Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Maybe the problem is that there are too many dishonest advisors, or to be more generous, too many selling the sky dearly. Shouldn't part of advisors' responsibility already be to advise on likely returns as well as on buys and sells? If they're concerned about their current clients' expectations, what does that say about the quality of the advice they've been giving up to now?
"Many advisors already act as fiduciaries, but the new rule will place additional restrictions on them as well. " I didn't see anything written about what those restrictions might be. ISTM that generally speaking, so long as they get their clients to sign a BIC (Best Interest Contract), they can continue doing business as usual. Unless, of course, they weren't acting in their clients best interest.
Could it be that firms are using the DOL rule as an excuse to move small accounts to lower cost robo accounts, and larger accounts to higher fee wrap accounts? Or is it that many advisors were not already acting as fiduciaries, and would have problems making an honest buck?
It's not that a lot of advisors are getting out of the business. The fact is that their broker-dealers are restructuring their business lines and are choosing to move away from the rep-sold fund and annuity business. For example, State Farm recently told their agents/reps that they would no longer be allowed to sell annuities, mutual funds and other investments. For many agents/reps, this was a big chunk of their annual income, right or wrong.
There have been and will be other big and small firms that will do the same, since they have known all along what they were forcing their agents/reps to sell were not in clients' best interests. Their billboards touting "Call me about your 401k rollover" were just teasers to get unsuspecting folks to move their dollars to a expensive, commission fund with front and ongoing payouts to reps, or to an even worse crappy annuity. The companies knew this all along, so the DOL rule & accompanying regs made the end to their self-serving business line come sooner than it would have otherwise.
Most of these firms say they can no longer afford to "service" small accounts. But there was never any "service" involved anyway. The end of trail commissions is a bright spot and means one less way the commission folks will keep screwing investors.
We have always acted as fiduciaries for our clients. No commissions in our investment advisory business. We have no insurance licenses. We were one of the first RIA firms to use retainer fees, which now account for much of our business. The new DOL rule and regs will have little impact on us. We may need to use the BICE form when we roll over a client 401k when we were not already including it in our advisory services. The form is essentially a rollover analysis form that requires the advisor to meet three standards: 1) Prudent Advice, 2) Reasonable Compensation, 3) Truthful and Forthcoming Disclosure.
No question that the Broker/Dealer companies' restructuring is because they know none of these three requirements can be met with the way their agents/reps now work. It will be most interesting to see how a few firms in Central Ohio that rely almost exclusively on annuity sales will revamp their marketing, somehow justify their sales practices when it comes to the BICE form. A number of them spend huge dollars on media advertising, of course never mentioning the "A" word. Time will indeed tell.
I will admit that I am surprised by the speed with which some of the change has occurred. Whether more firms will decide to go the State Farm route is the real test of the DOL rule & regs. Remember they apply to 401k rollovers, not regular IRAs and personal accounts.
I think you're confusing a rule about giving advice on what to do with 401k money (i.e. how or whether to roll it over), with the general fiduciary rules that DOL has promulgated. 401k plan advisors already had to be fiduciaries under ERISA. The broader impact of the DOL rules was not just to extend fiduciary duties to rollover advice but to IRAs in general.
This is why ML is keeping commissions on taxable accounts but is backing away from commissions on all types of IRAs.
A little more writing from the same ERISA lawyer who wrote that column above, this time on why ML is making its change:
[He] said there are several likely reasons Merrill decided to drop new advised brokerage accounts. "It is easier to comply with the new [DOL fiduciary] rules through level fee advisory services; if BICE isn't used, the prospect of class-action lawsuits is diminished. As I understand it, they don't currently accept small clients into brokerage accounts with individual advisors, and [Merrill] likely believes that larger clients are amenable to level fee accounts." Further, Merrill "believes that their clients will be well served by these arrangements."
