Fidelity vs Pontera (Round 2)!

On September 16, 2024, I wrote my second blog post as the “ERISA Nerd” about Fidelity announcing they will be blocking Pontera’s technology.

You can read the post by CLICKING HERE.

Well, here we go again!

On Friday, I received several emails at our “trading” domain about the NY Times article discussing the battle between Fidelity and Pontera.

You can read the NY Times article by CLICKING HERE (I had to pay to read it)

I’m assuming most everyone reading this blog is in the financial industry and familiar with both Fidelity and Pontera (technology to trade “held-away” accounts).

Now, before I go on and give my “two cents” as the “ERISA Nerd”, I need to let you all know that I am biased!

I have been a financial adviser since 1997. I created a company called PlanConfidence that allows advisers to easily create ERISA-compliant 401(k) advice for all their clients with a click of the button.

When we first started, Pontera did not exist.

So, the participant was responsible for implementing (trade) the advice we created.

When Pontera (formerly FeeX) created a way for advisers to trade the “held-away” accounts, it was a game changer!

Why?

Because even though our software could easily bridge the gap between creating personalized, ongoing advice, the participants had to login into their custodian’s website and implement it themselves.

And many of them did not!

Many Americans are either too time constrained, too hesitant or didn’t know how to trade their own account.

I know this firsthand as I’ve helped hundreds of clients trade their accounts.

My clients wanted my help implementing the advice I created.

They wanted me to trade it for them.

And then Pontera (Feex) came out and allowed me to do just that!

Now, I no longer work as an adviser, as I help financial firms create ERISA compliant, personalized, ongoing 401(k) advice for all their clients with the click of a mouse.

And I let the firms know their clients can implement it themselves or they can use a firm like Pontera to implement (trade) the advice we create.

We even internally changed some of our processes to make it easier for advisers to do so when using Pontera.

Our goal at PlanConfidence is to get rid of the word “held-away” from an adviser’s vocabulary. We believe all 140 Million Americans should be getting professional, ongoing advice from an adviser of their choosing! Period, full stop!

I tell you all this to preface that my opinion as the “ERISA Nerd” is highly biased.

But even though I am biased, I can see why Fidelity would want to lock out Pontera and are even willing to harass their own 401(k) participants (clients) in the process to do so.

Fidelity is not just a custodian for 401(k) assets.

They are not just a website for 401(k) participants to login and manage their plan.

Fidelity is huge company with many ways to “monetize” the 401(k) participant.

They have their own proprietary mutual funds participants can use.

They have their own Target Date Funds (TDFs) participants can use.

And they don’t want an “outside” (not affiliated with Fidelity) “selling away” their proprietary mutual funds or TDFs.

I have not met an adviser who thinks they can’t outperform a TDF with their own personalized and ongoing advice.

So, Fidelity knows the money in TDFs will decline if an “outside” adviser could trade their account.

They also have their own financial advisers who can offer “one-off” advice to the 401(k) participant without becoming an ERISA Fiduciary.

Why would Fidelity want to give a 401(k) participant the ability to choose their own adviser “held-away” from Fidelity?

It doesn’t make economic sense for them.

For Fidelity it’s all about the money.

I don’t begrudge them about this.

This is America, they have a right to make money.

However, I believe there is a bigger issue that is going to come to the surface.

I think this issue may end up in the court system to decide if Fidelity’s (valid) concern over “cyber-security” outweighs the ability of a participant to have an adviser manage their 401(k) account.

See, when a financial adviser trades a 401(k) account with discretion, they become an “ERISA Fiduciary” under section 3(21)(a)(i).

Being an ERISA Fiduciary is a much higher standard than being a Fiduciary under the 1940’s Act.

In fact, the courts have called it, “The highest duties under the law”! - Donovan v. Bierwirth

The adviser, when using Pontera, accepts the fact they are operating under the highest duties under the law.

If they were to breach any of their duties as an ERISA Fiduciary, a client can go to Federal Court and sue them.

ERISA also grants “class action” lawsuits. (These are rights that clients do not normally have when working with a financial adviser due to the mandatory arbitration clauses in their agreements).

What is unknown at this time, what happens to a 401(k) custodian when it locks out access or does not accept instructions from an ERISA Fiduciary?

Fidelity obviously has the ability to identify which accounts are being managed by an adviser using Pontera.

Which means Fidelity knows these instructions are coming from an ERISA Fiduciary.

I imagine a scenario where Fidelity blocks Pontera and a 401(k) participant losses money due to a market decline.

Or, the participant does not make as much money due to an increasing market because Fidelity blocked the trades or locked the participant/adviser from their account.

ERISA Fiduciaries can be held liable for any losses, or missed gains, if they breach their fiduciary duty. (And the losses or missed gains have to be paid back with personal assets).

The 12.2 trillion dollar question on the table right now is can the same high standards of ERISA Law apply to a 401(k) custodian (who is normally NOT an ERISA Fiduciary) if they ignore or block instructions from an ERISA Fiduciary?!?

Can Fidelity be held liable for not accepting instructions from an ERISA Fiduciary?

Can class action lawsuits be granted for ignoring an ERISA Fiduciary?

Can all the high standards an adviser needs to operate under ERISA be transferred to a firm who knowingly and willingly violates them?

I am popping my popcorn, getting my soda ready and eagerly awaiting the results of Fidelity vs Pontera round 2.

I will be sure blog more about this as the drama unfolds!

-The ERISA Nerd!

(aka: Kevin T Clark, RF)