The Franchise Owner's most trusted news source

Log In / Register | Jul 17, 2018

Interview with Guidant's CEO Stephan Roche on Why It Is Exiting 401k Rollovers to Finance Startups

Guidant decides to get out of small business financing. Photo/Guidant

BELLEVUE, Wash. (Blue MauMau) - Stephan Roche steps into the CEO role at Guidant Financial Group, inheriting a difficult situation. Guidant, the largest company in the relatively new and controversial industry of rolling over retirement funds to finance business startups, let go of a huge block of its staff on Monday. And announced on Tuesday it was indefinitely suspending its small business financing unit for fear of running afoul of the Internal Revenue Service.

Mr. Roche spent considerable time last night in an exclusive interview with Blue MauMau to explain to the industry the forces at play and why Guidant decided to close its small business financing arm.

[BMM] You've been the CEO for just seven days and had all of this hit the fan.

[Roche] Before we had an inkling that Guidant Financial was going to suspend small business sales, the board made me the CEO of each of the individual subsidiaries seven days ago. But I was actually brought on board January 14, over a year ago, and made CEO of the parent company. There are three different subsidiaries. One of which is Guidant Financial. The other two are subsidiaries that we run. They have nothing to do with the small business financing arm.

In effect, I have been CEO of the company since July of this past year.

[BMM] Are there any anticipated changes in leadership?

[Roche] No. None.

[BMM] Will the closing of your small business financing services affect your existing customers?

[Roche] All of our current small business financing customers will be treated with the same level of care and expertise that we've provided since we launched the product five years ago. We don't intend to change that and we don't intend to have any regulatory decision to come down from the Department of Labor (DOL) or IRS to change that. All of our current customers that we've already completed or are in the process of completing, we will fully complete. All we have done is stop selling any new products in the marketplace. It is just a suspension of sales, it is not intended to be a permanent exit from the marketplace. In terms of other products, Guidant started as a self-corrected IRA company. We have a very significant business in both the self-corrected IRAs, where we utilize an LLC structure to provide individuals a chance to invest their IRAs in non-traditional assets like real estate or private stock or others assets that would not include a small business. A small business investment was through a 401k rollover only. And so we have that as well as a record-keeping platform to support our current 401k rollover clients in which we can be fully supportive and can continue to invest in optimizing our platform to create the best experience possible for our customers. So we do have a very significant business outside of our 401k rollovers and small business financing. And that is what we have regeared ourselves to focus on as we await any impending guidance from the IRS or DOL.

The IRS came up with the terminology of ROBS (Rollovers as Business Startups). You can look it up in the Employee Plans division. (See IRS's Employee Plans News, pdf, pg. 3. When ‘Too Good to Be True’ Very Well May Be: Funding Business Startups with Plan Assets). Once again the ROBS transactions is on the short list of those they intend to continue to evaluate.

This is not in any way a Guidant investigation, nor is there any indication that they are investigating Guidant specifically. We certainly haven't been notified of any investigation whatsoever. But we do know the IRS continues to have ROBS transactions in 2009 as one of their highest priority investigations. That's obviously one of the triggers for our decision to suspend sales because we simply don't know how things are going to come out in terms of the regulatory requirement to support the product.

Our self-directed IRA business is very profitable, and frankly has had nice growth in the last few months. As individual investors have chosen to avoid the stock market and traditional bonds and mutual funds, they have shifted more to alternative assets. That business is very healthy and we have a very strong belief in the prospects of the business. That made it easier to make the decision to suspend sales, but again it's not something we wanted to do.

Let me set the record straight that there have been no issues and that there are no indications that there will be issues. So we don't have any facts in hand that suggests that the IRS is targeting Guidant. What it is is a series of events over the past few months.

The field directive was the initial effort by the IRS to clarify the guidelines for the ROBS product. The field directive is used by the IRS to provide field examiners with guidelines on how to audit a plan. Most of us felt as we reviewed all of the compliance documents that we were already compliant based upon the new field directive. 

When that came out, Guidant felt and continues to feel that all of its products were 100 percent compliant and that all of our customers remain compliant to the degree that we input that compliance. Of course, we cannot manage their issues unrelated to ROBS, but from out standpoint they are 100 percent compliant.

