Plan Sponsors Have Fiduciary Duties to Follow During Adviser M&As

Advisory firm merger and acquisition (M&A) activity is on the rise without any sign of slowing down. But what are plan sponsors to do if their advisory firm is acquired, or if the firm they partner with keeps acquiring others?

Plan sponsors should first find out whether and how the services their financial adviser provides will be impacted, says George Sepsakos, an ERISA [Employee Retirement Income Security Act] attorney and principal at Groom Law Group. “The first questions that our [plan sponsor] clients typically ask is how the direct experience with the adviser is going to change, and if they need to be concerned with the effects of the relationship,” he says.

Beyond that, plan sponsors will want to understand whether the acquisition will bring on any conflicts of interest that were not a concern before, Sepsakos adds. Plan sponsors should ask, “Is the business strategy of the company that was acquired the same? Will they now have access to proprietary funds that they otherwise haven’t had access to? Are there other streams of revenue that were important to the acquired entity business but could now flow to the adviser?”

One notable question Sepsakos consistently asks his clients is whether the adviser can continue to work on the full investment lineup. “There are instances where there are securities that the adviser is not able to provide advice on,” he explains. “If those securities are in the plan lineup, the question becomes whether the adviser will have to recuse themselves, or will there be another mechanism to oversee that bucket of security?”

Additionally, and oftentimes most importantly, Sepsakos says, ask about potential fee changes. Is there any reason for the fees to change? Would the acquisition affect fees at all, and is the adviser going to have a different process for selecting or recommending investments?

Robert Friedman, an ERISA attorney and partner at Holland & Knight, recommends employers review the contracts they have with the advisory firm if it’s going through an acquisition.

However, he notes that if the acquisition involves an equity-type transaction where the advisory firm is owned by another company or person, then it’s likely little has changed within the firm and its services.

“The advisory firm will still be intact, but it would still make sense to review the contract and see if the sale has any effect on the terms,” he advises. “The plan sponsor may not need to do anything initially, but they will need to pay attention consistently to make sure that the advisory firm is still capable and competent.”

If there is a change in the structure of the advisory firm, then plan sponsors will likely be asked to consent to a new contract. In this case, Friedman strongly encourages plan sponsors to ensure they understand the potential alterations that would occur as a result of the acquisition. “Those changes could be anything. It could be a change in the team that is servicing the plan sponsor, a change in fees or a change in the approach that the advisory firm takes when providing services,” Friedman says.

It’s also important to consider any new services that will be offered through the acquisition. One example is that the entity that is acquired could offer managed accounts, while the new adviser only provides target-dates funds (TDFs). Another example could be that the new advisory firm conducts business with individual participants who leave an employer-sponsored plan. Both of these instances could cause substantial changes to the plan, both Sepsakos and Friedman say.

Friedman emphasizes that employers hold a serious fiduciary duty to ensure the advisory practice can provide advice on prudent investments and avoid conflicts of interest.

“If there is any question about this, then the plan sponsor needs to take action,” he continues. “If the advisory firm is not capable of discharging its duties, the potential liability will roll back on the plan sponsor.”

The core liability that a sponsor holds is recognizing and understanding how the plan adviser’s business has fundamentally changed, Sepsakos adds. He doesn’t anticipate a halt on M&A activity anytime soon, so he recommends that plan sponsors watch out for any new acquisitions with their advisory partner.

“M&A activity has been really hot and I think it’s here to stay—at least in the near-term,” he says. “We can all expect there to be some major changes in that segment of the business that we just need to keep an eye on.”