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Fiduciary follies?

A new Department of Labor rule expands who is defined as a fiduciary, and wealth managers now must define themselves accordingly.

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From the pages of In Business magazine.

Listening to some professional wealth managers, you’d swear the Department of Labor has thrown a grenade into their foxhole, but not every wealth manager agrees that the DOL’s new rules governing their industry is an act of war.

While some financial firms backed off after first agreeing to an interview, we spoke to two local financial advisers who have no problem with the fact that the new rule expands the investment advice fiduciary definition under the Employee Retirement Income Security Act of 1974 (ERISA). It will automatically elevate to the level of fiduciary all financial professionals who work with retirement plans or provide retirement planning advice, and legally and ethically require them to meet the standards of that status.

“It’s actually what your mother and father told you about the golden rule,” explains independent financial adviser Nathan Brinkman, president of Triumph Wealth Management in Madison. “It’s basically what I would consider common sense — to treat others as you would want to be treated yourself.”

The new rule likely will impact those who work on commission, such as brokers and insurance agents, the most. In addition, expect rollovers from 401(k) plans to individual retirement accounts to receive more scrutiny from regulators, but the retirement plans covered under the rule include various types of defined contribution plans such as 401(k)s, 403(b) plans, employee stock ownership plans, simplified employee pension (SEP) plans, and savings incentive match plans such as IRAs. There are certain types of irrevocable trusts, such as credit-shelter trusts, that some firms are adding to this list because there are fiduciary implications, but they are not identified in the rule.

Jon Goldstein, a private wealth adviser with Goldstein & Associates, an Ameriprise private wealth advisory practice, says the definition of fiduciary is still being clarified, as are the criteria used to evaluate whether the standard has been complied with. One of the goals is to level compensation in a firm so that it’s clear and understandable, and so clients can determine what firm to choose. Since advisers and firms have different focuses, compliance will mean different things to different firms.

“Every firm is different, and every client’s needs are different,” Goldstein explains. “The products are different, and then their needs probably change over time. So, again, it’s pointing the clients to the appropriate situation.”

Advisers hope that an 18-month extension on the rule will give people a chance to work through what the rule actually means, and previous guidance appears to give wealth managers some breathing room. Even with the delay, parts of the rule were enacted. 

“The Department of Labor said — I think it was sometime early in January — that they are not necessarily going to look at claims for fiduciary standards as long as you can document that you are working toward improving your process to become a fiduciary,” Goldstein notes. “So to some extent — I’m not sure that’s the exact reason for the 18-month delay — but I’m hoping that’s where people go because some people were hoping, and that’s firms and clients and advisers, for some very concrete standards, and while the term fiduciary is out there, there is a lot of interpretation of exactly what it means.”

The rule also does not allow advisers to conceal any potential conflict of interest, and states that all fees and commissions must be clearly disclosed in dollar form to clients. “Yes, but just to clarify that, usually what they’re doing involves a percentage of the dollar amount,” Brinkman says. “As an example, let’s use bonuses. In the past, companies may incentivize advisers to sell a certain product, and so what they are trying to do is make sure that all compensation is disclosed.

“Number two, in the past every organization or institution defined fees separately, so some of them were transparent and some of them were not overly transparent. So the premise of this is just being transparent with fees, which I am a big fan of.”

What are the different kinds of fees typically charged? According to Brinkman, there are platform fees, administrative fees, and trading fees, and with some of these there could be good reasons why they’re not overly transparent. For example, if you engage a product that has no initial trading fees, it’s easy to not disclose those, but then when you make a change in the future that triggers a trading fee, Brinkman believes that should be disclosed.

What the rule is trying to do, he reiterates, is create transparency in fees. Alternately, he believes it will more than likely level fees. “With full disclosure, and everybody forced to disclose fees the same way, eventually what it’s going to do is level fees,” he says. “The great majority of our industry does it the right way, in a transparent way, and has been disclosing fees, but there are always a couple of bad apples in every industry that traditionally have not been as transparent. As a guy in the industry, I’m a big fan of the belief that everybody should play by the same rules.”

