News, Vision & Voice for the Advisory Community


DOL fiduciary rule's upcoming September surprise'll send brokers memo-izing -- or else -- says Fred Reish in Nashville to a spellbound room

The Drinker Biddle attorney's invariably even tone gained inflection as he spoke of how brokers can only invoke BICE exemptions to go off DOL script by zealous, proactive documentation

Thursday, May 25, 2017 – 7:53 PM by Graham Thomas
no description available
Fred Reish: You need the data in your file.

Brooke's Note: People say certain things, and in certain ways, in front of different people. It is perhaps the best reason, from a content standpoint, to attend a conference. Graham Thomas was -- full disclosure -- in Nashville as an RIABiz advertising executive but he took notes copiously, debriefed on-stage people and broke a story or two. He recorded a time and specific pain issue for the new DOL rule listening to a tip-top lawyer. He also recorded a rare-to-see scuffle that broke out around the profoundly different ways risk software sellers are selling risk software. Mike Kitces presided. This Tennessee action wasn't just a bunch of fiddling around.

The financial advisory business will shift from buyer beware to broker be aware starting in September and the net effect is that brokers will need to work more and do so more proactively. 

Though the rollout of the fiduciary rule hits June 9, the burden finally shifts from the investor to the 401(k) salesman  -- particularly stockbrokers -- four months later when exemptions and modifications provisions of the Department of Labor's new regulation begin to kick in, said Fred Reish, principal of retirement services at the Los Angeles office Drinker Biddle & Reath LLP.  (Many people believe such provisions can be ignored until January.) See: 'Poof, it's gone!' DOL quietly strips two heavy lifts from the fiduciary rule as it makes delay official

Reish is a tall, lawyerly man accustomed to the rapt attention of his audience because he is perhaps the last legal word on topics of fiduciary law. He speaks in uninflected, well-structured sentences.

So everyone of the 600 attendees in the room -- 401(k) advisors, during the annual FI360 conference in Nashville May 19-23, leaned in a couple millimeters more as he became -- by his standards -- animated as he made clear where the pain would come from. Brokers will need to do homework, namely disciplining themselves to write down an explanation for actions taken that require exemptions. 

Former ass't Labor secretary Phyllis Borzi was keynote speaker and among the attendees curious to see how the rule will play out. 

"Best Interest Contract Exemption is where the action will be,” Reish said. “So many lines of business are affected: annuities, securities, alternatives and more. Each one has to be analyzed and level fee or exceptions filed.”

Meanwhile, Blaine Aikin, executive chairman at Fi360, chairman-elect of the CFP Board, perhaps hoping to assure that his guests digested the fine food served at the event, downplayed the September changes: “We can expect to see changes in three months [but] seems to me what we are talking about is minor. Ultimately, there might be some practical but not fundamental changes to the core fiduciary rule.”  See: Joel Bruckenstein pitches DOL rule to Sen. Marco Rubio after fate makes them JetBlue seat mates.

Burden of  truth

Reish was unrelenting in his contention that the changes are fundamental. "There is truth and there is proof," he said. He recommends memoizing conversations relating to account opening.“In a post- fiduciary-rule world, he said, "the burden of proof is on the advisor to prove what he or she did was prudent."

Also on Reish's post-rule checklist: Make sure all actions performed on behalf of the client are listed and noted. Also, formalize the list of services provided. He suggested: monitor and meet annually, tax planning, holistic planning, aggregate asset allocation, help with minimum distributions, investing for withdrawals and sustainable withdrawals.

“Formalize your retirement services, better you are at that, the easier it is to prove the recommendation,” he said.

Blaine Aikin: We can expect to see changes in three months

If Reish gave a free pass to any group, it was RIAs who have mostly always lived by a process and have  already incorporated level fees in their retirement practice. It's “all about process – where RIA’s are most informed, broker-dealers will need to document.”

That seemingly innocuous statement means a whole lot of pain for the commission side, due mostly to the how the previous administration designed the law -- which is, Reish described, in an “extraordinarily broad” way (lawyer speak for “great wall of paper”). See: The short scoop on Wall Street's claim that the DOL rule is too long.

Don't fight it

The definition of advice is modeled on the Independent RIA or “pure level fee” versus every other kind of compensation on the other side. This directly applies to asset managers now as well since advisors on the retirement side will defer to “Morningstar or Wilshire, that's how funds are going to get selected -- if I were an advisor I would want to know more about that process,” advised Reish.