More recently, some two weeks back there was an ASPPA (The American Society of Pension Professionals & Actuaries) conference. They had a conference with Michael Julianelle, who authored the IRS memo of October 1 (pdf), and Monika Templeman (IRS Director of Employee Plans and Examinations), and other top-ranked DOL employees. One of our executives was at this conference. At the conference, the IRS expressed frustration to attendees that the field directive went out. They started calling all the companies that sell the product, promoters. And when you call us 'promoters,' that is a specific terminology that is used by the IRS to describe companies or firms that promote certain products that they will then choose to evaluate. So it isn't necessarily negative, but it's not positive. It's just terminology...

[BMM] Help me understand. Is the terminology "promoters" specifically for those firms who market or pay commissions for rolling over retirement plans to fund small businesses?

[Roche] It is a term used for those who market the [ROBS] products. They were clearly frustrated that those who promoted the products saw October's field directive as an opening to continue to promote the product and didn't take it as seriously as they had expected. So there was a lot of chatter on what the IRS's next steps would be. And then there was a lot of chatter on what the Department of Labor's next steps would be.

In conversation with our attorneys, and we have several that we utilize, including a Washington D.C.-based firm, we decided that in an abundance of caution — based upon the rumors that we were hearing from Washington, and again, I stress that NONE of them were directed at Guidant, nor were there communications to Guidant or its lawyers about this, that they were seeking to move further with more regulatory guidance and potentially with even more drastic action — last Thursday we felt it was prudent and the right thing for our business to take immediate action to suspend sales [in the rollover business] until we understood the IRS and the Department of Labor.

[BMM] Is the IRS investigating the industry?

[Roche] Yes.

[BMM] Are they investigating Guidant individually and separate from the other players?

[Roche] No. That is a mischaracterization.

I understand why the mischaracterization may be in the marketplace, but I can't stress enough that it is simply not the case where we are being under examination independently of the industry as a whole. But we do believe the industry is under a microscope and that the examination will be ongoing. I direct you to the IRS website, specifically the EP [Employee Plans] division. If you look there, you'll see that they talk about 2009 ROBS transactions.

[BMM] Some competitors have said that you paid commissions to franchise brokers and by not following the letter of the law, it put you in a bad position with the IRS.

[Roche] No. This is not the case. We don't think that is the issue they are looking at. We think that there are two other issues that the IRS is looking at, but we don't know. At this point it is all speculative because we simply don't have any data.

I cannot stress enough what a big deal it is for us to make this decision. Guidant's leadership feels it is the perfect time for a product like this. We literally have trillions of dollars in retirement savings. Even with the hit that retirement savings have taken with the overall economy, and the Dow Jones and NASDAQ, you still have trillions of dollars. And to free up that capital to invest in small business in America seems to me the most obvious, intuitive thing we can do and it should have been a part of the Economic Recovery Act. And yet it wasn't.

To us, there is an opportunity to change the discourse in Washington. We would prefer to do it on our terms rather than wait for the Department of Labor and IRS to act because they simply aren't reaching out to us to look from our perspective on how they should move forward.

[BMM] You obviously felt that there wasn't a foreseeable future in ROBS. You decided to pull out, but yet have strong feelings that there is a market for this product.

[Roche] I cannot stress enough how much of an impact we think this will have on the overall American economy. This situation is extraordinarily frustrating for us to be in a position in which we know that we have a very strong, 100 percent compliant product that provides access to funds for Americans looking to start their own businesses. We believe that investing in your own business is not only an appropriate investment for retirement, but it's probably the single best investment.

Let's talk about some alternatives to investing in your business because there are certain people who don't see it as clearly as we do. But then you talk about employees of Bear Stearns or Washington Mutual or Lehman Brothers or Enron, who invested their own 401k monies in their own company stock and lost 100 percent.

