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Should you consider a second opinion?
The Department of Labor (DOL) Fiduciary Rule is a new ruling, originally scheduled to be phased on April 10, 2017 – Jan. 1, 2018, but now delayed until June 9, 2017 including a transition period for the applicability of certain exemptions to the rule extending through Jan. 1, 2018.
The rule expands the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA). If this sweeping legislation (1,023 pages in length) is not stopped outright, it will automatically elevate all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary, bound legally and ethically to meet the standards of that status. While the new rules are likely to have at least some impact on all financial advisors, it is expected that those who work on commission, such as brokers and insurance agents, will be impacted the most.
The law was initially created under the Obama administration. But on February 3, 2017, President Trump issued a memorandum that attempted to delay the rule's implementation by 180 days. This action included instructions for the DOL to carry out an “economic and legal analysis” on the rule's potential impact. Then on March 10, 2017, the DOL issued its own memorandum, Field Assistance Bulletin No. 2017-01, clarifying the possible implementation of a 60-day delay to the fiduciary rule, and explaining the different possible enforcement policies should the rule still go into effect on April 10, 2017.
In late March 2017, the world's two largest asset managers, Vanguard and BlackRock, called for a more significant delay to the rule considering the confusion these repeated moves to delay the rule have caused. After a 15-day public comment period, during which time the DOL received about 193,000 comment letters, with nearly 178,000 opposing a delay, the DOL sent its rule regarding the delay to the Office of Management and Budget for review.
After the review by the OMB, the DOL publicly released an official 60-day delay to the fiduciary rule's applicability date. The 63-page announcement noted that "...the Department has concluded that it would be inappropriate to broadly delay application of the fiduciary definition and Impartial Conduct Standards for an extended period in disregard of its previous findings of ongoing injury to retirement investors." Responses to the delay have ranged from supportive to accusatory, with some groups calling the delay "politically motivated."
Breaking Down the Fiduciary Rule
The Department of Labor’s definition of a fiduciary demand that advisors act in the best interests of their clients, and to put their clients' interests above their own. It leaves no room for advisors to conceal any potential conflict of interest and states that all fees and commissions must be clearly disclosed in dollar form to clients. The definition has been expanded to include any professional making a recommendation or solicitation — and not simply giving ongoing advice. Previously, only advisors who were charging a fee for service (either hourly or as a percentage of account holdings) on retirement plans were considered fiduciaries.
A fiduciary is a much higher level of accountability than the suitability standard previously required of financial salespersons, such as brokers, planners, and insurance agents, who work with retirement plans and accounts. "Suitability" meant that as long as an investment recommendation met a client's defined need and objective, it was deemed appropriate. Now, financial professionals are legally obligated to put their client’s best interests first rather than simply finding “suitable” investments. The new rule could, therefore, eliminate many commission structures that govern the industry.
Advisors who wish to continue working on commission will need to provide clients with a disclosure agreement, called a Best Interest Contract Exemption (BICE), in circumstances where a conflict of interest could exist (such as, the advisor receiving a higher commission or special bonus for selling a certain product). This is to guarantee that the advisor is working unconditionally in the best interest of the client. All compensation that is paid to the fiduciary must be clearly spelled out as well.
Covered retirement plans include:
Defined-contribution plans: four types of 401(k) plans, 403(b) plans, employee stock ownership plans, Simplified Employee Pension (SEP) plans and savings incentive match plans (simple IRA)
Defined-benefit plans: pension plans or those that promises a certain payment to the participant as defined by the plan document
What Isn't Covered
If a customer calls a financial advisor and requests a specific product or investment, that does not constitute financial advice.
Financial advisors can provide education to clients, such as general investment advice based on a person's age or income, and it also does not constitute financial advice.
Taxable transactional accounts or accounts funded with after-tax dollars are not considered retirement plans, even if the funds are personally earmarked for retirement savings.
This is where individual investors need to be informed, educated to make “prudent decisions,” especially when it comes to “rolling-over “ retirement plan assets to an individual IRA account.
Also, be aware and ask yourself. Are your taxable accounts being conducted in a strict fiduciary manner? If not, it is our opinion, to seek advisory, that manages all account’s with the fiduciary guidelines.
History of the Fiduciary Rule
Originally, the DOL regulated the quality of financial advice surrounding retirement under ERISA. Enacted in 1974, ERISA had never been revised to reflect changes in retirement savings trends, particularly the shift from defined benefit plans to defined contribution plans, and the huge growth in IRAs.
A set of reforms was proposed back in 2010, but it was quickly withdrawn in 2011 after fierce protest from the financial industry regarding regulatory costs, liability costs and client concerns.
