Don'ts of Online Enrollment Landing Pages

Picture this. Tia is 23 and recently landed her first real job. She is instructed to attend a meeting during which someone who sounds remarkably like Charlie Brown's teacher tells her that she should allow money to be deducted from her already woefully insufficient paycheck...because she needs to save for retirement. She is equipped with a rather thick packet of information to read and "learn" about retirement plans - what they are, how they work and all about investing. Right. In reality, the packet is placed in the desk drawer, on the kitchen counter, on the back seat of the car, with the intention of getting online and getting enrolled, until its eventual fate, the recycling bin.

At some point after that Tia receives an email nudge from the plan administrator to get going on that enrollment. The email contains some random numbers and a convenient link to an Enrollment site. She follows the link and encounters this...

Had Tia been somewhat familiar with retirement plans and their benefits maybe just maybe she might have followed through and completed the enrollment process. But alas, she wasn't, so of course she didn't.

Retirement plan providers must not only focus on the enrollment process itself, but also zone in on that first connection with the employee. Several providers stand out from the crowd in presenting a high impact first view of the plan.

Now, using the same scenario above, Tia clicks on the link in the email and lands here...

Now we're talkin'! Join the movement? Orange Money? Tia's curiosity is piqued and the chances that she will explore further have now increased exponentially.

A warm welcome, reassuring language, an appealing design can make all the difference in whether Tia begins saving for retirement at 23…or 27 when she moves on to the next employer.

Never underestimate the impact of the first impression!

Each task within the Online Enrollment process is crucial. Selecting a contribution rate, selecting investments (or allowing default), designating a beneficiary - all necessary actions, however the first order of business in the enrollment process is assuaging employees' fears and concerns and driving them to actually proceed with the enrollment.

So here are some basic Dos and Don'ts of Enrollment Landing pages:

Please Do:

  • Use motivational, action-oriented messaging
  • Use a conversational tone
  • Offer strong, clear calls to action
  • Lay out the benefits of participating in one's retirement plan- Currently, only 24% of providers present this information to new enrollees.
  • Offer Assistance if Needed- Enrollees should have the option of reaching out if needed when confusion sets in. Fortunately 74% of providers are aware of this need and have obliged.
  • Wow them! Make an impact. Make them willing to stretch those paychecks despite the student loans they are struggling with.

We kinda think John Hancock Retirement Plan Services' Welcome page feels like a party! Energetic images with super fun placement, great typography and upbeat messaging. Of course letting employees know that the process will be quick and painless definitely helps to lessen the potential level of anxiety.

Please Don't:

  • Drown visitors in text. Tia didn't read the fancy, full color, glossy, image-filled packet, she's certainly not going to read paragraph after paragraph of uninteresting Web text.
  • Forget to call out to new enrollees when sharing a portal between Account Access and Enrollment. Employees first encountering the plan should be offered a hand to hold.
  • Offer TMI. Employees need to know the importance of participating in the plan. They need the basics of how the plan works. They need to know about how they benefit from pre-tax contributions. They don't want to know about the Pension Protection Act of 2006.
  • Use Vague Labels. The resources now available to new participants are sophisticated, innovative and highly useful, but are so often prefaced by a link to "Useful Resources", "Helpful Tools" or "Financial Education". Think of Tia, what is the likelihood that she wants to receive a "Financial Education"? Slim to none. Show her the fancy projection tool or the helpful budgeting tool that will help her reduce her college debt and save more for her retirement.

DALBAR’s State of the Industry – Online Enrollment study takes a deep dive into 23 digital plan enrollment processes and reveals those providers that recognize the impact a streamlined, well designed and easily utilized process can have on an employee’s decision to enroll. Check out our research to view a Top 15 Ranking along with industry best practices!

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  • By Shelley Ann Eramo
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  • 1/23/2018
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  • 1
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  • Categories: 401(k)

Cost Structures Needed for Advisors

In every other profession that serves the public the cost of delivering services is the gold standard for doing business. Health care costs are so compartmentalized that there are full time jobs to apply cost codes to every procedure. Attorneys, architects, educators and engineers all have cost structures for professional activities. These cost structures are by no means uniform but vary widely so clients can compare quality, convenience and cost.

Financial advisors do not need thousands of cost codes to manage their business but knowing what various professional services cost changes a primitive “pot luck” approach into a sustainable one. The knowledge of the cost of services enables the business owner to tailor services to a client’s budget and ensure ongoing profitability of the business. Cost structures also avoid the danger of unknowingly charging excessive fees and concerns of compensation disclosure. A cost structure provides a rational basis for selecting share classes that aligned with the services provided. (Fees can now be properly explained.)

Cost structures begin with an inventory of activities. The typical cost of performing each activity is then calculated, resulting in a menu of services that the advisor offers.

The inventory of activities contains all tasks that are performed in the business. Many of these are services to clients but many are not. Client services are those activities, where the value is immediately visible to clients. For example, client services may include activities such as:

  • Assess needs
  • Assess risk tolerances
  • Develop solutions
  • Create strategic asset allocation
  • Select investments
  • Make recommendations
  • Provide education
  • Monitor portfolio
  • Answer questions and concerns

Non-service activities include activities such as:

  • Client acquisition
  • Research
  • Compliance
  • Continuing education
  • Staff and management activities

Determining the cost of activities is the second step. This includes variable costs and allocation of fixed costs. Variable costs are determined by the resources expended on the activity. Resources include direct expenditures as well as the typical amount of time spent.

Variable costs can be shared by two or more activities. In this case, the variable cost is divided among the applicable activities. Typical variable costs are:

  • The value of time spent on the activity
  • Third parties paid to support a specific activity such as an estate planner or tax expert
  • Tools, subscriptions and services applicable to the activity(ies)

Fixed costs are those which apply to every activity. The business owner must decide on how the fixed costs are allocated to each activity. Typical fixed costs include:

  • Sales and marketing expenses
  • Office space, facilities and utilities
  • Equipment and communication
  • IT Services
  • Travel & Entertainment
  • Indirect employment expenses
  • Taxes
  • Profit

The result after creating a cost structure as described here is a menu of services that can be paid for in a number of ways… commissions, assets under management, flat fees, hourly rates, etc. The critical factor is knowing how much compensation is needed. The method of payment is secondary.

An advisor can use this information to prepare a cost statement that may be private or disclosed as the advisor sees fit. Such a cost statement would incorporate all the costs described here and might look like this:

The Service Cost Summary described here can also be used to create a blend of mutual fund share classes that properly pays the advisors cost of doing business. Take a situation where the foregoing example was the advisor’s cost and the advisor can use a blend of A, T and clean shares for a client’s portfolio. The objective is to use a blend that produces the compensation that covers the cost of servicing, including a desired margin of profit.

For our example, the client has a total of $500,000 to invest in mutual funds and requires only the following services:

Assess needs
Assess risk tolerances
Develop equity portfolio
Develop fixed income portfolio
Create strategic asset allocation
Select investments
Make recommendations
                Total Payout Required

A share class breakdown by assets produces this payout:





Payout @ 80%

A Shares (at breakpoint)




T Shares




Clean Shares








The total payout of $4,430 is within $100 of covering the advisor’s cost and profit. More assets would be allocated to A and T shares is more services were required.

 As this example shows, advisors can control payout to ensure that costs are covered without a compliance risk or threat of excessive fee litigation.

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Anatomy of Investor Returns

Investment returns have been simplistically reduced to a single percentage that disguises the incredibly complex issues that investors experience. This article is intended to shed some light on these complexities. It shows how deceptive the most frequently published investment returns are.

These complexities are presented in the form of a narrative of an investor, Harry, and his adventures with his retirement plan.

What happens to real people: Harry’s Story

A $500 payroll deduction is automatically put into Harry’s 401(k) each month. Unfortunately, this is $500 less to pay bills and for the essentials and pleasures of life. But this is worth it because it means a more comfortable retirement for Harry and his family when that time comes.

Harry’s monthly pay stub holds some good news.  The $500 deduction is a lot less painful because his employer sweetens the deal with an additional $250 plus there are no taxes withheld! The $500 payroll deduction instantly becomes a $750 contribution to Harry’s retirement, with no taxes taken out.

There is even more good news at the end of the quarter. Harry gets a statement showing his three monthly investments are now worth $2,350, but contributions only add up to $2,250! Another $100 appeared as though it was by magic.

Harry is also delighted to see on the statement that the markets had gone up by 10% in the quarter. Compare that to a CD that earned a measly 0.1%! That would explain the magical $100.

