My article for the Financial Planning website, on the new DOL rule, is up. You can find it here: http://www.financial-planning.com/blogs/idea-exchange/veres-professional-advisors-already-winners-with-fiduciary-rule-2696313-1.html.
Basically I said that the final rule offered some interesting concessions both to advisors and to the industry. I hate the fact that the fiduciary disclosures and fee disclosures can now be put on the brokerage firm’s website rather than affirmatively provided to the plans and participants. I’m not crazy about the fact that somebody can act as a plan advisor and then sell an IRA rollover and put the customer’s money into commissionable products.
But overall, the new rule fundamentally (and with pretty zero exception) requires the broker or independent BD rep to act as a fiduciary. That brings a lot of people into the principles-based universe, which is alien territory for the brokerage firms. They’ll all have to set up subsidiaries that function as fee-compensated RIAs in order to keep working with qualified plan money. My take is that the DOL was a bit sly about its concessions, making it harder for the wirehouse arguments to prevail in court should there be (as I think there WILL be) a legal challenge to these provisions.
That means that this is a milestone for the planning profession, a stake in the ground further than anyone has gone before in the fiduciary requirement space. After today, it will be harder for the SEC to argue that it should be more lenient on conflicted advice in the non-ERISA space than the DOL was with qualified plans.
The brokerage firm just lost a lot of ill-gotten revenues, and the attendant influence that will buy at the SEC and on Capitol Hill. What’s not to be cheerful about?
I’ve been monitoring other reactions, and noticed a few interesting things.
The most negative comment on the rule-that is, the one that most believes that the rule is a sellout to the industry-is Josh Brown’s piece in on Fortune’s website, which you can find here: http://fortune.com/author/joshua-brown/?iid=sr-link1 He makes the important point that current arrangements between brokers and qualified plans have largely been left untouched, except (this is my comment) that the brokers servicing them now have to declare themselves to be fiduciaries and acting in that capacity.
But I think even that can be seen positively, because it opens up a door of opportunity. Fiduciary advisors can swoop in on these accounts, point out the high fees and hidden costs and displace the relationship with the help of a third-party administrator. Your normal costs for managing assets will come to around 50 basis points on pools of money much larger than your typical client accounts, which will be about a third what the brokerage firms will cost. I think the DOL actually did the financial planning profession a favor by not requiring the brokerage firms to tighten up their existing accounts.
Others have noted, as I have, that in the final version of the rule, non-traded REITs are no longer excluded from being recommended. This was a big win for the independent broker-dealers, who lobbied hard for this provision so their top salespeople wouldn’t have to give up their favorite product.
But how can you plausibly call yourself a fiduciary when you recommended this garbage to plan participants?
More importantly, under the new rules, which are pretty strict on this, those sales reps can’t get paid preferentially for recommending annuities and non-traded REITs, meaning they can’t get a fat commission. At best, they have to accept levelized fees, not unlike AUM fees.
This will test my long-time assertion that without fat commissions, nobody would recommend those products to their customers. I suspect that suddenly we’ll see what products brokers and salespeople actually believe in, rather than what lines their pockets. If they don’t have any interest in recommending these products without the commission structure, what does that say about their past recommendations to their customers?
Most importantly, the DOL rule writers seem to have been very careful to make sure that Wall Street firms and sales agents cannot disclose away, disclaim away or have their customers contractually sign away fiduciary responsibility. This may have been the Obama Administration’s rough revenge on Wall Street for all the lobbying to emasculate Dodd-Frank after taking all that bailout money. The new DOL bill may actually have the effect of siphoning $28 billion a year out of Wall Street’s bonus pools, and a proportionate share out of expensive variable annuities and non-traded REITs.
One of the odd things about this period right after the rule was announced is the silence of the brokerage and insurance firms that lobbied so furiously against previous versions of the rule. What are they thinking right now? There are two possibilities. Either they will quietly go about their business, which will tell us that they got the concessions they wanted, or they’ll squeal and scream and file legal challenges, which will tell us this rule really does cut into their hidden-fee revenues.
This may sound counterintuitive to many people, but I would prefer the latter, and a legal challenge would be nice. I really like the existing contrast between the fiduciary professional advisor’s business model and the sales models, and I love hearing the sales folks try to explain why it’s such a terrible idea for people to work with advisors who would treat them like their grandmother. It’s the best way to educate the public that I can think of.