No confusion on my part. The b/d community, especially the second-tier companies like State Farm, found their bread and butter in 401k rollovers. The big BDs like ML have essentially dropped clients with small-value accounts already. IRA or 401k or other qualified plan, they won't deal with the average investor. The impact for most BDs is the rollover, not IRAs in general. The DOL intent is one thing, but it is no accident that their effect is pretty small on the big guys, but potentially very hard on the smaller BDs. Why else would the MLs have said they could live with the new regs. They have pretty much already adjusted their business lines, or could go that route without disrupting their bottom line too much.
ERISA regs may have said that 401k plan advisors had to act as fiduciaries, but we all know many 401k plan investment options have been ludicrous at best, with all sorts of hidden fees, trail commissions, and other goodies that benefit the BDs and the reps. As we already know, many investment company 401k plans have options that are only their own funds or mostly just their funds. So the existing ERISA regs have been ignored for a long time. But that's off topic.
A number of attorneys will tell you that moving 401ks to level-fee accounts does not remove the BICE form, that it will still be required to prove the three standards I mentioned in my previous post. The big question is what is "reasonable compensation". Of course that is not defined and is thus open to a range of interpretations.
The smaller guys, many of which have no "advised" or "fee" brokerage accounts to begin with and do not have the infrastructure to go that route, are the ones to take the brunt of new regs. Again, I do not believe this was entirely unintentional. They simply do not have the bucks to pay lobbyists anywhere close to the big boys. So their influence on the new regs was in many cases next to nothing.
Keep in mind the regs are packed into more than 1,000 pages (only our wonderful federal government could do this), and of course there is no coordination with the SEC/FINRA/State regs, and there is no enforcement of the new rules, except for anticipated future lawsuits. This is all a long way from over, as the many federal agencies fight over who will regulate whom in the advisory business.
Your comment on ML keeping commissions on non-qualified accounts raises another issue, and begs the question: "If commissions are not fiduciary in nature for retirement accounts, how are they fiduciary in nature for other accounts?" Obviously they are not, but investors are expected to swallow that camel since non-disclosure will remain part of that process. In the meantime, ML and other big wirehouses are forcing their reps to jettison "smaller" clients so they can move more and more accounts to "fee" accounts.
Like our friend Vintage, I am more cynical as I age, and I am cynical about this whole DOL thing. To think for one moment there were no politics involved is silly. While the result of the regs is having some positive results (like State Farm's decision), I have no doubt that money still talks in Washington, and folks like ML and other biggies will see a rather small impact on their business. They will keep shedding skins and re-naming what they do.
BobC, you wrote that the DOL rules do not apply to ordinary IRAs. "DOL rule & regs. Remember they apply to 401k rollovers, not regular IRAs and personal accounts. "
That was just plain wrong. BICE may not apply to some vanilla IRAs, but that's not what the regs are about. The regs are about holding advisors of ERISA and IRA accounts to a fiduciary standard.
In fact, BICE is, as the 'E' states, a set of exemptions to the fiduciary standard. So if BICE doesn't apply to vanilla IRAs, that means that those IRAs are held to an even higher standard, i.e. one without exemptions.
"A number of attorneys will tell you that moving 401ks to level-fee accounts does not remove the BICE form ..."
Even ML agrees with that. BICE is required for moving 401ks, but only for moving the accounts and not not for maintaining the level-fee accounts once established. From the ThinkAdvisor article I cited:
Merrill says that it will not use the Best Interest Contract exemption “to service or support ongoing IRA brokerage account activity.” However, “when appropriate, we will use this exemption to recommend enrollments in our Investment Advisory Program from a retirement client’s IRA brokerage accounts, or rollovers from ERISA 401(k) plans.”
The original DOL proposal would have done away with commission-based accounts. If the big boys want everyone in wrap accounts anyway, and the big boys wrote all the rules, how did we get a final version that restored commissions?
When the DOL initially floated this proposal in 2010, it stated that fiduciaries could not be paid on commission. Since then, however, it has bowed to pressure and admitted commission-based schemes as long as the broker signs an agreement stating that the advice is given in the customer’s best interest.
