Hurling jabs at opponents and proponents alike, the fiduciary maven says both sides failed to recognize and incorporate the role of RIAs

April 15, 2016 — 5:40 PM UTC by Guest Columnist Don Trone

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Brooke’s Note: The only thing that is now more contentious than the back and forth leading up to the DOL passing of its new “rule” is whether or not we should celebrate the moment as a milestone for fiduciaries — or take a moment to relegate Labor Secretary Thomas Perez to the same place in the appeasement hall of fame as Neville Chamberlain. Into the second camp I’d put Don Trone, though he’s really in a third camp because, in his RIABiz column, he bemoans the fact that advisors won’t be paid enough to manage IRA assets. Meanwhile, if Perez is Neville, I am still channeling Zhou Enlai, Chinese premier from 1949 to 1976, who was famously quoted saying that it was “too early to tell” about the success of the French Revolution of 1789. It’s noteworthy that that quote was later debunked and it turned out Zhou was talking about the 1968 social revolution. I sense we have plenty of debunking yet to follow about the significance of this DOL rule making.

Here’s what’s become abundantly clear in the wake of the Department of Labor’s release of its final fiduciary rule: The DOL and proponents of the new rules were not familiar with existing fiduciary best practices or the critical roles played by financial advisors. See: The DOL’s final rule contains a litany of 11th hour concessions to brokers that show Wall Street lobbyists earned their keep.

The Department of Labor made worthwhile changes to its original proposal. See: Why Obama and the DOL are all wet when it comes to the proposed fiduciary rule. However, there are still seven reasons why the new fiduciary standard should be viewed as a fiduciary folly:

1. It’s based on rules, not on principles

The DOL claims that the new regulations are based on principles, not rules. Really? Yes, “acting in the best interests of others” is a principle. It only takes seven words to convey that principle. However, the DOL uses 1,000 pages of rules to kill the concept — death by a 1,000 cuts. See: How Wall Street emasculated the DOL rule with an old-fashioned end game: 'Somebody made a deal’ — and why tort lawyers are licking their chops.

2. It’s subjective, not objective

The new regulations require the fiduciary to demonstrate compliance with a 'prudent’ standard. What are the specific details — the objective requirements — of this new prudent standard? They’re not defined, which increases the probability of meritless and frivolous litigation. See: A veteran of securities law killed his weekend reading all 1,000 pages of the DOL rule — and has a takeaway to share.

3. It’s complex, not simple

When operating in a volatile and dynamic environment, simple is preferable to complex. Consider the following simple explanation:

A fiduciary cannot parlay their position of trust for personal profit. As such, the fiduciary has a duty to notify the client of every party that has been compensated by the client’s account; and, to demonstrate that the compensation is fair and reasonable for the level of services being rendered. [Source: 3ethos]

The above fiduciary best practice was defined in 50 words. The DOL needed 1,000 pages.

4. It’s exclusive, not inclusive

Opponents warned that the new regulations will be prohibitively costly for retirement savers with smaller account balances. The warnings were ignored. The median IRA account balance is $25,000, which, if charged a 100 basis point advisory fee, will only generate an annualized fee of $250. And keep in mind, that’s the median — half of all IRAs will generate even less revenue. How can we possibly expect financial advisors to provide an ERISA fiduciary standard of care — and assume fiduciary liability — for that level of compensation? See: Why exactly DOL’s latest action is so shocking to so many brokers — and even ERISA lawyers — despite years of warnings.

5. It’s negative, not positive

The new rules are intended to be punitive. Proponents argued that there are bad advisors and the DOL needed to define new regulations to control and constrict their inappropriate behavior. Unfortunately, the regulations will also control and constrict the behavior of great advisors, who make up an overwhelming majority of the industry! See: Stealing the FPA show, 'rock star’ Marcia Wagner sounds four-alarm fire drill on DOL’s onrushing fiduciary rule — especially one arising from a stumper of a rollover provision.

6. It was driven by self-serving interests, not the best interests of retirement savers

Proponents of the new rules claimed the moral high ground — unjustly. More than one proponent advocated for change because they saw an opportunity to commercially exploit the new regulations. Several proponents conspired to muzzle critics and to cover up unethical activity. And, many other proponents joined in solely for the opportunity to throw a punch at Wall Street. See: Why Wall Street’s DOL killer threat — that 'millions’ of IRA investors will go unadvised under new rules — is hogwash.