Meanwhile, Harold Evensky offered his own take on the rule. Harold has been around… forever, and has been consistently wise about the various initiatives over the years. As you can see, he believes (as I do) that a fiduciary oath is the best way to distinguish between a professional and somebody with a sales agenda. It may not be a perfect solution, but it’s better than 1,000 pages of regulations.
Musings on the DOL Rule
Harold Evensky, CFP
By now it’s certainly no surprise that the Department of Labor has issued its long awaited missive on Fiduciary Duty. With over 1,000 pages there is a lot to absorb; however, I believe the DOL has done a Solomon like job of streamlining, simplifying and clarifying the Rule. Although like many other supporters of the fiduciary concept I too would have liked to see something stronger, the thrust of the DOL presentation of the Rule(s) that resonated with me was:
“Today a loophole will be closed making the system more fair.” I agree, the actions of the DOL will absolutely make the system “more fair.”
I believe that given the realities of today’s political constraints; e.g., an SEC Governor who opines that the Rule “…seems to ignore the chorus of voices that questioned whether it will restrict middle-class families’ and minority communities’ access to professional financial advice by making retirement advice unaffordable.” [Michael Piwowar] and the views of some legislators, “This fiduciary rule will harm countless Georgians who have worked hard to make sure they make wise financial decisions for their families’ futures… For families across the country, this rule is essentially the Obamacare for retirement planning, and I will do everything I can to overturn this rule.” [Sen. Johnny Isakson]. Along with the multiple millions of dollars spent lobbying against the implementation of a DOL Rule, the result is amazing and to be applauded.
Some of the issues that seem to be missing in the seemingly endless commentary on the Rule are:
ﾥ The argument that small investors (e.g.., “the countless Georgians”) will lose access to advice. Balderdash. First, brokers DO NOT provide advice. If they did, they would have to do so as Investment Advisors and would already be held to a fiduciary standard. Second, there is a large universe of fiduciary advisors (RIAs) who are ready, willing and able to provide substantive advice. Third, as we’ve already seen, traditional commission based platforms will quickly find a way to continue to operate under the new Rule; e.g., “LPL Cuts Prices, Account Minimums Ahead of DOL Fiduciary Rule.”
ﾥ Although few investors and, for that matter, few investment professionals understand the difference between rule based regulation and principals based regulation; the DOL does. As it noted “Rather than create a highly prescriptive set of transaction-specific exemptions, the Department instead is publishing exemptions that flexibly accommodate a wide range of current types of compensation practices, while minimizing the harmful impact of conflicts of interest on the quality of advice.”
Rather than a check list of rules, firms are provided significant latitude subject to the principal that the firms and its advisors act as fiduciaries. No wiggle room here.
ﾥ Where the buck stops. Under the current suitability standard, if there is a dispute, the ultimate responsibility for proving the claim rests on the shoulders of the client. Under a fiduciary standard the responsibility shifts to the advisor. This is a distinction not lost on compliance departments. As a consequence I believe the enforcement of fiduciary standards will not be a result of detailed rules and micro-managing regulators but rather the actions of firm compliance departments and ultimately the results of arbitration and court rulings.
I believe the DOL Rule is a seminal event and will significantly improve the investment outcome of individual investors for decades to come. My friend Bob Veres, publisher of InsideInformation and longtime industry observer best summed it up.
“But overall, the new rule fundamentally and with pretty much zero exception requires the broker or independent BD rep to act as a fiduciary, and it brings a lot of people into the principles-based universe, which is alien territory for the brokerage firms… My take is that the DOL was a bit sly about its concessions, making it harder for the wirehouse arguments to prevail in court should there be (as I think there WILL be) a legal challenge to these provisions.
I said it’s a milestone for the planning profession, a stake in the ground further than anyone has gone before in the fiduciary requirement space.”
Finally, as legislators, businesses and the courts go about interpreting and implementing these 1,000+ pages, individual investors might happily ignore the activity by simply having their advisor sign the Committee for the Fiduciary Standard’s mom-and-pop Fiduciary Oath. The simple commitment states:
I believe in placing your best interests first. Therefore, I am proud to commit to the following five principles:
ﾥ I will always put your best interests first.
ﾥ I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.
ﾥ I will not mislead you, and I will provide conspicuous, full and fair disclosure of all important facts.
ﾥ I will avoid conflicts of interest.
ﾥ I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.
With that signed and in hand, you will at least know that, for you, the relationship is structured so that YOUR interest comes first.
If you would like a copy please drop me a note at harold@evensky.com