But wait a minute, 10% of $2,250 is $250. Why did Harry’s $2,250 only go up by $100?

Harry figured that this difference could amount to a great deal of money in 20 years when he retires so he was not happy and called the number on his statement for an explanation. Harry learned the important lesson that while the balance of $2,350 was his, other figures had nothing to do with his account.

The 10% return applied only to investments that were in place from the start of the quarter to the end of the quarter and since his came in at different times the magical money was not as much. Harry’s total contribution for the quarter would have to be made on the first day of the quarter for the entire 10% to apply. Even if Harry had the money, this day one investment could not be done due to constraints of the 401(k) plan. Harry concluded that the 10% really did not apply to his account, even though it was on his statement!

Additionally, Harry found from the friendly representative at the number on his statement that there were a number of other factors that were not shown which also lowered the magical figure. He was totally confused after learning that his money was allocated and not fully invested, that there were expenses not shown on his statement and that he was paying trading costs and fees that were only shown in legal disclosures.

The 10% return on his statement did not reflect the fact that only 65% of his account was invested in comparable stocks. The remaining 35% was held in low yielding bonds and in cash. This means that it would be impossible to earn the 10% on over one third of his money! The representative explained that this is done to limit his losses when the markets went down. Harry saw the benefit but still felt that the 10% on his statement was misleading. By this time Harry had been on the phone for half an hour and the representative was becoming less friendly.

Harry then tried to understand what the expenses were and why they were not shown on his statement. Harry was comfortable after learning that the expenses covered items like administrative costs, record keeping, managing investments and for the services of an advisor. He remained concerned that these expenses were not reflected in the 10% return shown on his statement. He asked the representative, “Why show the 10% if you know it is wrong?” The representative’s frustration was growing.

Harry was not giving up, he wanted to get the whole story so he asked about the trading costs. He immediately understood that there was buying and selling of investments and that commissions had to be paid when transactions occurred. Harry was becoming angry when he realized that these commissions were not reflected in the 10% on his statement! It is all the representative could do to calm Harry down. His concerns had grown to accusations of illegal activity!

Harry had to hear the end of this. What additional fees apply to his account that are not included in the elusive 10%? Harry learned that there were fees that apply if he were to take out a loan or had a personal hardship and had to withdraw some funds. Harry thought this unfair, but it would be his choice to take the loan or withdrawal.

Harry learned about something else that he thought would answer many of his concerns but there was yet another cost and burden on him. The representative described the self-directed brokerage account. This would mean that Harry need not use the low yielding investments if he chose not to. He could use very low expense investments like ETFs and Index funds. The trading commissions would be lower. Harry was not so happy to find that the self-directed brokerage meant just that, he would have to enter every investment himself and if he made a mistake it would be his loss. Furthermore, the cost of this type of account would exceed what Harry was currently paying. By now Harry and the representative had been on the phone for an hour and a half and both were totally stressed out.

Harry thanked the representative who had confused him and decided to be thankful for the magical $100 and forget about the possibility of earning any more.

Life went on for Harry until one statement showed that his balance was actually less than it was on the previous statement. By now Harry’s balance had grown to $50,000 on the previous statement and the new statement showed only $47,500. How was this possible? Harry had not withdrawn any money. In fact $2,250 was added to his account. To make matters worse, the market had gone down by 4% but Harry’s balance went down by 5%.

Harry again called the number on the statement and learned that the expenses, trading costs and fees were being incurred, even when Harry’s account was losing money.

What was Harry to do? By this time he realized that he was not earning as much as was possible but the taxes and penalties of withdrawing his money made it impractical… He was trapped!

Harry was now committed to avoiding future surprises. He wanted to understand what might be in store for him in the future. What if he changes jobs? What happens when he retires?

By this time Harry had become famous in the phone center. He had won the contest multiple times for time spent on the phone! But Harry remained undaunted.

Harry found that changing jobs could cost him money.

First was the “unvested” portion of his account that he would lose. At the time Harry made the inquiry, his unvested balance was $25,000. Yes, that was a nasty surprise that changing jobs would cost $25,000. But that’s not all. If Harry decided to take the money out of the old employer’s plan, he would owe taxes on that money plus a 10% penalty unless it was reinvested in 60 days.

The taxes and penalties could be avoided if the new employer permitted Harry to invest the money in the new employer’s plan. This is a great solution if the new employer’s plan is as good and cost no more than the old plan.

The other option is to shop for a “Rollover IRA”. Harry could transfer his plan money into this account, avoid the taxes and penalties and never have to worry about future job changes. The problem here, Harry found out is that these “Rollover IRAs” could cost as much as twice as much as the 401(k) plan.

Harry kept wondering, “When does all this end?” Unfortunately, the answer was “Not yet.”

When Harry decides to retire he will face a new set of issues. With some careful planning beforehand, Harry can avoid some of these.

The first problem Harry will face is taxes. As currently configured (the usual practice), Harry will owe taxes on every dollar he withdraws from his retirement plan. This is treated as ordinary income and is subject to withholding, just like his paycheck is. Ouch!

But there is an alternative that Harry can use to avoid this nasty retirement surprise. Instead of using a regular 401(k), Harry could use a Roth 401(k) if his employer offers it. With the Roth, Harry pays the taxes on the contributions and at retirement can withdraw the contributions and all the appreciation tax free. This is an attractive option if Harry is willing to pay the taxes along the way because all the growth (the magical money) is tax free!

The next problem is outliving his retirement funds. Surely, if Harry decides to spend like a drunken sailor after he retires, his funds won’t last very long. But even if Harry controls his spending, he could live to use up his entire account. In addition to controlled spending two other actions can help.

Harry can invest wisely so that his retirement funds continue to grow during his retirement years. This usually requires an investment strategy that is connected with the spending controls. Such an arrangement adjusts spending to what investments can sustain.

Another action is for Harry to create his personal pension plan that will continue to pay him for as long as he lives. This is called an annuity and is more expensive than the sustainable spending described above. However, it eliminates the risk of running out of funds.

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Response to Edesess Article Published in Advisor Perspectives

In response to article published on 10/09/2017: 

If this was a first offense and had no visibility, I would laugh it off as uninformed rambling. But this is not the first offense and the article has gained some credibility by being carried in a respected publication.

This is not a laughing matter, but a serious threat to all who seek to act in the best interest of investors.

The underlying premise of the article as carried in its headline is that “Investors do not underperform their investments”. The article promotes the notion that investor performance is as good as it can be and gives an absurd reason for any belief to the contrary… a fictional error in a DALBAR calculation.

All who champion the cause of improving investor returns must rise up to challenge this nonsensical conclusion and the preposterous and false argument on which it is based. The facts of underperformance are published on DALBAR’s Website, .

The conclusion that “Investors do not underperform their investments” flies in the face of the basics of mutual funds. These basics make it impossible for any more than 1% of investors to ever outperform an applicable index and causes the average investor to lag that index by several percentage points. The author and anyone who chooses to believe this absurd conclusion should understand the myriad of performance limiting factors that guarantees that over 99% of investors have and will underperform indices:

  • Non-uniform acquisition and withdrawal dates… performance is measured over specific time periods but investors transact on every business day
  • Sales charges (loads, 12-1 fees, redemption fees, etc.) are not included in the calculation of benchmark returns
  • Operating expenses that pay for the management, operations and distribution of investments are not factored
  • Portfolio trading costs that are incurred every time a fund buys or sells a security are absent from indices that trade “free”
  • Asset allocations into low performing asset classes such as cash and other defensive investments
  • Dividends and capital gains taken in cash are excluded since indices assume that all distributions are reinvested
  • Leakage from loans, margin interest, fees or other deductions never occur in an index
  • Opportunity cost of being out of the market during periods of appreciation is never experienced by an index which is assumed to always be fully “invested”
  • Investor trading activity ebbs and flows unlike an index that reflects a buy and hold posture
  • Psychological factors such as loss aversion, herding and excessive optimism do not influence the benchmarks
  • The irrational belief that higher prices (expenses) will yield better investments is derived from consumerism where the expectation is that prices in some way reflect value

The theory that most investors actually earn benchmark level returns is in contradiction to the fact that the balances in their individual accounts show underperformance.

If investors did earn index level returns, there would be no point in educating and advising them or creating solutions that improve performance. In other words, the work that the investment community and DALBAR have done to bring investor performance closer to index level returns would have been pointless since “investors do not underperform”. This supposition is contradicted by the fact that investor performance has significantly improved over the two decades since DALBAR’s analysis has been published.