7. It’s a bronze standard, not gold

The fiduciary movement has been active for more than 30 years. During that time leaders have been focused on defining fiduciary best practices that could be used to outline a professional standard of care. The new DOL regulations now define “fiduciary” in terms of a de minimis standard — the minimum standard of care that must be met in order for an advisor to provide services to a retirement saver. See: Why it’s not OK that NAPFA and FPA agree with FSI about relaxed accountability for holders of IRAs.

Sadly, there is nothing inspiring or engaging about being a fiduciary under the rule of the DOL.

Don Trone, GFS® is one of the three co-founders of 3ethos. He founded the Foundation for Fiduciary Studies, fi360, and the AIF and AIFA designations. He has served on the U.S. Department of Labor’s ERISA Advisory Council, and has testified before the U.S. Senate Finance Committee on fiduciary best practices.



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Adam Frasier said:

April 15, 2016 — 6:29 PM UTC

We are drowning in corporate bureaucracy and stifling innovation in our country. We take a simple concept and completely destroy it and we wonder why our advanced system is losing to more straightforward approaches. Just take a look at our tax code, make something so complex no one understands it, no one can properly advise on it yet ignorance of the law isn’t an excuse?

Complexity Equals Corruption! We have a tax code of nearly 80,000 pages; even the French have less than 2,000 pages. And we were going to expect something different?

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Jamie McLaughlin said:

April 15, 2016 — 9:50 PM UTC

Well said, Don.

Misère, égalité, fraternité.

Jamie

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Stephen Winks said:

April 15, 2016 — 10:57 PM UTC

The complexity is attributed to regulators trying to make the brokerage industry something it is not. Perhaps the solution and simplicity is achieved by an entirely different, separate and distinct advisory services business model that is lower in cost and more technically competent in advisory services than brokerage is willing to go.
SCW

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Robb Smith said:

April 16, 2016 — 12:35 PM UTC

Unfortunately, SCW, this new “solution” has already been born by the White House and DOL and is much more ominous than the in-fighting our industry continues to engage in. It’s called the federal and state government and their unprecedented intrusion into and direct – albeit unfair – competition with the private-sector retirement industry.

And, oh yes, all this bickering about a fiduciary standard? It just disappears under this new solution as both the feds and states have been exempted from ERISA by the same regulator that has continually chastised those in the private-sector who do not meet such high standards.

I am not yet convinced that the DOL rule was watered down solely for the sake of appeasing the brokerage industry when it was clear the DOL had solid victory in-hand. What is becoming clear is that neither side of the fiduciary argument is satisfied which promulgates continued in-fighting and divisiveness within the private-sector retirement industry, just what the doctor ordered if your final aim is its demise.

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Stephen Winks said:

April 18, 2016 — 2:56 PM UTC

Shouldn’t the expectation of the consumer be that every recommendation is in the client’s best interest? If so there is no difference between taxable and non-taxable accounts. Essentially there would be no difference in cost or compensation in taxable and tax exempt accounts. Of course this is not the case, as the same consumer protections available for non-taxable accounts are not available for taxable “retail” accounts. This exposes the fallacy of the brokerage lobby (including the SIFMA and FINRA) which advance the self interest of the industry (avoidance of fiduciary duty) over the best interest of the investing public.
SCW

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Doug McDonald said:

April 18, 2016 — 4:10 PM UTC

Too bad that they did not legislate “growth of the economy” while they were at it.
LET’S SEE..how do you spell sclerosis (?) of the “free markets”..??

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Jeff Harrison said:

April 19, 2016 — 10:59 PM UTC

There is a famous quote from Lenin about “...taking two steps forward and then one back…”. Hopefully this was just the first step of many leading to a measurable workable enforceable definition of the client’s best interest. That would be a very real, and much needed, step in restoring the publics trust.

Whether or not the standard should be that of a fiduciary, something the public does not understand or appreciate or that of a reasonable investor is just as important a discussion as making sure that the guidance is clear and serves the public well.


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