Some people feel the law will be a good thing for clients and will force advisors to change their business models. One thing is for sure, the new Fiduciary standard will change and that standard will change how advisors do business.
Before we go forward, let’s review the rule and the issues at hand. First, the DOL has recommended the change to the fiduciary standard. The new definition will put both a civil and criminal liability to any recommendation given on ERISSA programs. These programs would include, 403(b)’s, 401(k)’s, Traditional, SEP, and SIMPLE IRAs, Pensions, and all qualified retirement plans. This new standard would mean you would have to permanently guaranty what you recommend is right for the client today, a year from now, and forever. This is an impossible guaranty as situations change and conditions worsen and improve and recommendations cannot in this case. The rule would also cap fees at a certain total percentage, the highest discussed is 1%, including both fund fees and your prices.
The intention of the rule is to protect consumers from bad advice. These new rules will protect customers from getting any advice. Yes, I will agree there are advisors who made wrong recommendations for the particular clients and they may have made decisions based on products rather than client needs. However, with a cap on fees, leveling out of commissions, and also putting civil and criminal liabilities on recommendations this might be a little of an overreach. Advisors may not want to go forward helping clients below a certain level of assets, which means that clients will have to make decisions without all information and this might lead to them doing poor things or getting bad advice from those who do wish to give the advice. While we do not know the final wording the wording will come pretty close to what is descried.
The effect on advisors will be a drastic change in distribution and business models. Now there is hope. There are two exceptions to the rule. The first, The Best Contract Interest Exemption. This is meant for A share mutual funds and Variable Annuities and allows for the client to allow the rep to obtain commission. You would have to have it signed by the client and explain all commissions and fees that will be charged. Anytime that you even think you might discuss retirement with a client you would need to get the client to sign a form that allows you to get paid either a commission or a higher fee than the law allows, even if you have not even decided how you would help the client. The other exception is the PTE 84-24 exemption. This exemption does cover fixed annuities and fixed indexed annuities and also small group annuities under 100 employees. While you would still be held to the fiduciary standard you would be able to sell some products if they were right for the client, but that needs to be a smart justification.
This new rule forces advisors to move to a fee based model and will allow limited commission opportunities. In general, this is not a bad thing. Fee based planning is the way our industry is moving but it will be painful. However, the limits for accounts will go from their current levels of 25,000 to as much as 500,000 to ensure profitability with compliance with the new retirement rules. Now, these rules will only affect retirement plans at first, but expect them to move to all areas of client service eventually.
This is not doomsday though. There is a way to protect your practice and still provide advice. That way includes Insurance. Many advisers have gotten away from doing comprehensive planning and helping clients through insurance planning as well. Utilizing products such as Whole Life, Disability Insurance, Long term Care and other insurance products will help supplement funding options and also help protect your practice in many ways. Are you ready to do planning and provide insurance solutions? If you are not, this is not a problem, solve ur puzzles can help.
Rodney Mogen, is the president of solveurpuzzles, a business focused company. Solve ur puzzles helps three groups: Small Businesses, Financial Advisors/Agents, and Local Government Entities. Rodney is also a small business advisor focused on developing financial strategies for small business owners and helping them develop their own strategy and ideas to grow, sell, develop the way they want. He is focused on creating proper financial strategies for Advisors and business owners to assist them in their day to day duties by solving their financial puzzles. Rodney is also the Director of Financial Strategy for The Evans Group. Check out more information at www.solvurpuzzles.com.