Furthermore, there is the economic absurdity that the revenue generated within the financial community is created without a net loss of investor returns. Compensation received by the entire financial community is derived from investors.

Claiming to have discovered a (non-existent) calculation error in DALBAR’s methodology and blaming this for the general acceptance that investors underperform applicable indices is ridiculous on its face, in addition to being false.

The author goes on to accuse Morningstar of being a co-conspirator in this alleged massive fraud. Morningstar stands accused of quantifying one of the causes of investor underperformance. This implausible theory of a conspiracy underscores the absurdity of the article.

For the record, QAIB uses the actual balances in investor accounts each month to calculate investor profits or loss after all performance limiting factors are considered. This reflects the personal return that the average investor would see on a statement. Representations to the contrary are false. Additional research is used to identify solutions that reduce the underperformance. A compendium entitled Managing Investor Behavior that covers two decades of such solutions was recently published and is available from DALBAR.

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  • By Lou S. Harvey
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  • 10/10/2017
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  • 1
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  • Categories: Advisors

Plan Success - How to Measure it and How Not to

In the quest for a really good 401(k) plan, the focus is often one-dimensional but in reality many dimensions apply. The narrow focus may reflect certain aspects of a plan but falls far short of what should be considered an overall success. Serious deficiencies may be overlooked unless a comprehensive assessment is made.

The one-dimensional approach also fails to account for the different interests of three classes of stakeholders - participant, plan sponsor and the various service providers. Each class of stakeholder has different goals and so the progress to those goals must be assessed differently. A plan may be successful for the participant because of high matching contributions but not so for a plan sponsor who pays the cost!

Plan Participant

As anyone who has attended an enrollment meeting will attest, participants seek maximum disposable income, maximum retirement benefits and want to avoid unnecessary risks. The disposable income is lowered by participant contributions. Retirement benefits are enhanced by matching contributions, high investment returns and low expenses. Risks take the form of investment risk as well as the risk of needing the funds before they are available or running out of funds during retirement.

For the participant, the successful plan is one where matching is high, investments produce exceptional returns, there is little risk of loss, expenses are low and funds are available should needs arise. These goals reflect a short term perspective but may not be in the long term best interest.

Plan Sponsors

The typical plan sponsor seeks two goals - the plan is valued by employees and it is hassle-free.

The value placed by employees is determined by the participant goals described above but these features must be presented effectively for the value to be recognized. This requires compelling communication about the plan features. The number of employees who receive the plan benefits is a critical determinant of the aggregate value of the plan.

For a plan to be hassle-free, there must be minimal employee complaints and little need for help. Hassles also come from compliance and regulation where plan sponsors desire the minimum involvement.

Service Providers

The rational service provider seeks profitable growth. The profits are achieved through revenue that produces acceptable margins. Sustained growth is derived from consistently meeting plan sponsors’ goals.

Acceptable margins are produced when the provider’s costs to service each plan is fully recovered by the revenue earned. Loss leaders erode margins.

Meeting plan sponsor goals also includes those goals that are valuable to participants.

Measuring Success

Recognizing these different stakeholders requires three different sets of measures with varying levels of importance placed on the metrics used. Success for one stakeholder may have the opposite effect for another. It becomes essential to be specific about which stakeholder class is being referenced.

The following measures are categorized for each of the stakeholder classes and whether the effect is positive (+), negative (-) or neutral (~) on the success of that class. While each measure will not apply in every case, its importance must be considered in the light of the specific circumstances.


Effect on:

Plan Participant

Plan Sponsor

Service Providers

Plan Profile




Assets in plan




Allocation of assets to capital appreciation




Allocation of assets to capital preservation




Participation Rate




Contribution Rate




Plan Expenses




Plan Features




Automatic Enrollment




Matching Contribution




Number of Investment Alternatives




Default Investment (QDIA)








Hardship Withdrawal








Catch-up Contributions




In-Service Distributions




Safe Harbor (eliminates ADP & ACP testing)




Self-Directed Brokerage




Quality of Plan Services




Plan Administration or TPA Services








Platform of Available Investments








Plan Investment Selection and Monitoring




Participant Advice by Computer Model




Face to Face Participant Advice




Pre-retirement Counseling




Effectiveness of Communications




Enrollment Kit




Participant Statement




Enrollment Meetings




Education Program




Phone Center




Plan Sponsor Website




Participant Website




Plan Sponsor Interface




Client Relationship Management




Ease of Doing Business




Technological Compatibility








Plan features/benefits not covered elsewhere




Other concerns or issues not covered elsewhere




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Confused By the Clarity
The State of the Fiduciary Rule

It is certainly clear that the DoL Fiduciary Rule (“Rule”) will materially change the investment business over the next ten years but what is unclear to me is what those changes will be. As I read and hear definitive statements about what will and will not happen, I fail to understand how so many informed people could possibly be so confident about so many things.

This article is about the state of affairs and why I am so confused by the clarity others have expressed.

There are four major centers of influence that will define the final Rule.

There is the current administration that will dictate what administrative actions or inactions will be taken by the DoL, SEC, IRS, Department of Justice, etc. But the composition of these areas of current administration could change as other administration areas have.

In 2020 the entire administration could change. A likely delay of the Rule’s implementation for more years could herald another administration that could either be much more supportive or much less supportive of the Rule.

The courts have supported the Rule thus far but there is the very real possibility that higher courts could strike down the Best Interest Contract Exemption (“BICE”) contained in the Rule.

A least likely influence is that the Congress will find common ground to halt or modify the Rule.

Despite all these centers of influence in play, there are certain aspects of the Rule that are already in place and “Cast in Stone” so that changing them is almost out of the question. There are other aspects that are simply “Unknowable” at this point since the relevant centers of influence have not weighed in on them. There are also aspects of the Rule that are not yet in effect but are “Likely to be Implemented”. Then there are those that are “Unlikely to Remain” as part of a final Rule.

The most important aspects of the Rule have been put into these categories to help explain my confusion, and maybe yours.

Cast in Stone

The aspects of the Rule that have already been implemented are by far the most difficult to change or to reverse. These include the aspects that were implemented on or before June 9th, 2017:

  • The Definition of the Term “Fiduciary”; Conflict of Interest Rule-Retirement Investment Advice. This revised definition specifies who is a fiduciary, what Fiduciary Acts (See Appendix) are and what constitutes a breach (Conflicts of Interest1).

    The activities that are now “Cast in Stone” as Fiduciary Acts as of June 9th 2017 are summarized in the following table:

    Checklist of Ten Types of Recommendations Defined as Fiduciary Acts
    1The advisability of acquiring, holding, disposing of, or exchanging securities or other investment property
    2Investment policies or strategies
    3Portfolio composition
    4Selection of other persons to provide investment advice
    5Investment management services
    6Selection of investment account arrangements (e.g., brokerage versus advisory)
    7Other management of securities or investment property
    8Whether, in what amount and in what form rollovers, transfers, or distributions from a plan or IRA should be made
    9To what destination should a rollover, transfer, or distribution from the plan or IRA be made
    10How securities or other investment property should be invested after being rolled over, transferred, or distributed from the plan or IRA

    The most far reaching impact of the June 9th Fiduciary Acts are probably the effects on rollovers. As it stands today, a rollover is required to be in a client’s best interest but meeting such a standard is not a familiar process and BICE provides guidance only for level fee arrangements. It is therefore necessary to create a process to show that a client’s best interests are served by the rollover. This may be challenging when the cost of the rollover alternative is substantially higher than the cost of not rolling over.
  • Once defined as a Fiduciary Act, standards must be maintained that comport with the universally accepted Prudent Expert Rule2.
  • Furthermore, retirement regulations prohibit all conflicts of interests unless the prohibition is waived by an exemption, for which specific conditions must be met.
  • Laws and regulations that remain unchanged such as statutory exemptions defined in the Pension Protection Act of 2006 (408g exemption). These exemptions have the full force and power of being derived through the constitutional process of making laws.