Five years later, the financial industry was put on notice in 2015 that the landscape was going to change. A major overhaul was proposed by President Obama on February 23, 2015. "Today, I'm calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests," the president said. "It's a very simple principle: You want to give financial advice, you've got to put your client's interests first."
The DOL proposed its new regulations on April 14, 2016. This time around, the Office of Management and Budget (OMB) approved the rule in record time, while President Obama endorsed and fast-tracked its implementation; the final rulings were issued on April 6, 2016. Before finalizing the ruling, the Labor Department held four days of public hearings. While the final version was being hammered out, the legislation was known as the fiduciary standard. In January 2017 during the first session of Congress of the year, a bill was introduced by Representative Joe Wilson (R, S.C.) to delay the actual start of the fiduciary rule for two years.
Reaction to the Fiduciary Rule
There’s little doubt that the 40-year-old ERISA rules were overdue for a change, and many industry groups have already jumped onboard with the new plan, including the CFP Board, the Financial Planning Association (FPA), and the National Association of Personal Financial Advisors (NAPFA). Supporters applauded the new rule, saying it should increase and streamline transparency for investors, make conversations easier for advisors entertaining changes, and most of all, prevent abuses on the part of financial advisors, such as excessive commissions and investment churning for reasons of compensation. A 2015 report by the White House Council of Economic Advisers found that biased advice drained $17 billion a year from retirement accounts.
However, the legislation has met with staunch opposition from other professionals, including brokers and planners. Financial advisors would rather be held to a “suitability” standard than a “fiduciary” standard because the latter will cost them money – in lost commissions and the added expense of compliance. The stricter fiduciary standards could cost the financial services industry an estimated $2.4 billion per year by eliminating conflicts of interest like front-end load commissions and mutual fund 12b-1 fees paid to wealth management and advisory firms.
While the best interest contract exemptions would permit broker-dealers and insurance companies to provide plan participants with fiduciary advice while still receiving commissions, many professionals fear the conflict-of-interest yardstick would essentially eliminate commissions. This, in turn, would force financial advisors to create or shift fees onto individuals, and could price many middle- and lower-market investors out of the market, they argue.
Three lawsuits have been filed against the rule. The one that has drawn the most attention was filed in June 2016 by the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and the Financial Services Roundtable in the U.S. District Court for the Northern District of Texas. The basis of the suit is that the Obama administration did not have the authorization to take the action it did in endorsing and fast-tracking the legislation. Some lawmakers also believe the DOL itself is reaching beyond its jurisdiction by targeting IRAs. Precedent dictates Congress alone has approval power regarding a consumer’s right to sue.
Some critics suggest the new Fiduciary Rule makes no difference anyway. Those observers say consumers will still be subject to being cheated by “bad actors.” For example, complying with the new rule will require more paperwork. Paperwork, critics say, is a great place to hide a scam and then later say the customer signed and knew what he or she was signing. More recently, members of President Trump's advisory team have both criticized the rule and Trump signed an executive order to delay its implementation. The DOL continues to defend the rule in multiple lawsuits in 2017.
After the DOL officially announced the 60-day delay to the rule's applicability, a "Retirement Ripoff Counter" was unveiled by Senator Elizabeth Warren and AFL-CIO President Richard Trumka. Partnering with Americans for Financial Reform and the Consumer Federation of America, their counter attempts to highlight the "...cost to Americans of saving for retirement without the fiduciary rule, starting from Feb. 03, 2017." The press release from Americans for Financial Reform states, "Every day that conflicted advice continues costs them [Americans] $46 million a day, $1.9 million per hour, and $532 a second.
Who Does the Fiduciary Rule Affect?
The new DOL rules are expected to increase compliance costs, especially in the broker-dealer world.
Are your accounts held by a broker-dealer? Understanding this could surely help you potentially avoid, high-cost commission products and other related hidden-fees.
Understand the Fee-only advisors and Registered Investment Advisors (RIA) entity.
Advisors and registered reps who dabble in terms of advising 401(k) plans and are paid by commissions, from the plan assets, may be forced out of that business by their broker-dealers due to the new compliance aspects. This could reduce the number of advisors who serve smaller plans. That's what happened in the U.K. after the country passed similar rules in 2011; since then, the number of financial advisors there has dropped by about 22.5%. Ameriprise CEO Jim Cracchiolo said, “The regulatory environment will likely lead to consolidation within the industry, which we already see. Independent advisers or independent broker-dealers may lack the resources or the scale to navigate the changes required, and seek a strong partner.”
Annuity vendors also will have disclosed their commissions to clients, which could significantly reduce sales of these products in many cases. These vehicles have been the source of major controversy among industry experts and regulators for decades, as they usually pay very high commissions to the agents selling them, and come with an array of charges and fees that can significantly reduce the returns that clients earn with them.
What Sort of Investments Will the Rule Impact?
The main impact is anticipated to be connected with IRAs.