Are the commissions even worth the paper headache? Tim Hill, vice president-national sales director of Principal Funds in Minneapolis, summed up the prevailing mood of asset managers at the conference,

“Regardless of the regulatory outcome, the era of fiduciary care is upon us, so the lens we look through to support has to change. Trying to say anything else is foolish – don’t fight the tape.” See: DOL rule-killers now on defense as legal failures add up, reinforcements don't make it to Washington and the clock ticks down.

Thorough documentation, Reish explained, at the front-end of client interactions is the new normal to stay out of trouble.

“You will need a BICE exemption if you make more from IRA and adhere to new conduct and behavior standards like: No materially misleading statements, reasonable compensation and best interest standard of care, and you need the data in your file," he says. 

Persistence, not perfection

He added somewhat reassuringly:

"It doesn’t need to be perfect, it just needs to be reasonable.” See: The takeaway from Friday's DOL rule guidance is 'significant'.

The fi360 event coincided with DOL secretary Anthony Acosta announcing, via Wall Street Journal op-ed, that the clock on the fiduciary rule will indeed start June 9. See: Alexander Acosta's DOL rule letter to WSJ contains double message and one long-term objective: 'Gut' it.

Reish also suggested ways advisors can move clients from 401(k) to an IRA and stay compliant with the rule, one of which is employing an educational process to lead clients to make their own decisions using statements like "other clients have done this....I'm educating you on what to look at…” In every instance,

Risk panel gets frisky

The snarkiest discussion of the conference came from a panel hosted by Michael Kitces called,  Assessing Client Risk Tolerance In A Fiduciary Future -- timely because of concern arising as the market averages push to new highs seemingly every week.

It was ZZZZZZZZZzzzzzzzzzs until Kyle Van Pelt, managing director of partnerships at Riskalyze, asserted that “in bull markets people take more risk, we are the GPS for the portfolio. We manage psychological aspects since humans cannot manage in 30-year cycles.”  Riskalyze tests every six months.

In the competitive risk software business where only recently has Riskalyze come along and stolen the show, by some accounts, them's fighting words. See: How Aaron Klein plans to make Riskalyze the epicenter of the RIA business with $20 million of fresh private equity money.

Riskalyze's success in part is attributed to keeping questionnaires and time periods simple embodied by capturing it all in a risk number. For competitors who go deeper, these methods amount to shortcuts. Min Zhang, co-founder of Totum, an L.A.-based risk software startup, has been a vocal critic. See: With algorithms and awkward questions, an ex-PIMCO 32-year-old crashes the RIA business.

FinaMetrica Pty Ltd.'s senior strategist Tyler Nunnally disagreed publicly saying FinaMetrica still recommends asking investors about material changes to their circumstances every couple years.

A wall of windows allowed the light in where vendor booths were set up – much more pleasant mingling resulted.

Speaking later to RIABiz, Nunnally further explained his concerns about Riskalyze's approach, saying, “It's one thing to say this is a great lead-gen tool, quite another to then take and apply that to a long-term investment strategy since the model is designed to only hold up for six months.”  

Nunnally also expressed concern about where that could leave an advisor legally if some market event happened after the last six-month interval, and the advisor had not yet taken the most recent assessment.

During the panel, Tolerisk founder and CEO Mark Friedenthal flatly stated that “risk is not a perfect science” and then rhetorically asked Van Pelt: “When will the next bull market occur Kyle? You can’t tell us.” See: Why robo-advisors meet the lofty fiduciary standard when so few humans can, according to an opinion written by Betterment's outside counsel.

After the session, Friedenthal summed up his point saying that people's views toward risk while they are raking in gains are a useless data point. “There is no point in measuring someone's willingness to accept risk in a bull market. It is irrelevant." See: Chatting with David Amster as he joins a compliance risk firm in 'crowded' industry just as the DOL storm makes shore.

HSA sweet spot

One of the most least-emotionally charged but most informative presentations came from Roy Ramthun, president and founder of HSA Consulting Services LLC, who led the Treasury Dept.'s implementation of Health Savings Accounts after they were enacted into law in 2003.