A number of material questions have been raised but not yet answered about the survivability of the Best Interest Contract Exemption. These aspects are generally the consequences of the regulatory process, actions taken and promises made. By describing the answers to these questions as “Unknowable” it also means that there is a reasonable likelihood for those answers to either favor or oppose the BICE:

  • What aspects of the Rule will the courts ultimately uphold and which will be struck down?
  • What enforcement will be in place when the No Enforcement Policy3for various aspects of the Rule eventually expires?
  • What the consequences will be of failing to meet the “Working Diligently” requirement of the No Enforcement Policy?
  • Will plaintiffs and courts recognize the No Enforcement policy or will private action be based on regulations already passed and thereby limiting the usefulness of this policy?
  • Will the SEC make changes based on the Dodd-Frank Act4, and will they augment, replace or contradict the DoL Fiduciary Rule?
  • How will arbitration panels act until all exemptions are fully implemented?
  • What are the final exemptions and what conditions will be required for each?
  • Who will be in charge of the DoL Fiduciary Rule at the EBSA (department previously headed by the architect of the Rule, Phyllis Borzi)?

Likely to be Implemented

Certain aspects of the Rule are likely since they are favored by the current administration. They are likely only if the Rule is fully implemented during the tenure of this administration as it is composed today. If not fully implemented, changes in department heads can reverse the likelihood:

  • The No Enforcement Policy of selected provisions, subject to “Working Diligently” to comply with the best interest requirement, reasonable compensation and misleading statement aspects of the existing Rule
  • Some form of additional exemptions that waives prohibitions to conflicts of interest
  • Compensation through existing arrangements, subject to conditions that are yet to be defined
  • Other alternatives to BICE that are better aligned with certain business models

Unlikely to Remain

Elimination or changes to the following aspects of BICE have been promised or implied by the current administration. Full implementation of final exemptions must take place under the current administration for these to be eliminated or changed:

  • Right to class action for all retirement investors
  • Required warrantees and supporting procedures
  • Disclosure requirements as defined in the current version of BICE
  • Limitations on compensation for pre-existing and future business
  • Written contract requirement


Faced with these uncertainties, what would a prudent expert do? I don’t know, but here is what I advise:

  • Stop trying to find the right answer… no one knows

The best answer is:

  • Limit expenditures to aspects that are “Cast in Stone”
  • Hedge against the “Unknowable” aspects with contingency plans
  • Assess progress with aspects that are “Likely to be Implemented” and make any improvements that represent minimal disruption and cost
  • Stop all spending on aspects that are “Unlikely to Remain”
  • Pay attention to all aspects and keep them all in focus, not just those that are in the latest headline, tweet or study.

Frequently Asked Questions

This report puts a wide range of issues into perspective and raises a number of questions. This section is intended to give more depth to several of these issues and answer questions that may have been raised.

What aspects of the Rule were “Set in Stone” on June 9th, 2017?

  • In its announcement on April 4th, 2017 of a 60-day extension of the applicability dates of the fiduciary rule and related exemptions, the DoL noted regarding the revised June 9th date…

    “The fiduciary definition in the Fiduciary Rule published on April 8, 2016, and impartial conduct standards in these exemptions, are applicable on June 9, while compliance with the remaining conditions in these exemptions, such as requirements to make specific written disclosures and representations of fiduciary compliance in communications with investors, is not required until Jan. 1, 2018.”

    “Under the terms of the extension, advisers to retirement investors will be treated as fiduciaries and have an obligation to give advice that adheres to “impartial conduct standards” beginning on June 9 rather than on April 10, 2017, as originally scheduled. These fiduciary standards require advisers to adhere to a best interest standard when making investment recommendations, charge no more than reasonable compensation for their services and refrain from making misleading statements”.


What does “Working Diligently” actually entail?

  • In its Field assistance Bulletin No. 2017-02 (“FAB 2017-02”) the DoL announced its No Enforcement Policy and that “fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions” would be granted relief.

    The April 4th announcement made reference to what was expected during the “transition period”. Fiduciaries need to “adhere only to the impartial conduct standards (including the best interest standard), as conditions of the exemptions during the transition period”

    There is no further guidance as to what must be done or shown to establish that the promised relief would be granted. This makes relief uncertain, considering that the DoL has also announced that the referenced exemptions are subject to change and new exemptions could be added.

    A reasonable response of FAB 2017-02 would be to assess and then assume the most likely conclusion. Any evidence of work done to comply with the current version of BICE should be well documented in the event that relief is withheld at a future date.

What will happen to the BICE changes that have already been developed?

  • Changes fall into one or more of four broad categories that have different dispositions.

    • Improve Business: Improvements may include lower costs, automation, marketing advantage and intangibles.
    • Commitments Made: Reversing public statements and promises made to clients could have serious negative effects. Efforts need to be made to minimize any potential harm.
    • High Cost of Reverting: New practices and systems that have already been implemented may involve high risk, disruption and expenditure to undo. It is possible to seek efficiencies that reduce the burdens without reverting to the previous practices and systems.
    • High Cost of Continuing: In cases where significant future costs or risks are anticipated, the decision to abort is clear, given the enormous instability that has evolved.

    Separating changes into these four categories can lead to a clear course of action.

What aspects of the Rule are covered by the No Enforcement Policy?

  • In its FAB 2017-03, the DoL promises relief for violation of BICE, Principal Transaction Exemption or limitations on the use of Arbitration.

    “…the Department of Labor will not pursue a claim against any fiduciary based on failure to satisfy the BIC Exemption or the Principal Transactions Exemption, or treat any fiduciary as being in violation of either of these exemptions, if the sole failure of the fiduciary to comply with either the BIC Exemption or the Principal Transactions Exemption, is a failure to comply with the Arbitration Limitation in Section II(f)(2) and/or Section II(g)(5) of the exemptions.”


Why is further delay likely?

  • As long as supporters and opponents of the Rule see a reasonable path to achieving their conflicting goals, it will be difficult to avoid further delays. The precedent having been set, both supporters and opponents will demand a postponement of any aspect with which they disagree. Denial of a delay at this point would produce an outcry that would force the delay.

What forms of compensation are affected by the Rule?

  • Any compensation that is paid by, reduces the retirement investor holdings or influence the advice that is given is covered by the Rule. This includes all fees, expenses, commissions, salaries, incentives and non-cash compensation received by the person who performs a Fiduciary Act.

What court cases are pending that can materially change the future of the Rule?

  • The National Association for Fixed Annuities vs. DOL and Secretary Thomas Perez: The DoL rule’s definition of reasonable compensation is too vague, and the inclusion of fixed-indexed annuities in the BICE is “arbitrary and capricious” and “contrary to law.”

    U.S. Chamber of Commerce vs. DOL and Secretary Thomas Perez: The DoL has “improperly exceeded” its authority by creating this rule, is in violation of ERISA and other rules, and that it has “unlawfully created a private right of action.”

    The American Council of Life Insurers/National Association of Insurance and Financial Advisors vs. DOL and Secretary Thomas Perez: The DoL rule “unlawfully and arbitrarily imposes fiduciary duties on commercial sales relationships and communications that are not fiduciary in nature.”

    Indexed Annuity Leadership Council vs. DOL and Secretary Thomas Perez: The fiduciary rule and the BICE are “arbitrary and capricious” and exceed the DoL’s statutory authority.

    Market Synergy Group vs. DOL and Secretary Thomas Perez and Assistant Secretary Phyllis Borzi: The DoL rule inflicts “severe and irreparable harm” and its actions “violate applicable law and procedure.”

    Thrivent Financial for Lutherans vs. Acosta: The DoL exceeded its statutory authority by attempting, with its new fiduciary rule, to force all disputes into federal court rather than allowing for alternative dispute resolution methods.

What is the greatest effect that BICE will have on the industry?

  • If BICE survives, it will transform the way pricing is done. The combination of fiduciary risk, best interest requirement, compensation limitations and the burden of disclosures will eventually outweigh the convenience of bundling advisor compensation with other associated products and services.

    Advisors will demand a dizzying array of prices to fit each situation encountered. What is even more complex are the changes that follow as clients naturally begin to act like consumers and demand discounts and price reductions. All this will make it impractical for product and service providers to manage. Distributors will be forced to step in and manage the pricing.

    Distributor control of pricing will ultimately change the way business is conducted and transform the relationship of manufacturers and distributors as distributors create higher markups and lower core product pricing.

Will there ever be strong enforcement of BICE?

  • Very likely. The new definition gives a concrete basis to prosecute so regulators expect to see increased enforcement from private sources. Courts and arbitration panels will render judgement on losses where a fiduciary breach can be shown.

    This form of enforcement can be expected to remain dormant until there is a major market correction.

How do you explain what is going on to a client?