We have had a very strong track record among our customer base of successful companies. Do some fail? Absolutely. Just as some franchises fail. There are people who don't succeed and in the process they lose some or a significant portion of their retirement money. But we have always said that if you are going to start a business, you are going to use capital from somewhere. If you use it from your home, you might lose your home if your business fails. If you use an unsecured line, you might go into personal bankruptcy and lose your credit score for the next seven years. If you lose your retirement money, that's a terrible outcome. It's not something that anyone would wish upon a small business owner, but at least they can wake up on Monday morning, get a job, start fresh and begin again to rebuild their retirement.

We've always believed in the compliance of our product, but also the value of this product in helping to rebuild the American small business engine.

[BMM] What sort of franchisors do you think this IRS/DOL initiative and your pullout will impact?

[Roche] I think it will impact all of the franchisors indirectly. Our place is not to convince the marketplace to suspend sales. If FranFund and BeneTrends and others are looking to move forward, we support them 100 percent. We've had a very strong personal relationship with each of the players. Every once in a while you might hear some strong language coming from one, it is because we all compete aggressively with each other. But we believe in what they are doing, just as much as we believe in what we are doing.

We believe in the strength of the industry. That's why Guidant has set up a conversation with industry leaders Wednesday (today) to lead the discussion about what we can do to preserve the status of the ROBS product and understand what regulatory guidelines are necessary to make sure all of our customers are doing the right thing for the IRS and the Department of Labor.

This is something that we believe in very strongly and we'd like to get back in the market. Once the IRS and DOL clear Guidant, this market is going to explode because I think a lot of prospective customers look at this and get a little bit nervous because of the field directive. Their CPAs may be uncomfortable because they question if this is legal. Once there is clear guidance, it will be clear that it is legal.

We have very strong competitors, but I think that Guidant has always had a leading position in terms of the number of transactions it has completed because we have a very strong product that we have been able to sell.

[BMM] What is the composition of the franchisor or client that uses Guidant's services? Brokers? Small franchisors?

[Roche] Yes to all of those. You probably won't see as often the significant franchisors that require, say, a million-dollar upfront investment, what we call the top-tier franchisors. That is not to suggest that the other franchisors aren't strong brands. But McDonald's, Dunkin' Donuts, Taco Bell and other top-tier national brands all have their own in-house financing units. Guidant has never been in a situation in which we have helped fund their franchisees.

What we specialize in is franchises from $20,000 to $250,000 in startup costs. Those are the very, very small mom and pop franchise units that can be launched by hiring minimal employees and capital equipment. These types are very strong utilizers of Guidant's services. But we also have franchises that need as much as half a million dollars in startup costs. These will utilize the 401k ROBS product as one of the sources of financing to balance with the SBA loan or equipment leasing. Those tend to be larger and relatively less common transactions.

The more common ones are going to be in the $50,000 to $150,000 range. Of course, we do quite a bit of business. Only about half of our business was with franchises. We did quite a bit of business with new business startups outside of the franchising community. Also business transactions where someone was purchasing an existing business.

BMM: There's been a huge drop in SBA-backed loans, such as 7a and 504 loans. Conventional loans are way down as the banking system struggles. Small businesses are struggling to get credit lines and loans. How has Guidant been doing given the drop in the economy and the present credit crunch?

[Roche] I believe there was a 57% drop in SBA loans (7a loans) in the fourth quarter of last year. That's a big drop.

But Guidant grew double digits in 2008 relative to 2007. Our business definitely slowed down in the fourth quarter of '08, particularly in October and November when the stock market tanked. I'd say the primary reason is that if you looked at the number of franchisees who purchased a franchise during that period or at new business startups, what you saw was that small business investors went to the sidelines. We had exactly the same level of lead flow and the exact same number of qualified conference calls in which we talked to these consumers, but what happened was our closing rate dropped because individuals shied away from new investments.

Come the middle of December and January, our business took off again. It raced out of the barn.

January was our first month-over-month growth in four months. And February was on track to be even higher, even though it is a short month. We were in a very strong position. Then again our other platform was generating record revenue for us.

One of the most frustrating things to come out of this decision was that our business was very healthy. So for our board to take this decision was something that was very contrary to the way we felt about the overall business. It was very healthy and survived, whereas many other businesses had struggled over the last six months.

Related Reading:

Your rating: None Average: 2.6 (5 votes)

About Don Sniegowski

Don Sniegowski's picture

Public Profile

Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email