As far as level of detail goes, on the one hand, the regulations are not short; on the other they don't spell everything out to the penny (e.g. what constitutes reasonable compensation). Should the regs be even longer and more detailed, or shorter and potentially subject to more litigation?
I did go back to read my original comments. You are right, I did say the rules do not apply to IRAs, and that was incorrect. Should have just said personal/trust accounts. Thanks for pointing out my error. I do not disagree with your general comments. But the BICE is not just "a set of exemptions to the fiduciary standard". If that were the case, fiduciary, fee-only advisors would not need to use it, since they have already established and stated their adherence to fiduciary standards in their registration documents. Nevertheless our compliance consultant attorneys suggest EVERY 401k rollover we do for clients should have one of these on file. The thought is that every advisor-assisted 401k rollover could be viewed as suspect, regardless of the process. Sort of having to prove you are not guilty. However, if this is what it takes to reduce the inappropriate annuity and other deceptive sales practices, we are ok with it. I agree with you on that.
The length has a lot to do with the nature of the beast. A bunch of government attorneys, agency bureaucrats and administrators (a combination of which is scary enough), beset by special interest groups, politicians, and other agencies. No wonder the document is absurdly long and often open-ended. Yes, having a fiduciary rule is better than none at all. Unfortunately politics prevents an all-encompassing fiduciary rule that is simple, straightforward, and applicable to ALL transactions and advice.
As mentioned earlier, politics is all over the new DOL regs. Just last week, the Senate Finance Committee unanimously approved legislation that would make it easier for advisors/retirement plan sponsors to add annuities to their programs. The bill would provide safe harbor from lawsuits. If you want to know how things happen in Washington, just follow the money. Note the legislation passed the committee unanimously. So much for these folks looking out for the public's best interest. Instead they fatten their own campaign chests and give another pass to the insurance/banking/brokerage industry. No wonder most citizens distrust Washington.
Glad you mentioned annuities (seriously). I'd run across comments by Milevsky and was debating whether to post a link. He's someone who has studied the annuity market extensively, and IMHO does objective analyses. He seems to be generally well respected in the field, e.g. here's a cite by Kitces.
Milevsky's thesis is that the DOL rules are unduly harmful to annuities in that they focus too heavily on fees That annuities are complex products that require effort to explain (or sell, for the cynics out there), so compensation needs to be higher than for selling an index fund. But what's reasonable compensation, especially for this type of product? I know BobC appreciates that question.
The takeaway from this is that the DOL rules need adjusting for annuities. Whether the proposed legislation is a good adjustment, I don't know, I haven't looked at it.
A safe harbor is a simple rule to follow, in contrast to an ambiguous regulation with little guidance and potential for lawsuits. If that safe harbor offers investors reasonable protection, that seems like a good thing. If it is too rigid (and removes good products from market), or if it eviscerates legal protections, then it is a bad thing.
The devil is in the details. The mere fact that a problem is being addressed is not proof that the system is rigged. (I'm sorry, too much 24 hour news exposure.)
When a combined $58 million in lobbying dollars from the financial industry are targeted to the Senate Finance Committee ( for 2016 PACs and individual campaigns), I do not have to think very hard about whether money talks. Like another poster at MFO, it doesn't take much like this for me to become cynical. It is such an obvious affront.
@BobC- make that "several other posters at MFO". Many years ago I proudly defended the title of "cynic-in-chief" at FundAlarm and then here at MFO, but I regretfully conceded that title a couple of years ago to those a bit younger and possessing more energy.
I am very grateful so many of you sent such thoughtful comments. I will continue to report on the DOL rule. If any of you are financial advisors who would be available for interviews, let me know plz: [email protected]
Comments
"Many advisors already act as fiduciaries, but the new rule will place additional restrictions on them as well. " I didn't see anything written about what those restrictions might be. ISTM that generally speaking, so long as they get their clients to sign a BIC (Best Interest Contract), they can continue doing business as usual. Unless, of course, they weren't acting in their clients best interest.