  • The government seeks to oversee the advisor/client relationship and there is a struggle going on between the pro-government and free market factions.

    Pro-government factions seek to have legal contracts, identical methods, controlled compensation, warrantees, and extensive public disclosures.

    The free market factions seek to rely on the self-interest of clients and advisors to maintain a fair and orderly process.


Fiduciaries and Fiduciary Acts

The definition that went into full effect on June 9th, 2017 revised ERISA 3(21):

  1. Such person provides to a plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner the following types of advice for a fee or other compensation, direct or indirect:
    1. A recommendation as to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, or a recommendation as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA;
    2. A recommendation as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., brokerage versus advisory); or recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made;

1 According to the Department of Labor, “Many investment professionals, consultants, brokers, insurance agents and other advisers operate within compensation structures that are misaligned with their customers’ interests and often create strong incentives to steer customers into particular investment products.

2 Fiduciaries must act in the interests of clients with the care, skill, prudence and diligence under the prevailing circumstances that a prudent expert acting in a like capacity and familiar with such matters would act.

3 On May 2nd, 2017 the DoL issued Field assistance Bulletin No. 2017-02 which in essences states that, “…during the phased implementation period ending on January 1, 2018, the Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions.” The DoL goes on to say “This Bulletin is an expression of EBSA’s temporary enforcement policy; and it does not address the rights or obligations of other parties.” Revisions that extend this policy to July 1st, 2019 are being considered.

4 Section 913 of the Dodd Frank Act empowers the SEC to make new rules to harmonize advisor regulations.

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Fiduciary Rule: Enforcement by No Enforcement

If you thought the Fiduciary Rule was mind boggling, the latest DoL policy directive takes contradictions to new levels.

First, the facts.

The DoL has confirmed that the Fiduciary Rule will take effect on June 9th, 2017 (“Transition Period”). But the enforcement of the Rule (See FAB 2017-02) and several of the exemptions will not be applicable until after a review ordered by President Trump. This final portion of the rule is scheduled for January 1st, 2018 and is likely to be changed from what is on the books today.

The promise of no enforcement does come with strings attached and offers only limited protection until the final portion of the Rule becomes applicable.

The first “string” is that new business must comply with three of the provisions of the BIC exemptions. All new business must meet the standard of being in the client’s best interest, compensation must not be above a reasonable level and there can be no material misleading statements. While it is not necessary to prove compliance, doing nothing is an enormous risk.

The second “string” is that compensation from existing accounts must not be above a reasonable level. It is necessary to test if the compensation from existing accounts is reasonable.

The third “string” is that advisors and firms must be able to show that they are working diligently and in good faith to comply with the new Rule. It becomes essential to show progress or readiness during the Transition Period.

The protections offered by the DoL no-enforcement policy extends to the IRS but does not address the rights or obligations of other parties. Other parties include other regulators and clients who have the right to sue if they should lose money and find non-compliance!

Now, what it means.

Starting on June 9th, firms and advisors will be at risk for doing nothing. Action is required to move in the direction of compliance with the new Rule.

It is also far from certain what the new rule will be. Compliance must be based on the current version of the Rule and adaptations made if the Rule changes. While it is unlikely that the June 9th regulations will change materially, it is very likely that the delayed portions will be revised.

The January 1st date is also subject to change, so the Transition Period could go on for an extended period, increasing the odds of a market crash or other events that lead to lawsuits.

And finally, how to avoid trouble.

The looming question is what actions make the most sense for firms to take leading up to June 9th and immediately thereafter. The following list of actions are prudent because they demonstrate working diligently, are low cost and least likely to be changed as well as offer the best protection from threats outside the DoL and IRS:

  • Get trained on fiduciary practices that apply to the business that are designated as“fiduciary” by the June 9th applicability. A certification will show that that work was done and the threat of litigation is minimized by learning what prudent fiduciary practices are.
  • Develop new templates that permit advisors to accurately discover what client’s best interests are
  • Write procedures that adapt the business to fiduciary practices
  • Begin the process of changing practices to meet the fiduciary standard.
  • Test the reasonableness of compensation for existing clients and make the necessary changes that justify the compensation.
  • Notify clients of changes that affect them.
  • Consider using an exemption other than those outlined in the Fiduciary Rule. Alternatives include using a certified computer model (“408(g)”), a fee leveling arrangement (“408(g)”)under the Pension Protection Act or a non-conflicted business model.

These actions should be examined and those that are feasible should be adopted as soon as possible.

Test your knowledge of the June 9th rules… take the free test here!

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Bark Without Bite

The recent turmoil about the DoL Fiduciary Rule is unlikely to change anything in the short term. Long term changes will require a Herculean effort! In fact, additional exemptions are more likely than revisions of the current rule. There are four obstacles to changing the applicability date of April 10 or making other amendments before that time:

  • The Administrative Procedure Act (“APA”) requires a 90 day notice and comment period before the Trump Administration can make such changes… unless a major flaw is discovered in the regulation.
  • Three of the most conservative courts have considered every conceivable flaw and found none…. very unlikely that some new flaw will be discovered that was not uncovered in any of the lawsuits filed to date.
  • Another court (probably an appellate court) could delay the applicability date… very unlikely to occur before April 10, even with the support of the White House.
  • Congress could act to waive the 90 day requirement of the APA… but this would unleash a political firestorm and Democrats would certainly obstruct such a Bill until after April 10.

These obstacles lead to the inevitable conclusion that the April 10 applicability date is not changing.

What to do?

If plans to comply are underway, the smart course is to continue and show that there was a best effort made should the deadline be missed. If there has been no demonstrable progress to date, the reasonable course is to start immediately with the exemption that is the fastest to implement. For most circumstances this is using a level fee arrangement under the Best Interest Contract Exemption or conduct a 408(g) Audit established by the Pension Protection Act.

The greatest and most time sensitive exposure for those who adopt the Best Interest Contract Exemption are any existing clients who may be paying excessive fees. This is a liability because excessive fees disqualifies these clients from the protection of the Pre-existing Account exemption (Grandfathering). As a result, a prohibited transaction is created by simply failing to act.

Advisors must therefore act to develop evidence that demonstrates compliance with Grandfathering requirements. This involves a process of defining the services, costs and other factors to explain the level of compensation. Clients that pay excessive compensation must be dealt with immediately.

For more information on compensation requirements visit Compliance Compensation at

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  • By Lou S. Harvey
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  • 1/1/2017
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  • 0
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The 21st century has seen an escalation in the focus on retirement adviser compensation coming from a plethora of lawsuits, new laws from Congress, Regulatory action and even the President promising to cut $17 billion from adviser’s pay.

This unprecedented activity has led many to conclude that compensation will be cut. The basis for all this activity is the firm belief that advisers are excessively compensated for the work they do. Such a belief may have been fueled by the high profile case of Bernie Madoff. 

While it is entirely possible that unreasonable and excessive compensation exists, it is unreasonable to expect that such excesses are widespread.

Unfortunately the hunt for unreasonable compensation is being fueled by advisers and advisory firms that fail to see the threat to their own existence. Instead many carry out this destructive behavior by lowering their own compensation in an imprudent effort to avoid possible penalties.

This paper is intended to inform and to limit the damage to advisers who perform at a high level for reasonable compensation.

Supporting this initiative to limit the damage to good advisers, is the unanimous 2010 Supreme Court decision that stipulates that reasonable compensation must be based on factors of value described in the Gartenberg Standard.

The Gartenberg Standard incorporates the varied relationships and arrangements that exist between advisers and clients,developed from decades of understanding client needs and situations and molded into a framework of regulation and enforcement.

The Court warned about the use of benchmarks to compare advisers, limiting such tools to “arm’s length benchmarks” that include only those arrangements derived from arm’s length bargaining. The Court ordered that even “arm’s length benchmarks” were unnecessary and only ancillary to the other Gartenberg factors.

BICE II(c)(2) The recommended transaction will not cause the Financial Institution, Adviser or their Affiliates or Related Entities to receive, directly or indirectly, compensation for their services that is in excess of reasonable compensation within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2).
ERISA 408(g)(1)(b)(3) (B) Any investment advice takes into account investment management and other fees and expenses attendant to the recommended investments;

ERISA 408(b)(2)(c)(1) (i) General. No contract or arrangement for services between a covered plan and a covered service provider, nor any extension or renewal, is reasonable within the meaning of section 408(b)(2) of the Act and paragraph (a)(2) of this section unless the requirements of this paragraph (c)(1) are satisfied.