One thing is clear to Goldstein — the rule does prohibit advisers from concealing any potential conflict of interest, and it states that all fees and commissions must be clearly disclosed in dollar form to clients so the consumer can make an informed choice. Does that mean all the fees that are part of an overall charge? “Not necessarily,” Goldstein says. “There are a couple of different things that you’re looking at here. There are multiple ways advisers can work and multiple ways that clients can engage their services. The goal here is to make very clear what the compensation is that’s being received.”

In terms of setting a fiduciary standard for wealth managers, Goldstein calls it “phenomenal” and wishes such a rule had been in place for the past 50 years. “They have always said you’re supposed to disclose it, but not everybody always did — partially because it historically has not been enforced,” he explains. “Advisers just said, ‘No, we’re not necessarily always going to bring it up.’ The assumption is that advisers get paid for their work and maybe they just didn’t want to do that.”

In the context of the broker-dealer relationship, Goldstein believes a problem with brokerage firms, which have varied and targeted clientele, is that having a uniform standard doesn’t necessarily result in the best product or service because there is not a uniform distribution of need. However, there is one client benefit, intended or not, that is a direct result of the new rule, and that is some advisers could break away from brokerage firms and move to an RIA (registered investment adviser), or vice versa, to get in compliance.

“From that standpoint, the concern is that if you have advisers who are potentially at the wrong firm, their client is not a good match anymore, and we’re starting to see a lot of advisers changing firms so they can hone in and focus on the clientele and the process and the systems that fit their clients,” he says. “That is a really nice result, whereas previously a lot of advisers would stay at the same firm just because that’s where they have always been.”

Also under the new rule, financial professionals are legally obligated to put their clients’ best interests first rather than simply finding “suitable” investments, and many believe this aspect of the rule therefore could eliminate commission structures that have governed wealth management. So while a fiduciary standard has been established, Goldstein notes there still are “best interests contracts,” both of which are designed to put a wealth manager in the client’s shoes. In other words, what would you do with your knowledge and everything you know to align yourself with the interest of your client?

“There are going to still be, as far as I can tell, some exceptions for commissioned products and services,” Goldstein adds. “Which firms maintain that and for what types of accounts — that’s yet to be determined. The presumption is that those are probably going to go away. I don’t know how and I don’t necessarily know what replaces them, but there are some clients for whom maybe that still is the most reasonable and most beneficial course of action.

“Some clients innately understand that and they are more accepting of that than a fee for service, so you’re meeting the client’s expectations, as well as the intent of this fiduciary standard. As long as clients are still asking for that, how does it get regulated away? That being said, I’m not necessarily a fan of that structure, but I can see where it could still be around for awhile.”

According to Brinkman, the rule originally was to help in the 401(k) deferred compensation industry, but moving down to the IRA space, there will be one unintended consequence. Traditionally, the financial adviser that did business by way of commissions would service clients that did not have large account balances, and they felt they could earn what they wanted to earn. If you eliminate commissions, much of the general public is going to become underserved because advisers won’t be able to afford to service low-balance accounts. “Commissions are not necessarily bad and really all they’re asking us to do is make sure that advisers disclose commissions,” Brinkman adds.

A consumer with a low account balance will have to find the kind of adviser that trusts that kind of match.

In terms of how this is going to affect the general public, Brinkman says that when you introduce a new regulation that is going to a drive additional paperwork and drive additional compliance, those costs eventually will filter down to the clients in one of two ways. “One way is that they are going to have to pay higher fees, so even though the intention of the rule is to lower fees, there is a probability that this could actually increase fees that most people would pay because it puts a lot more liability on an adviser, which again I’m a fan of.

“But for the adviser, in order to stay current with everything, there is a cost of doing business with clients and that’s got to get passed out in someway, and so I don’t have that crystal ball to predict. My guess is that eventually the public, the consumer, is going to have to pay more for the services of a financial adviser.”


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