Could it be that firms are using the DOL rule as an excuse to move small accounts to lower cost robo accounts, and larger accounts to higher fee wrap accounts? Or is it that many advisors were not already acting as fiduciaries, and would have problems making an honest buck?
There have been and will be other big and small firms that will do the same, since they have known all along what they were forcing their agents/reps to sell were not in clients' best interests. Their billboards touting "Call me about your 401k rollover" were just teasers to get unsuspecting folks to move their dollars to a expensive, commission fund with front and ongoing payouts to reps, or to an even worse crappy annuity. The companies knew this all along, so the DOL rule & accompanying regs made the end to their self-serving business line come sooner than it would have otherwise.
Most of these firms say they can no longer afford to "service" small accounts. But there was never any "service" involved anyway. The end of trail commissions is a bright spot and means one less way the commission folks will keep screwing investors.
We have always acted as fiduciaries for our clients. No commissions in our investment advisory business. We have no insurance licenses. We were one of the first RIA firms to use retainer fees, which now account for much of our business. The new DOL rule and regs will have little impact on us. We may need to use the BICE form when we roll over a client 401k when we were not already including it in our advisory services. The form is essentially a rollover analysis form that requires the advisor to meet three standards: 1) Prudent Advice, 2) Reasonable Compensation, 3) Truthful and Forthcoming Disclosure.
No question that the Broker/Dealer companies' restructuring is because they know none of these three requirements can be met with the way their agents/reps now work. It will be most interesting to see how a few firms in Central Ohio that rely almost exclusively on annuity sales will revamp their marketing, somehow justify their sales practices when it comes to the BICE form. A number of them spend huge dollars on media advertising, of course never mentioning the "A" word. Time will indeed tell.
I will admit that I am surprised by the speed with which some of the change has occurred. Whether more firms will decide to go the State Farm route is the real test of the DOL rule & regs. Remember they apply to 401k rollovers, not regular IRAs and personal accounts.
Here's a clear column on the rollover rule:
http://www.planadviser.com/Magazines/2016/May-June/Rollovers-Under-the-Fiduciary-Rule/
What the DOL says about the advice that's covered by their rule:
"Covered investment advice is defined as a recommendation to a plan, plan fiduciary, plan participant and beneficiary or IRA owner for a fee or other compensation ..."
https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/dol-final-rule-to-address-conflicts-of-interest
This is why ML is keeping commissions on taxable accounts but is backing away from commissions on all types of IRAs.
A little more writing from the same ERISA lawyer who wrote that column above, this time on why ML is making its change: http://www.thinkadvisor.com/2016/10/07/dol-fiduciary-rule-forces-merrill-to-drop-commissi?page=2
ERISA regs may have said that 401k plan advisors had to act as fiduciaries, but we all know many 401k plan investment options have been ludicrous at best, with all sorts of hidden fees, trail commissions, and other goodies that benefit the BDs and the reps. As we already know, many investment company 401k plans have options that are only their own funds or mostly just their funds. So the existing ERISA regs have been ignored for a long time. But that's off topic.
A number of attorneys will tell you that moving 401ks to level-fee accounts does not remove the BICE form, that it will still be required to prove the three standards I mentioned in my previous post. The big question is what is "reasonable compensation". Of course that is not defined and is thus open to a range of interpretations.
The smaller guys, many of which have no "advised" or "fee" brokerage accounts to begin with and do not have the infrastructure to go that route, are the ones to take the brunt of new regs. Again, I do not believe this was entirely unintentional. They simply do not have the bucks to pay lobbyists anywhere close to the big boys. So their influence on the new regs was in many cases next to nothing.
Keep in mind the regs are packed into more than 1,000 pages (only our wonderful federal government could do this), and of course there is no coordination with the SEC/FINRA/State regs, and there is no enforcement of the new rules, except for anticipated future lawsuits. This is all a long way from over, as the many federal agencies fight over who will regulate whom in the advisory business.