The 21st century ushered in a witch hunt to find and punish advisers who take unfair advantage of consumers by charging unreasonable compensation. After three decades of largely failed efforts at pursuing fees charged by institutions, attention has turned to advisers.

There has been a history of success in reducing adviser compensation in the late 20th century. Of particular note are:

  • Deregulation of brokerage commissions 
  • The demise of contractual plans by requiring refunding of commission advances 
  • Cutting sales charges from 8.5% to 5% by the action of the self regulatory organization 
  • Reduction in retirement plan charges by the competitive onslaught of mutual funds 
  • Introduction of expense criteria in investment policy statements

Advisers are today faced with threats to retirement business from four directions:

  • Litigation from Retirement Investors 
  • Limitations of the Best Interest Contract Exemption (“BICE”)
  • Reasonableness requirements of the Pension Protection Act Exemption 408(g)
  • Fee Disclosure Regulation (ERISA 408(b)(2)

All of these seek to eradicate unreasonable fees, but it is the Supreme Court that provided the guidance of what a reasonable fee should be. It is up to the investment adviser community to adopt an appropriate standard of reasonableness that complies with this guidance.

Determining what is and is not reasonable for clients whose wealth ranges a thousand fold in a mosaic of relationships, services, products and compensation systems is complex. As the Court affirmed, simple comparisons of what others charge “are problematic because [they] may not be the product of negotiations conducted at arm's length”.

Assessment of reasonableness involves consideration of a host of factors that may be relevant to one situation but immaterial in another.

Answering these threats requires a course of action that recognizes and enhances the value that advisers provide so as to limit the exposure to massive compensation cuts.

2010 -JONES ET AL. v . HARRIS ASSOCIATES L. P. (a) A consensus has developed regarding the standard Gartenberg set forth over 25 years ago: The standard has been adopted by other federal courts, and the Securities and Exchange Commission’s regulations have recognized, and formalized, Gartenberglike factors.

The Guidance on Excessive Fees

In 2010 the US Supreme Court affirmed (Jones1) the historical standard for determining when investment related fees and expenses are excessive. The Court also added further guidance for lower courts to apply in judging whether compensation is excessive.

The affirmed standard are the Gartenberg Factors that require compensation be examined from multiple perspectives before a finding of excessiveness can be made, including at a minimum:

  • Services and Quality

    The nature, extent, and quality of the services to be provided by the investment adviser;

  • Adviser Performance

    the investment performance of the investment and the investment adviser;

  • Costs and Profits

    the costs of the services to be provided and profits to be realized by the investment adviser and its affiliates;

  • Economies of Scale

    the extent to which economies of scale would be realized as the investment grows and other circumstances increase efficiency;

  • Benefit to Investor

    whether fee levels reflect these economies of scale for the benefit of investors.

2010 -JONES ET AL. v . HARRIS ASSOCIATES L. P. “The essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arm’s length bargain. If it does not, equity will set it aside.” Gartenberg’s approach fully incorporates this understanding, insisting that all relevant circumstances be taken into account and using the range of fees that might result from arm’s-length bargaining as the benchmark for reviewing challenged fees

Conclusions of the Court

In its decision, the Supreme Court pointed out that in order to be excessive:

  • “…an investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining."

The Court also warned against placing too much emphasis on a comparison of one advisory fee against fees charged to others by other advisers (Statistical benchmarks). The Supreme Court wrote:

  • "These comparisons are problematic because these fees, like those challenged, may not be the product of negotiations conducted at arm's length.”
  • and
  • “Gartenberg uses the range of fees that might result from arm’s length bargaining as the benchmark for reviewing challenged fees.”

Arm's Length
adj. the description of an agreement made by two parties freely and independently of each other, and without some special relationship, such as being a relative, having another deal on the side or one party having complete control of the other. It becomes important to determine if an agreement was freely entered into to show that the price, requirements, and other conditions were fair and real. Example: if a man sells property to his son the value set may not be the true value since it may not have been an "arm's length" transaction

DoL FAB 2007-01 With regard to the prudent selection of service providers generally, the Department has indicated that a fiduciary should engage in an objective process that is designed to elicit information necessary to assess the provider’s qualifications, quality of services offered and reasonableness of fees charged for the service.

Arm’s Length Benchmarks

The Supreme Court discouraged the use of benchmarks, ascribing only marginal usefulness to “arm’s length benchmarks” that excluded many adviser arrangements in the market today. This lay to waste benchmarks that contain arrangements between parties who:

  • Are family members
  • Are employer/employee
  • Have other material business relationship(s)
  • Have controlling influence (Superior/subordinate)
  • Have a significant knowledge advantage of the market
  • Engage in bartering in which goods or services are exchanged
  • Are referred in a quid pro quo arrangement
  • Use temporary low pricing to capture market share

These exclusions make the collection and calculation of “arm’s length benchmarks” difficult, expensive and unreliable.

The process is made difficult by the need to identify only those arrangements that are arm’s length. The existence of these exclusions may only be known to the parties involved.

The process is expensive due to the slow manual process required to select the arrangements that qualify as “arm’s length”. The results are likely to be unreliable for the reliance on a manual process and the relatively small sample that can be obtained by this means.

A further consideration is that “arm’s length benchmarks” can only be applied to arm’s length arrangements.

Why Regulators Pass the Buck

In considering regulation regarding fees, regulators have had to avoid being reversed in court, and in particular by the Jones and Gartenberg precedents. Regulations have therefore stayed away from defining what compensation is reasonable and therefore not excessive

While the DoL and IRS have both expressed support for considering compensation in all vendor selection, they have generally been silent on what specific methods would be acceptable.

Endorsing benchmark comparisons would also contradict the Supreme Court decision that limits the use to “arm’s length benchmarks”.

Product Dependency

Unlike products that are generally cut from the same mold, advisers have evolved to meet a non-homogenous mix of client needs, preferences, fears and desires. Compensation for advisers based on products that are in the client’s best interest will invariably yield over-compensation in some cases and under-compensation in others.

The imbedded compensation received from product manufacturers presents a further challenge to regulators seeking to curb excessive compensation.

The first issue is jurisdictional.

A dually registered adviser may be paid by an investment manager and insurance company for products held in a combination of taxable accounts, IRAs and ERISA plans. In this case the adviser may come under the Jurisdiction of the SEC, Finra and one or more insurance commissioners. The IRA business is in the jurisdiction of the IRS and ERISA is the responsibility of the Department of Labor.
So who will be holding the adviser accountable?

The second issue is complexity.

The payment of this compensation can take very intricate routes. Starting with the client the funds may come first to a broker/dealer, a bank for certain activities, an insurance agency or a payroll provider for payroll deductions. It may then flow to a number of product providers who distribute the funds as directed, including back to the broker/dealer.
Imagine trying to follow the money!

The third issue is conflicting laws.

This entangled system is further knotted up by the growing number of laws that sometimes contradict each other. The list of these are so long it would be impractical to attempt to list them here, but consider just the categories of State and Federal laws covering securities, insurance, taxes, money movements and consumer protection.
And excessive compensation could potentially violate any of them
The Gartenberg Standard cuts across these jurisdictions, complexities and laws to provide a rational way to assess reasonableness.

Why Rely on Gartenberg

Specifics of the case is fairly narrow but the principles of the Court’s decision have wide application.
These principles can be summarized as follows:

  • The reasonableness of Adviser’s compensation cannot be determined by a single measure but require at least the five considerations embodied in the Gartenberg Standard in addition to other relevant facts.
  • The compensation received by other advisers under similar circumstances may have no bearing on the reasonableness of another for several reasons, but in particular transactions are often not “arm’s length” and involve other relationships and services.

These principles guide regulators and courts and are applicable to individual clients as well as institutions and large investment pools.

The Gartenberg Standard also addresses the variation in the portfolio mix that an adviser’s client owns. Examining each adviser recognizes the difference in time and skill required to serve very simple portfolios (say indexed mutual funds) from portfolios that are more complex (with insurance products, alternative investments, etc.) as well as every possible combination. With Gartenberg, advisers with complex client portfolios are not penalized for the time it takes to serve them.

Employing these principles provides advisers with the greatest protection since they are based on a Supreme Court decision. In the event of a charge of excessive or unreasonable compensation the adviser can answer the plaintiff or regulator with a value argument. The value provided by the adviser is represented in the Gartenberg Standard which can often be demonstrated to exceed the compensation that the adviser receives.

