The DOL Fiduciary Rule and Your Best Interests

You can’t afford financial advice that doesn’t serve your best interests.

It seems crazy to us that anyone giving financial advice would not see acting in their clients’ best interests as a true “win-win” situation that would ensure greater client satisfaction, retention, nd referrals, leading to long-term success for the advisor as well as the clients. But the truth is that conflicts of interest have been a hot topic for many years in the financial industry.

According to a fact sheet released April 6, 2016 by the White House Council of Economic Advisers, conflicts of interest in retirement advice could be costing American families a stunning $17 billion a year. The report states, additionally, “the rules of the road do not ensure that financial advisers act in their clients’ best interest when they give retirement investment advice. Instead, some firms incentivize advisers to steer clients into products that may have higher fees and lower returns.”

To stop advisors from recommending only what benefits them the most—and, perhaps even more importantly, to stop financial firms from incentivizing their representatives to sell unworthy products at inflated prices—the Department of Labor (DOL) has changed the rules under which many financial professionals operate when it comes to retirement accounts.

The New DOL Fiduciary Rule

The DOL Fiduciary Rule was created under the Obama administration and originally scheduled to be phased in beginning in April of 2017. Delayed under the Trump administration until June 9, 2017, allowing for extra comments, it is now in force, yet without teeth, as we are in a transition period until Jan. 1, 2018, during which certain exemptions apply.

The rule affects anyone who works with retirement plans or provides retirement planning advice. The best-interest requirement, also known as a fiduciary duty, now requires anyone advising on ERISA accounts, including 401(k)s, 403(b)s, SEP plans and IRA rollovers to put the investor’s interests before their own.

During the transition period, financial institutions and advisers must comply with the “impartial conduct standards” which are consumer protection standards that ensure that advisers adhere to fiduciary norms and basic standards of fair dealing. As specified on the dol.gov website, the standards specifically require advisers and financial institutions to:

• Give advice that is in the “best interest” of the retirement investor.
• Charge no more than reasonable compensation; and
• Make no misleading statements about investment transactions, compensation, and conflicts of interest.

Fiduciary versus Suitability Platform

Brokers and insurance agents who are not Registered Investment Advisors (as we have always been) have typically operated on the suitability platform, rather than the fiduciary platform. With the suitability platform, a broker or agent can sell any product that is “suitable” for the investor, whether or not it is the “best” product for that investor or not. So no penny stocks for Grandma’s retirement fund. However, there’s no rule preventing someone from selling Grandma something “just okay” that benefits the best interest (or highest commission) of the salesperson.

The result of this lower standard? Financial corporations have been developers and sellers of financial products rather than advocates of savers and investors. Agents sometimes peddle inefficient, complicated annuities with big cancellation penalties, while brokerages have become famous for packaging together under-performing mutual funds with high commissions that motivate brokers to sell them. (We aren’t suggesting that all annuities are bad or that all name-brand brokerage funds under-perform, only that conflicts of interest exist and the suitability standard has rightfully been questioned.)

According to Tony Robbins, author of Money, Master the Game, only about 10% of the financial professionals (planners, representatives, advisors, brokers, wealth managers) operate as fiduciaries. And to muddy the waters further, 26,000 of the 31,000 fiduciaries in the US are also brokers who operate at various times under the suitability standard, and at other times, under the fiduciary standard. So it’s possible, even commonplace for brokers to “switch hats” between advising and selling, sometimes operating as a fiduciary, but other times, protecting their own bottom line.

Whose Best Interest?

“Better advice will mean better returns for investors,” celebrated The New York Times in an article titled “Retirement Savings Made Safer.” And while that is clearly the intention of the new DOL rule, its implementation may benefit some investors more than others, or even have an adverse effect on some.

For instance, in the rush to comply, there is confusion amongst brokers as to how to interpret the rule. A Washington Post interview with Barbara Roper, director of investor protection for the Consumer Federation of America, revealed a host of issues in which brokerages seem to be using the rule to (surprise) represent their own best interests, using the DOL rule to shift smaller nest eggs from commission-based accounts into fee-based, “advisory” accounts (even if the old commissions were less than the new fees), disallow random (instead of monthly) IRA deposits, and impose additional restrictions that the WaPo journalist labelled “hogwash!”