However, TGA Capital Management provides all its account/advisory clients in a strictly fiduciary capacity and this is in our clients-best-interest.
In particular, rollovers from 401(k) plans to IRAs will certainly come under scrutiny. There have been many instances reported in the financial press (and likely tens of thousands more in reality) about advisors suggesting rollovers to IRAs, even though it may not have been in the client’s best interest – either in terms of moving the client’s money out of a low-cost company retirement plan that offered solid investment choices to the types of high-cost investments recommended in the new IRA.
The DOL has also released answers to common questions they've received about the new rules in the form of FAQs, which address topics from investments to advisor compensation.
More Rules of the SEC?
As if there wasn’t enough confusion among advisors and clients about the new plan, the Securities and Exchange Commission (SEC) has projected proposing its own set of fiduciary rules in April 2017. It is likely any new SEC rules would extend beyond retirement accounts and govern the way in which RIAs and brokers treat clients in all dealings, mandating that the client’s interests must come first in all cases. SEC Chairwoman Mary Jo White has indicated that she supports non-governmental, third-party examinations of investment advisors. The Financial Industry Regulatory Authority (FINRA) would be an example of such a third party.
White has expressed SEC enforcement priorities as including:
Increased examinations of investment advisors who are regulated by the SEC.
Enhancing their oversight of FINRA as it takes on a bigger role in overseeing broker-dealers.
Cybersecurity.
Economic risk and analysis of various investment vehicles.
Data analytics to better focus its resources on the examination of investment advisors.
A major concern of many advisors and brokers will likely be impacted whether a new set of SEC rules will be consistent with the new DOL fiduciary rules. In the event of conflicting rules, financial advisors may find it difficult to follow the proper course of action, that provide a majority of services on a commission-based service.
If advisors and their firms are now faced with a second set of rules that is decidedly different than the DOL rules, the costs of compliance and the manpower needed also could drive some smaller broker-dealers out of the business.
How Technology Can Help
The rules will likely spur development and upgrades of many technology platforms and applications that will aid independent broker-dealers in meeting their compliance challenges. There’s little doubt that the new fiduciary rules will take a bite out of advisors’ profit margins, but software solutions might help mitigate the impact.
Digital technology has progressed to the point where computers have become able to perform routine investment management tasks such as portfolio rebalancing, dollar-cost averaging and tax loss harvesting. These automated programs, or Robo-advisors, are able to accomplish increasingly sophisticated tasks for clients and at some point will most likely be capable of maintaining complex portfolio management strategies that currently require human intervention.
The concept of fiduciary as it is written in the DOL bill is now colliding head on with the increasing lack of human intervention in the robo-advisor arena. Regardless of how this issue plays out, though, it seems clear that Robo-advisors will ultimately profit from the DOL rule. It may soon be possible to employ Robo-advisors to create trading algorithms that are always absolutely in compliance with the DOL rules, regardless of market conditions or client circumstances, and without the possibility of human error. Most of these programs already use low-cost index funds for their trading, which will sit well with regulators.
Read more: DOL Fiduciary Rule Explained as of April 18, 2017, | Investopedia http://www.investopedia.com/updates/dol-fiduciary-rule/#ixzz4gVHC4F5P
It may make sense to reexamine how these differences in providers can impact your cost, and overall results, especially if you think it may expose you to being underserved.
You can contact us for more details and be sure to sign up to receive our advisory weekly and monthly regulatory updates, market research, and our educational, informative website.
What it means to you ~
Not understanding the impact of the D.O.L., rulings and requirements, could confuse an individual’s choice of why it is imperative to select and seek “fiduciary,” guidance, rather than commissioned brokerage and to understand why it is best to work with A Registered Investment Advisory, bound by providing “full cost disclosure,” and a legal obligation to represent its advisory client partners, solely in their best interest.
Helping plan sponsors/participants and individuals to make better-informed decisions, when it comes to their investment and finances is our sole intention and best-practice.
To us, any form of commission, hidden fees, or continuing revenue, from clients’ accounts, or other incentives, is a conflict-of-interest and we highly recommend it is a practice that should be avoided at all costs.
If you feel that you’re being underserved or would desire a free fiduciary opinion or a second opinion, about your corporate sponsored / participant plans (401k), or your individual accounts, you can call us for a free no obligation online consultation, or a personal visit at your location.
Schedule a no-obligation consultation with us here; https://calendly.com/mgreen-5 or you can request more detailed information here; Contact us
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Michael D. Green, Principal
TGA Capital Management.Com
25 Braintree Hill Office Park
Braintree, MA 02184
A Registered Investment Advisory, RIA
Mgreen@tgacapitalmanagement.com
https://www.linkedin.com/in/tgagiacapitalmanagement
1.508.224.9646
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