Operating outside of these principles exposes advisers to excessive compensation penalties, regardless of other regulatory compliance. If a client should suffer a loss, and an adviser cannot show evidence of meeting the Gartenberg Standard, it is far more likely that the adviser or firm will be forced to restore losses or worse, pay penalties.

It becomes clear that while nothing is certain, the prudent choice for advisers is to operate under the Gartenberg Standard and the opinion of the Court.

Exceptionally high service requirements.

Applying the Gartenberg Standards to Various Situations

The four examples that follow show the misleading results that can be produced by using simple peer group averages without considering the Gartenberg factors.

Example 1: Reasonable above average compensation for an IRA

  • The client is retired and has only one account with assets of $700,000 to fund retirement in addition to Social Security. Investment requirements are to hold a substantial portion of assets in the energy sector but to avoid health care. The client requires quarterly reviews to monitor the IRA portfolio and update personal preferences and risk tolerance.

    The adviser receives compensation of 95 basis points which is 50% higher than other similarly situated clients with other advisers.

    This give the misleading impression that this client is overpaying for the adviser’s services.

    Applying Gartenberg, the finding is that this client should be paying more:

    • The first step is to calculate what the client is actually paying the adviser:

      $700,000 X 95 bps = $6,550
    • Next is to determine the cost and profit of providing the services to this client. Adviser spends 24 hours per year servicing this client at an internal cost + profit of $350 per hour.

      $350 X 24 hours = $8,400
    • Additional factors are then considered and weighted. These may increase or decrease the hourly calculation to arrive at a “Reasonable” compensation.

      Adviser performance: + 10% ($840)
      Economies of scale: +0% ($0)
      Benefits to client: +25% ($2,100)
    • Summing to a total reasonable compensation of

  • The reasonable compensation in this case is far in excess of what the adviser earns.

  • Example 2: Reasonable above average compensation for 401(k) Plan

    • This client is a 401(k) plan with $13 million and 300 participants. Participation rate is 93% of eligible employees and contributions average 7.5% of salaries. The average age of participants is 46. Plan asset allocation is rated at moderately aggressive. The adviser visits quarterly and provides regular training sessions with employees. The adviser is responsive to calls from participants 24 hours per day.

      The adviser receives a net of 40 basis points as broker of record on the plan. This is nearly double the average for plans of this size.

      Applying Gartenberg, the finding is that this client should be paying more, not less:

      • The first step is to calculate what the client is actually paying the adviser:

        $13,000,000 X 40 bps = $52,000
      • Next is to determine the cost and profit of providing the services to this client. Adviser spends 52 hours per year servicing this client at an internal cost + profit of $450 per hour. An analyst in the practice spends 45 hours per year at $150 per hour

        $450 X 52 hours = $23,400
        $150 X 45 hours = $6,750
                           Total = $30,150
      • Additional factors are then considered and weighted. These may increase or decrease the hourly calculation to arrive at a “Reasonable” compensation.

        Adviser performance: + 25% ($7,538)
        Economies of scale: +0% ($0)
        Benefits to client: +50% ($15,075)
      • Summing to a total reasonable compensation of:

    • The reasonable compensation in this case is close to what the adviser earns.

  • Example 3: Unreasonable below average compensation for large client

    • This client has total assets of $47 million with the adviser that includes a $100,000 IRA on a separate platform that pays the adviser 65 basis points. This account receives no services from the adviser and is considered a “convenience” for the client.

      The average adviser compensation for IRAs of this size is 85 basis points, but this simple average does not consider the scale of the entire relationship.

      Applying Gartenberg, the finding is that this client should be paying less:

      • The first step is to calculate what the client is actually paying the adviser

        $100,000 X 65 bps = $650
      • Next is to determine the cost and profit of providing the services to this client. Adviser spends ½ hour per year discussing this account at an internal cost + profit of $350 per hour.

        $350 X ½ hour = $175
      • Additional factors are then considered and weighted. These may increase or decrease the hourly calculation to arrive at a “Reasonable” compensation.

        Adviser performance: + 0% ($0)
        Economies of scale: +0% ($0)
        Benefits to client: +5% ($9)
      • Summing to a total reasonable compensation of:

  • While this scenario is not likely to be called out as a problem, it is an irritant since it technically violates the Gartenberg Standard. In reality, the adviser could simply decline this compensation.

  • Example 4: No average compensation for situation

    • This client purchased an annuity for his IRA, but seeks to surrender it now. The surrender charges are 4% of the account valued at $250,000. There are no ongoing services to this client.

      The adviser received a 5% commission at the time of the sale but will not participate in the surrender charge. The issue is, however, that the client is now paying for compensation that the adviser received two years ago. There is no available peer group average for this scenario.

      This scenario illustrates the need to consider a variety of factors when assessing the reasonableness of adviser compensation. Using Gartenberg, the adviser compensation received at the time of the sale was simply an advance. The analysis is therefore performed as if the payment and receipt occurred concurrently.

      Applying Gartenberg, the finding is that this client should be paying less:

      • The first step is to calculate what the client actually paid the adviser:

        $250,000 X 5% = $12,500
      • Next is to determine the cost and profit of providing the services to this client. Adviser spent 4 hours discussing this account at an internal cost + profit of $350 per hour

        $350 X 4 hours = $2,450
      • Additional factors are then considered and weighted. These may increase or decrease the hourly calculation to arrive at a “Reasonable” compensation.

        Adviser performance: + 10% ($245)
        Economies of scale: +0% ($0)
        Benefits to client: +10% ($245)
      • Summing to a total reasonable compensation of:

  • The reasonable compensation in this case is considerably less than what the adviser earned and would be considered excessive.

What Profit is Reasonable?

One aspect of Gartenberg that has been the subject of confusion is the determination of a “reasonable profit”. The adviser’s profit is one component of compensation, but left unchecked could be excessive.

In attempting to provide some parameters, DALBAR gathered data on the pre-tax profit margins in financial services and related industries. The findings were unsurprising in that the range is close to initial estimates:

  • The average margin was 35.9%
  • The minimum was 16.1%
  • The maximum was 54.5%

Margins within these ranges are arguably reasonable and would reign in extreme cases.

How to Prove Reasonableness

Proof is having the evidence before the fact, not trying to create it afterword. There is very little credibility in trying to explain that taking home a five figure compensation was fair after a client lost $1 million.

The answer is making it undeniably clear beforehand what the pay will be and what facts were available to support your decision.

While the cost and profit factors of the Gartenberg Standard can be quantified, it is necessary to establish a credible method of weighting the other factors to establish the reasonableness of compensation.

This proof can be accomplished by estimating the time spent and allocating the cost to each client. This is a well-established practice and has been used by professionals for centuries.

The proof of reasonableness is a comparison of the compensation calculated from allocated costs and profit.

Advisers must estimate the time spent on:

  • Delivering services to the client
  • Discovery, research, analysis and monitoring required to achieve the results produced.

Economies for clients where applicable are used to reduce the allocation to those clients.

A further refinement is changing the allocation based on skill, knowledge and experience of each practitioner in a multi practitioner office

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The Department of Labor is expected to impose new regulations that require financial advisors to enter into a written contract with each client (“Fiduciary Rule”). This contract requires that the financial advisor act in the client’s best interest as well as a number of additional provisions and warranties.

There has been an unprecedented level of resistance to the Fiduciary Rule that is scheduled to take effect in the fall of 2016. Opponents argue that these regulations pose a threat to the financial services industry and its clients and that the upheaval will cause more damage than any benefit that could be derived.

There have been a series of threats to the status quo of financial advisors in last 10 years. These have had little effect on the way business is done. In spite of the potential for massive changes, financial advisors and institutions have had to do little more than make minor adjustments and add more disclosures.

Some examples of these threats to the status quo that occurred in the last decade were:

  • The pension protection act of 2006 threatened to neutralize incentives by limiting advisors to computer models or level fees. Thwarted by favorable rulemaking by regulators.

  • Dodd/Frank threatened universal fiduciary standards. Still awaiting regulatory action

  • Fee Disclosure promised radical changes in pricing by disclosing what clients were paying and what they were getting in return. Poor compliance and weak enforcement turned this tidal wave into a ripple.

  • 12b-1 repeal would prohibit the largest compensation source for financial advisors. These efforts have died on the vine.

  • Government sponsored retirement plans have been proposed to replace private sector plans. Moving at a snail’s pace, the automatic IRA is being adopted in only a few states

  • Repeal of tax advantages threaten to undermine a key benefit of retirement plans, annuities, IRAs, etc.