Describing HSAs as “no better tax deductible strategy,” Ramthun cited the triple tax benefits of pre-tax contributions (income and payroll), tax-deferred growth and tax-free withdrawals for qualified medical expenses. He implored the audience of advisors to “pay ourselves instead of insurance” (referring to the massive growth, and expected continuing growth, of high-deductible plans). See: Capitalizing on 'unintended consequences' of DOL changes, Ken Fisher pounces on a fat-margin 401(k) opportunity.

Other benefits to HSA account-holders include no required minimum distributions, their portability (like IRAs), no expiration (so it can transfer to spouse, estate asset to other beneficiaries), and at age 65, HSA funds can be used for any expense penalty free (ordinary income tax applies).

But the premium benefit strategy, according to Ramthun, involves first maxing out the match on a 401(k) and then maxing out the HSA. A potentially huge tailwind looms in the form of HR1628, which raises the max contribution to $13,000 for families in 2018. Odds of passage look good since Washington seems behind it.

Nashville spirit

The entire city of Nashville was supporting their hockey team just blocks from Omni Hotel where the conference was held.

There were many other sessions and quotes of value – which happily brings us to Quick Hits:

F-words: “Remember that money is full of feeling," said Sheri Fitts, CEO and founder of ‎ShoeFitts Marketing and chief marketing officer of Sheridan Road Advisors LLC. "Forms, facts figures fear fiduciary -- 'F' words, these can be scary and intimidating.” And later on, “A well-executed brand increases the perceived value of the services provided.”

Doffing caps: “OCIO or rep as PM, advisors are managing to models instead of components, and the avenues for advisors to access investments are changing," said Tim Hill of Principal Funds. "So the way we see it is more of a concierge-level service and meeting the needs of entire families versus just screening mid-caps.” See: Are ultra-high-net-worth clients really worth it?.

Sun shines in: A few great things that distinguished the Fi360 conference from the others on the circuit: A wall of windows allowed the light in where vendor booths were set up – much more pleasant mingling resulted. The appetizers going around the hall were delicious and the entire city of Nashville was supporting their hockey team just blocks from the conference (seriously, the whole city was outside – very cool). Special thanks to Terra McBride and especially Renee Watkins for doing such a great job.

This article has been updated to reflect the correct spelling of Blaine Aikin's last name and his correct current title at fi360: executive chairman.

Related Moves

After Riskalyze raised a pile of cash, it went shopping for a chief technology officer and found him at Apex Clearing

The Auburn, Calif., risk software maker is undergoing a shift to enterprises and nabs Josh Gray from the Dallas firm.

August 10, 2022 – 2:25 AM

Riskalyze replaces Lori Hardwick with Laurie Schultz at board chair and publicly tells her -- and the RIA industry -- it's moved the goalposts to a $1-billion valuation

The Auburn, Calif., firm's new chair already took one risk software firm to unicorn status and promises to 'do what it takes.'

November 24, 2021 – 11:12 PM

Lori Hardwick steps down as AI Labs president and steps up as a gunslinging paladin for Riskalyze and other firms in new gig economy consulting role

The co-founder went to the Tiburon CEO Summit in April and came away with four big consulting gigs that morphed into a new career

June 13, 2019 – 2:48 AM

Mentioned in this article:

Tech: Other
Top Executive: Aaron Klein

Compliance Expert
Top Executive: Tyler D. Nunnally - (USA)

Stephen Winks

Stephen Winks

May 26, 2017 — 2:28 PM
Prudent process (asset/liability study, investment policy, portfolio construction, performance monitor, etc.) which puts financial services back into the financial services business authenticate back to statute, will be the new reference point to professional standing in advisory services. Here-to-fore b/ds have fought fiduciary duty, now it is their best interest to be a stickler to detail as directly or indirectly required by statute. Finally the brokerage industry is aligned in the best interest of the investing public as it becomes a strategic imperative. The broker is accountable for every recommendation they have ever made and there are at least 265 fiduciary duties entailed in continuous, comprehensive counsel of fiduciary duty (more depending on the granularity of the definition of advice) which are documented in prudent process which every b/d must support as its core intellectual capital which drives market share and professional standing. We are about to experience a renaissance in advisory services in the best interests of the investing public. SIFMA/FSI suddenly discovers fiduciary duty for its brokers is a good thing .SCW

RIABiz Directory

The Industry Sourcebook for RIAs

   |    LISTING

RIABiz Directory sponsored by:

Directory Sponsor Logo