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Conflicted Interpretations

In the aftermath of the Department of Labor fiduciary rulemaking, I’m hearing a lot of nonsense from the sell side of the industry—about how the rules are absolutely unworkable, about how one simply cannot serve an unwealthy client without selling him an annuity into his traditional or Roth IRA.

But there’s also a surprising amount of nonsense coming from fiduciary advisors as well.  People who are suspicious of any new rules, and who are very fussy about adhering to the strictest definition of regulations, are imposing on themselves additional burdens that I believe were never intended by the DOL in the first place.

One example is the “variable compensation” clause in the rule.  Variable and fixed compensation, it seems clear from the language of the rule, was intended to apply to sales agents who recommended a non-traded REIT instead of an ETF to a rollover IRA customer because they could pocket a nice fat commission if they recommended the former, and got nothing if the customer ultimately purchased the ETF.  The DOL allows that broker to make the non-traded REIT recommendation if his compensation is fixed at a certain amount regardless of what the customer buys.  My guess is that the sales agents are going to be less motivated by the non-traded REIT sale if there’s nothing in it for them, and the DOL probably followed this logic.

But now I’m hearing fee-only advisors saying that they’re going to have to register themselves under the Best Interest Contract Exemption because some of their investment recommendations might not be the lowest cost products out there.  And they believe they might trigger the variable compensation rule if they don’t apply their AUM fee to their clients’ cash holdings.  Because they charge an AUM fee on the rest of the portfolio, any money they recommend to flow from the cash portion to the investment portion would constitute non-variable compensation.

It’s obviously not my job to make compliance decisions for the advisory community, but I would recommend that everybody take a step back and look at the bigger picture.  Was it the DOL’s intent to provide incentives for you to apply your AUM fees to a client’s cash accounts, so you could comply with the new regs?  Do you think the DOL believes you should give up your investment judgment and simply recommend whatever happens to be on the Morningstar list of least expensive options?  Don’t you think the BICE exemptions were purely and simply an accommodation to product manufacturers who were selling investments that would otherwise be hard to justify as a fiduciary recommendation?

There are going to be a lot more fussy interpretations of the DOL rule, but the ones I see so far are coming from two sources:

1) compliance attorneys, who love to comb through these regs to find more work for them to charge you for; and

2) the brokerage and independent BD community, which would love to somehow get real fiduciaries to denounce a rule which clearly impedes sales activities to qualified plans and IRA rollover recipients.

The rules were designed to reduce conflicts of interest in providing advice to peoples’ retirement assets.  I wish now we could find a way to reduce the conflicts of interest involved in providing advice on how to follow the rules.