  • Overhaul of tax laws threaten to change the tax treatment of all investments. No overhaul has made it through the Congress.

The lesson from this past decade of threats may well be that the best bet is to sit back and do nothing, for this too shall pass.

Is the Department of Labor Fiduciary Rule any different?

While the Fiduciary Rule may suffer the same fate as previous initiatives, it may be instructive to understand how this differs from previous attempts at major changes. Here are 10 ways in which the Fiduciary Rule differs from previous proposals/changes.

  • Populace issue with a winning message… Opponents must win the argument that acting in a client’s best interest is too disruptive, too expensive, too risky and exclusionary to be a prerequisite for financial advisors.

  • High visibility… Repeated demands of the President and active involvement of Congressional Leaders with associated media coverage continues to make consumers aware of the planned regulation.

  • High awareness of how previous changes failed to materialize… The administration and regulators are keenly aware of the ways that previous attempts to change have been thwarted and have implemented tactics to overcome them.

  • No fear of reprisal from disapproving Congress… Unlike any time in recent history, the current administration has shown disdain for the Congress after suffering no reprisals for standing against Congress in the past.

  • No action required from Congress for adoption… The Fiduciary Rule is a regulatory change that requires no action from Congress to take effect. While Congress could vote to stop the Fiduciary Rule, there is little chance such an action would survive a certain presidential veto.

  • Low interest in campaign support from the financial sector (AKA Wall Street)… The current administration appears to have little interest in support from the financial sector and has been unwilling to negotiate.

  • Enforcement not dependent on regulatory inspection… The Fiduciary Rule is embodied in a written contract that permits any client to take action against financial advisor or institution, needing only to prove a breach of contract.

  • Explicit agreement required of each client… Clients play an active role since each will be required to sign a best interest contract, thus opening the door for clients to review the arrangement with their attorneys.

  • Risk of non-compliance… Clients may have to be reimbursed for market losses. The exposure exists for losses if the protection of the contract is not in place.

  • Liability for failure to comply increases over time… The likelihood of a loss occurring increases with the time of the exposure since the period over which the loss is calculated could be any period.

Is it really different this time? “What if I do nothing?”

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The Broker/Dealer business model was created to distribute products to investors but has now incorporated the delivery of investment advice. When viewed as an investment advice business the inherent conflicts of interest has alarmed regulators and consumer advocates and driven the regulatory changes we see today. Michael Kitces offers some thoughts on how this incompatibility can be resolved, but “something’s gotta give!”

Mr. Kitces’ position is supported by DALBAR products such as the 408(g) Model Certification that separates the personality driven business of relationship management from the scientific probabilities of asset allocation and investment selection. The 408(g) Fee Leveling eliminates the conflicts of interest with an audit that complies with DoL and IRS regulations..

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If the goal of compliance practices is to keep advisors out of trouble, the job just got a lot harder. As firms seek a course of action after the Fiduciary Rule, the problem of compliance becomes exponentially more difficult. Compliance based on processing orders is not remotely capable of protecting anyone from what happens before the order is even received. Complex pre-order procedures and practices may go unsupervised without rethinking how compliance is achieved. Michael Kitces shares his views on the inadequacy of compliance that exists today...

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More Work and Less Pay

New Federal regulations change what financial advisors do and how they do it as well as the amount of compensation they receive. These regulations apply to advisors who offer investment advice to IRAs, retirement plans or participants. The effects will also be felt by clients, providers they use and affiliated firms.

Under current rules, most financial advisors are paid by investments to find good deals for clients. The advisor’s business is sustained by offering investments that perform well for clients. Advisors who offer bad investments lose clients and are out of business in a short time.

Regulators have decided that this type of arrangement represents a conflict of interest and have established new rules to end these practices. Under the new rules the advisor’s job is no longer finding good deals and payment is no longer for making investments.

Under the new rules, the financial advisor’s job is to provide defined services to clients and receive payment that is in line with those services, which must be in the client’s best interest. On the surface this appears quite reasonable but further examination shows the challenges that the change creates.

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Computer Model Certification


The Fiduciary Rules go into effect April 10, 2017 and must be fully operational by January 1, 2018. These applicability dates set the timelines for decisions, preparation and implementation of alternatives to comply with these regulations.

The Conflict of Interest Rules (“COIR”) replace the 1975 definition of what constitutes a fiduciary for ERISA plans and IRAs. The effect of COIR is to transform currently permitted practices into prohibited fiduciary acts.

Institutions and individuals must cease these prohibited fiduciary acts or use an exemption to legitimize these activities.

The Chosen Exemption

Among the exemptions is the provision in the 2006 Pension Protection Act that exempts advice delivery by a certified computer model from prohibited conflicts of interest (408(g)). The use of 408(g) has certain advantages when business circumstances permit its use and the requirements are achievable. Advantages can include:

  • Overcome conflicts of interest and differential compensation from related businesses

  • A superior solution for investors

  • Lower risk for the fiduciary

  • Lower cost to implement, operate and to maintain

  • Shorter time to market

  • Scalable to handle high volumes

Flexibility to make changes and adapt to new investment types and practices

DALBAR Qualifications

Under 408(g) Computer Models can only be certified by an eligible investment expert, with the appropriate technical training or experience and proficiency to analyze, determine and certify, in a manner consistent with the regulation. DALBAR has met these qualifications and has been performing certifications since the inception of the regulation in 2009.



The certification attests to five dimensions:

  • Regulatory Compliance
  • Capabilities, strengths and weaknesses
  • Performance
  • Consistency with offers and agreements
  • Reasonableness and cost


In addition to compliance with securities laws the computer model may be certified as compliant with regulations as they apply to:

  • ERISA Plans

  • Managed account QDIAs

  • IRAs


Capabilities are evaluated in three areas:

  • Discovery… information gathered about the client and defaults used when information is not available

  • Interpretation… how client information is applied

  • Investments… universe of investments available


Historical Results:

  • Participation in up markets

  • Capital preservation in down markets


Consistency of communication and model results:

  • Contracts, descriptions, brochures and other materials

  • Appropriateness for audience and expected knowledge to meet the requirement: “Calculated to be understood”

  • Tests run with multiple scenarios


Reasonableness is an overall evaluation of all observations taken together in relation to the cost to users of the mode




  • Application with attachments received in good order

Pre-Qualification Review

  • Review materials for disqualifiers and terminate engagement if uncorrectable

Additional Disclosures

  • Determine and request any additional materials

Investment Theory Evaluation

  • Determine if exception procedures will be required

Performance Record

  • Examine samples in up and down markets Cost Evaluation

  • Determine if direct and indirect cost to the client is reasonable

Regulatory Checklist

  • Review items specifically suggested by DoL

Model Tests

  • Test models and communication for consistency

Management Letter

  • Review any exceptions or deficiencies and determine if resolution is feasible


  • Issue certification, good for one year from date of issue


Additional Support

DALBAR offers a number of services to enhance the utility of the computer model and the effects of the Fiduciary Rule on the use of the model as an alternative to the Best Interest Contract Exemption. These services are separately purchased and are not included in the certification.

Upgrade Analysis

Current implementations of the computer model are examined for possible violations of the new Conflict of Interest Rules, Areas of concentration include handling of rollovers and potentially conflicting exemption requirements.

Pre-Certification Review

DALBAR will perform a subset of the certification process before changes are made to comply with 408(g). In this way, findings from the pre-certification can be incorporated add to or reduce the changes being made. The cost of pre-certification lowers the cost of the actual certification.

Usability Analysis

The usability is based on criteria for a particular target audience. The access to, use of, exception conditions and the follow through are evaluated.

Contact Center Monitoring

Contact center representatives who use the certified computer model must comply with the requirements of 408(g). The contact center monitoring adds a level of oversight of the required practices and is evidence of “best efforts” in the event of a failure to comply or litigation.


Consulting engagements may cover planning, diagnosis, cost/benefits, research and other services that utilize DALBAR’s expertise, knowledge of the market, practices and regulations.


Cory Clark (617) 624-7156

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About Lou Harvey

Louis S. Harvey
President & CEO

Founder and leader of DALBAR, Lou Harvey is relentless in the search for the forces that are shaping the world of financial services today, tomorrow and for years hence. Using Dalbar’s research capabilities, Lou Harvey seeks insights from inside and outside the industry to understand and anticipate changes in customers’ needs and the ways products are distributed.