As Roper explains, fees vs. commissions are one area in which the rule is sometimes misunderstood:

While some brokers are shifting retirement accounts to fee accounts, many continue to offer commission accounts. Where both options are available, the rule requires the broker to recommend the option that is best for the customer. The first question you should ask is what fee you will be charged and how that compares to your average commission costs for the past several years. If the cost of the advice is going up, are you getting valuable new services that you want and need? Or will you pay lower costs on the investment recommendations to make up the difference? If not, you should ask on what basis the adviser determined that this was your best option. If you don’t like the answers you get, shop around for a different firm that offers the services you want and need and allows you to pay for them in the way you prefer.

We agree: if you feel your firm isn’t operating in your best interests, find another. But there is much debate over what constitutes a client’s best interest.

For years, advertisements designed to steer public opinion against the fiduciary rule have questioned whether or not expanding the rule actually guarantees better advice, or simply excludes people not likely to pay fees from receiving advice at all by shifting accounts from commission-based to fee-based, or requiring advisory fees up front. It’s a fair question. While investors with significant assets must be especially mindful about both commissions and management fees that can add up to huge numbers, those just beginning to invest might be better off paying low commissions or fees (think Vanguard) rather than higher “advisory” fees for advice they may not want.

“Fee Vs. Free” Advice and Our Approach

We have offered The Prosperity Pathway™, a fee-based advisory process, for many years and we believe in fee-based advice! However, we don’t believe that shifting all investment advice to fee-based or fee-only will necessarily serve every investor’s best interests.

In theory, paying a fee for financial advice means you will be able to obtain quality help with your finances. However, in my decades of experience as (first) a typical financial planner and (since 1999) a Prosperity Economics Advisor, I have noticed a big problem with fee-only planning: When fiduciaries accept only accept fees, and no commissions, there often arises an implementation problem.

How many investors (or would-be investors) have gone to fee-only advisors, paid good money and spent valuable time in order to receive a beautiful binder containing what could be a brilliant financial strategy tailored to their specific needs, and then… done nothing?

More than you imagine. Probably millions of people.

They paid good money (that could have been invested) for a plan they didn’t implement. Even worse, they probably felt ashamed or embarrassed that they wasted money and took no action, which makes them less likely to reach out for help in the future.

There is also a problem of the appropriateness of a fee for newer investors. We charge $3,500 for our five-step, fee-based advising process. For investors who want that level of advice, can afford it, and have a level of complexity that benefits from it, our advising process allows them to:

• go through every aspect of their finances
• receive detailed, personalized advice
• fill out a “Prosperity Profile” that helps them see the big picture of their finances
• learn to apply the 7 Principles of Prosperity™ to their financial situation
• make confident financial decisions, and
• take action on those decisions.

But for someone just getting started with saving or investing, our advisory process makes little sense, as the fee represents a disproportionate amount of the money they have to invest. Example: If you had $25,000 to invest, a $3500 fee would swallow up 14% of it! (And if you only had $25k, you wouldn’t need that level of advice.)

So while a fee-based process “fits” some investors, it can represent a unnecessary burden for others. Likewise, savvy investors who already have a clear sense about what they want and need (and who don’t want five appointments to clarify), a fee-based process can be “overkill” as well as a barrier to obtaining products that might be perfect for their needs.

So we aren’t fans of “one-size-fits-all” solutions and we will continue to offer flexible options to meet the needs of savers and investors. With or without the new DOL rule, we will continue to:

• act (legally and in practice) as fiduciaries and serve the best interests of our clients;
• not hold “assets under management,” as we prefer your assets be as much as possible under YOUR control;
• offer a fee-based advisory process for those who want it and will benefit from it; and
• provide complementary Q&A sessions as well as many articles, books and podcasts to help you educate yourself on Prosperity Economics and safe, sustainable wealth-building!

Moving forward, we will also be introducing a new, streamlined fee-based advisory process for IRA rollovers that will conform to the new DOL rules. (Stay tuned for more on that…)

For more information about the fiduciary standard, see our past article, “Suitability Vs. Fiduciary Standard: Who Should Give Financial Advice?” and listen to a great podcast on the topic from Kim Butler and No BS Money Guy Todd Strobel to find out more ways to protect your best interests and your money.

For more information about our Prosperity Economics philosophy, sign up for our complimentary Prosperity Accelerator Pack.

And to schedule a complimentary Q&A session (no sales presentation, just a conversation), contact Jill@prosperitythinkers.com.