This post will attempt to be different but it will summarize many of the other posts and articles and hopefully give you an understanding of how to move forward. First of all, the ruling could have been worse than it really is. Secretary of Labor Perez and the Obama administration have it in for advisors and agents. In some ways they are not wrong. Some of the issues and the reasoning for the original ruling are as follows:
- Advisors did sell retiree illiquid investments, not as a piece of allocation but as the only piece of the puzzle.This truly was not the right thing for the client.Now a piece of the pie might make sense in a retirement account, but usually some of these illiquid investments are better suited for non-qualified accounts
- Companies favored 0one product over another because they got more money
- High commission came from some products verses other products
- Sales with one company might generate a trip or additional bonuses
- Some companies used a product to qualify for validation of a contract forcing advisors to sell those products verses a better product.
One other reason for the ruling, the Government wants advisors to be fee based. Fee based advising is not a bad thing, but wrap accounts, or fee based management accounts, are not always the best thing for the client. While these accounts are great for advisors and clients:
- Creating annual Revenue for Advisors that is consistent
- Easier explanation of investment philosophy
- Greater access for clients
- Less difficult issues regarding Loads and other barriers to entry
- Less costs for trades, if heavily traded
- Smaller accounts have more advantage as there is no company load shuffle to get diversification.
- For example – You have $100,000 and you are looking to invest. For many reasons, including liquidity issues, you decide mutual funds are best for the client. However, their aggressive nature dictates that maybe American Funds is the best Large, Small and Medium mutual fund company for you, but their international and income portfolios are detrimental to overall security of the portfolio. Thanks to load restrictions and doing what is right for the client, you have to make the decision to go with American, be heavier in the stronger funds but still have some exposure in the weaker ones and hope the market does not turn.
- With fee based accounts you do not have to worry about the load issue and you can pick the best funds available.
These are the reasons and thought processes for the ruling, called the Fiduciary ruling for the Department of Labor. However, before we get to the ruling itself, let’s discuss some negatives of the ruling itself. First the Department of Labor has changed the Fiduciary standard for the industry and jumped the gun from the change the Securities and Exchange Commission is expected to issue as well. The DOL also went further with the standard than our current regulations allow for. The argument is that our current ruling only forces us to do what is suitable. In a way this is correct. Depending on the license that you have you might only have a suitability standard. An individual with a life only license or life and series 6 and series 63 license only has the suitability standard. However, those with a series 7 and a series 66, which has become the standard across the industry already have a Fiduciary standard. The Fiduciary Standard as defined by the DOL (2016) is described as doing what is the best for your client today, tomorrow and in perpetuity. The fiduciary standard of the DOL (2016) also carries with it criminal and civil liabilities, verses only civil under FINRA law.
The ruling itself has spelled the following for the industry and these are the new guidelines:
- A new Fiduciary Standard
- Language that must describe to the client what a fiduciary is, and the responsibilities of the advisor
- Exclusion or prohibition of certain products – unless an exemption is used
- Best Interest Contract Exemption – All Variable products (VA’s, Loaded Mutual Funds) Illiquid Investments like REITS, and leverage options), and Fixed Indexed Annuities are included. These products can still be sold but certain conditions must be disclosed including the commission and there must be a justification for why this product is in the best interest of the client
- PTE 84/24 -Traditional Fixed Annuities are included in here along with Group annuities for small groups under 100 employees.Simply put allows the sales of these products as long as a reasonable commission is applied to them
- An advisor can educate a client on their retirement accounts and not be a fiduciary, but if they make a recommendation then they become a fiduciary
- There is a reasonable cap on fees that can be charged in retirement accounts, but allows advisors and RIA’s to still charge fees and use fee based accounts. You will probably see an all in fee cap by companies of anywhere from 1.5% to 2% maximum
- There are several other rulings inside, but these are the major ones that might affect your practice.
- Analyze your practice and identify how much of your practice comes from the qualified area.
- Institute Financial Planning – If you are not a planner – team up with a planner, and you do the transactional part, and let the planner do the planning. I have been doing this for years. I do fee only planning for advisors across the country and now they have an extra layer of support and protection.
- Start moving your accounts, where appropriate and allowed, into fee based accounts. Charge a reasonable fee and move forward from there.
- Sell Insurance – Many advisors have gotten away from this. Now is the time to get back into it.
- Team up with other advisors who are stronger in areas than you are and leverage strengths.
- Talk with your clients.