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Forced Conscientiousness

The Department of Labor (DOL) is expected to release a final rule tomorrow that will govern how brokers and advisors give advice to clients with retirement accounts. This impending rule has been fiercely resisted by large firms in the financial industry over the years, but received the strong support of President Obama last year.

Today, I’m calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interest of their clients above their own financial interests. It’s a very simple principle: You want to give financial advice, you’ve got to put your clients’ interests first.
— President Barack Obama, February 23, 2015

The rule is bound to be long and complicated, but the essence of it will be to require advice givers to clients with retirement plans to act as fiduciaries. A fiduciary, simple put, requires the advice giver to act and serve in the client's best interest, and to eliminate or at minimum disclose, all potential conflicts of interest. Registered Investment Advisors (RIAs), like AlphaGlider, have always been legally required to act as fiduciaries to all of their clients, not just ones with retirement accounts. This hasn't been the case for broker-dealers (think Morgan Stanley, Bank of America Merrill Lynch, Wells Fargo Advisors and UBS Wealth Management Americas), by far the largest category of investment advice givers by assets. Until now, broker-dealers, as well as insurance companies, have only been required to give investment advice that is merely "suitable" for, but not necessarily in the best interests of, their clients.

The conflict of interest introduced by the looser suitability standard for broker-dealers and insurance companies had allowed them to legally recommend investment products that put their own profits ahead of their clients' best interests. These investment products were typically their own firms' investment vehicles, or those from external companies which rewarded the recommender with an undisclosed back door payment (a frequent occurrence with front-end load funds). A White House Council of Economic Advisers analysis found that these conflicts of interest annually add about $17 billion in additional, unnecessary expenses for their retirement account clients — 1% of their accounts.

Just last week I had a prospective client who was considering moving her retirement accounts into a rollover IRA managed by AlphaGlider. She also had a large, high-interest rate student loan. Upholding my fiduciary responsibility, I recommended that she keep her retirement account in her employer's plan instead of moving it to AlphaGlider. I did this because she could take out a loan from her current retirement account to pay down her high interest loan, but could not from a rollover IRA. A broker-dealer could have legally taken her business as it would have been a "suitable" action. But that will no longer be the case once the DOL fiduciary rule goes into force in about eight months. However, they will still be able to just be "suitable" in their guidance for their clients' taxable accounts. The DOL fiduciary rule doesn't touch them.

If you are a retirement account client of a broker-dealer or insurance company, changes may be coming down the pipe because of the new DOL fiduciary rule. If you currently pay via commissions, you may be moved into a fee-based arrangement or even dropped if your accounts are determined to be unprofitable in this new fiduciary environment. Expect to see more disclosures about the fees you pay. Expect to see a different mix of investments recommended to you — fewer high cost funds and variable annuities, and more low cost funds.1

The retirement account advice playing field is being leveled. Actually, it is being raised and leveled, to the level that AlphaGlider and other RIAs have been playing on all this time. We welcome this change and look forward to the day that US regulators require broker-dealers and insurance companies to play as fiduciaries when it comes to taxable investment accounts.

Incrementally, here are a few of the potential winners and losers that we think will eventually come out of the DOL's fiduciary rule. Increased transparency provided by new entrants (going back to Charles Schwab and Vanguard) and technologies (most notably the Internet) have been driving these trends for years, but we expect the DOL's fiduciary rule will add important momentum to them.

Potential Winners:

  • Low-cost, fee-based advisers — typically registered investment advisors (RIAs)
  • Low-cost investment funds, particularly index-based exchange-traded funds (ETFs) and mutual funds
  • Broker-dealers with established online delivery infrastructure

Potential Losers:

  • High-cost, commission-based broker-dealers, particularly those without an established online delivery infrastructure
  • High-cost investment funds, particularly those sold with upfront load fees
  • Insurance agents and the variable annuities they sell (5-7% up-front commissions are common with these vehicles)


The views expressed in this commentary are exclusively those of the author, and are not meant as investment advice and are subject to change without notice. The commentary does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive it. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. There is no guarantee that any investment program or account will be profitable or will not incur loss. You should note that security values may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Individual client accounts may vary.

1Mutual funds, exchange-traded funds and exchange-traded notes are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained directly from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

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