Your comment on ML keeping commissions on non-qualified accounts raises another issue, and begs the question: "If commissions are not fiduciary in nature for retirement accounts, how are they fiduciary in nature for other accounts?" Obviously they are not, but investors are expected to swallow that camel since non-disclosure will remain part of that process. In the meantime, ML and other big wirehouses are forcing their reps to jettison "smaller" clients so they can move more and more accounts to "fee" accounts.
Like our friend Vintage, I am more cynical as I age, and I am cynical about this whole DOL thing. To think for one moment there were no politics involved is silly. While the result of the regs is having some positive results (like State Farm's decision), I have no doubt that money still talks in Washington, and folks like ML and other biggies will see a rather small impact on their business. They will keep shedding skins and re-naming what they do.
"DOL rule & regs. Remember they apply to 401k rollovers, not regular IRAs and personal accounts. "
That was just plain wrong. BICE may not apply to some vanilla IRAs, but that's not what the regs are about. The regs are about holding advisors of ERISA and IRA accounts to a fiduciary standard.
In fact, BICE is, as the 'E' states, a set of exemptions to the fiduciary standard. So if BICE doesn't apply to vanilla IRAs, that means that those IRAs are held to an even higher standard, i.e. one without exemptions.
"A number of attorneys will tell you that moving 401ks to level-fee accounts does not remove the BICE form ..."
Even ML agrees with that. BICE is required for moving 401ks, but only for moving the accounts and not not for maintaining the level-fee accounts once established. From the ThinkAdvisor article I cited:
The original DOL proposal would have done away with commission-based accounts. If the big boys want everyone in wrap accounts anyway, and the big boys wrote all the rules, how did we get a final version that restored commissions? http://ibd.morningstar.com/article/article.asp?id=718083&CN=brf295,http://ibd.morningstar.com/archive/archive.asp?inputs=days=14;frmtId=12, brf295
As far as level of detail goes, on the one hand, the regulations are not short; on the other they don't spell everything out to the penny (e.g. what constitutes reasonable compensation). Should the regs be even longer and more detailed, or shorter and potentially subject to more litigation?
I'll stick with Voltaire on this one - the perfect is the enemy of the good. Things will sort themselves out over time. Having a fiduciary rule is better than not having one.
http://www.goodreads.com/quotes/215866-le-mieux-est-l-ennemi-du-bien-the-perfect-is-the
The length has a lot to do with the nature of the beast. A bunch of government attorneys, agency bureaucrats and administrators (a combination of which is scary enough), beset by special interest groups, politicians, and other agencies. No wonder the document is absurdly long and often open-ended. Yes, having a fiduciary rule is better than none at all. Unfortunately politics prevents an all-encompassing fiduciary rule that is simple, straightforward, and applicable to ALL transactions and advice.
Thanks for your input.
Thank you both for your civil and enlightening discussion regarding this complex subject matter.
Regards,
Catch
http://www.thinkadvisor.com/2016/09/08/milevsky-on-dol-fiduciary-rule-big-flaws-annuities?slreturn=1476284738&page_all=1
Milevsky's thesis is that the DOL rules are unduly harmful to annuities in that they focus too heavily on fees That annuities are complex products that require effort to explain (or sell, for the cynics out there
The takeaway from this is that the DOL rules need adjusting for annuities. Whether the proposed legislation is a good adjustment, I don't know, I haven't looked at it.
A safe harbor is a simple rule to follow, in contrast to an ambiguous regulation with little guidance and potential for lawsuits. If that safe harbor offers investors reasonable protection, that seems like a good thing. If it is too rigid (and removes good products from market), or if it eviscerates legal protections, then it is a bad thing.
The devil is in the details. The mere fact that a problem is being addressed is not proof that the system is rigged. (I'm sorry, too much 24 hour news exposure.)
Same potential conflicts of interest, so same fiduciary rule applies.
What I'd read was that the rule could make things more difficult, not easier, for robo advisors. Here's Kitces column on that:
https://www.kitces.com/blog/schwab-intelligent-portfolio-and-blackrock-futureadvisor-under-dol-level-fee-fiduciary-rules/
Thnx again!