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LPL Financial's DOL-rule memo to reps implies deeper message: Become an RIA or stand down on giving rollover advice

The 'deep-pocketed' broker-dealer puts its Series-7 brokers on notice to forget about suggesting a rollover even as it gives its hybrid RIAs a strict protocol to stay out of trouble

Author Lisa Shidler July 5, 2017 at 8:02 PM
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Jim O'Shaughnessy: LPL will allow us to give recommendations but you've got to make sure you're fully working in the RIA with compliance, supervision and that product recommendations are all under that umbrella.

Stephen Winks

Stephen Winks

July 6, 2017 — 12:36 AM
It is interesting how complex b/ds are making advisory services offered within a brokerage construct, simply to avoid having to acknowledge that brokers do not render advice and have no ongoing accountability for recommendations. Wouldn't it be simpler to say RIAs offer advice and ongoing accountability for recommendations while brokers simply make clients aware of their investment options with no ongoing accountability. With brokers it is up to the investor to determine investment merit on their own, regardless how limited the investors knowledge and experience may be. Thus, if informed, the investor would always prefer an RIA to a broker. Importantly, the RIA is less expensive and affords a far higher level of counsel. LPL is concluding that if a broker wants to render advice and by extension add value in the investors best interest, its brokers should become advisor thus greatly simplifying their business and elevating the professional standing of its brokers. This is indisputable and eliminates fiduciary liability associated in one rendering advice. The entire industry will gravitate toward this model that serves the best interest of the advisor and the investor. Everybody wins, especially the industry at large in protecting the trust and confidence of the investing public. SCW
Hoosier Counsel

Hoosier Counsel

July 6, 2017 — 2:18 PM
I have to respectfully disagree with Fred Reish on this. The point I believe he is missing (probably because he is not aware of it) is that LPL pressures/rewards its hybrid RIAs to custody IRA assets with its broker-dealer. In fact, pursuant to FINRA rules, an adviser who is dually registered with LPL and a hybrid RIA would be required to obtain LPL's permission before he/she could custody advisory accounts with another broker-dealer. Therefore, I believe it is incorrect to conclude LPL would not be involved in a dually registered adviser rolling assets into an IRA - especially if it is custodied at LPL. If I am an LPL hybrid adviser and custody my clients' IRAs at LPL - even though I can obtain lower trading costs with another custodian - it would seem I am operating under a conflict of interest if I accept additional compensation (trips, conferences, etc.) from LPL based upon the amount of assets I custody with it. Conversely, if LPL pressures me to custody those assets with it (or even prohibits me from custodying assets at another custodian), it is hard to understand how it would be immune from litigation regarding the increased costs my clients will be forced to pay as a result of not being able to obtain cheaper execution of their trades.
stephen winks

stephen winks

July 6, 2017 — 3:05 PM
Hoosier Counsel, You make an interesting point which is why ultimately, trade execution will be treated as a cost center to be minimized in the client's best interest common in the institutional market rather than a profit center to be maximized in the b/ds best interest. SCW
Hoosier Counsel

Hoosier Counsel

July 6, 2017 — 3:43 PM
True, but it will be interesting to see when b/ds like LPL who custody accounts for associated hybrid RIAs accept that change. Investment advisers already have a duty to obtain best execution for transactions in their clients' accounts - apart from ERISA or the IRC. As a result, the fiduciary rule only reinforced advisers' duty to act in their clients' best interests in this regard. Therefore, one would expect b/ds like LPL to have policies and procedures in place that prohibited them from pressuring or incentivizing advisers to custodying assets with them to avoid this conflict of interest.
Stephen Winks

Stephen Winks

July 6, 2017 — 4:20 PM
Hoosier Counsel, I have been fighting for this up hill for over 20 years. It doesn't help when the leading industry trade organizations (SIFMA/FSI) oppose fiduciary duty and are regulators. Knowingly acting counter to the best interest of the investing public seemingly has little to with financial services regulation. SCW
Hoosier Counsel

Hoosier Counsel

July 6, 2017 — 6:31 PM
Well, the problem is not with those opposing the rule. It is with the rule itself. The market was already fixing this issue before the government stepped in. Go back and look at how many retirement plans were serviced by brokers in 2007 and how many are serviced by brokers in 2017. Advisers won the day - not because of governmental intervention - but because they were able to market against brokers providing conflicted advice. Furthermore, the DOL already had all of the tools it needed to forcibly address the issue through the disclosures mandated by ERISA 408(b)(2). However, rather than enforcing the rules it already had in place, the DOL decided it could "fix" the problem by trying to fit a square peg (the recommendation of brokerage products) into a round hole (fiduciary investment advice). So where are we now? Brokers can now honestly tell clients they are providing "fiduciary investment advice" under ERISA, despite the fact they are receiving unlevel compensation that would have never been permitted prior to the passage of the new rule. In addition, clients are even more confused. "So, a broker isn't licensed to provide investment advice under the Investment Advisers Act but can provide 'investment advice' to retirement plans, plan participants, and IRA owners?" Just as with health care, the regulators thought they were smarter than the actually were and have now created a real mess than may take years to undo. Let's hope this fiduciary rule can be unwound before the whole concept of a fiduciary duty under ERISA is lost forever.
Stephen Winks

Stephen Winks

July 6, 2017 — 7:46 PM
Hoosier, I am afraid the fiduciary concept is lost forever largely because of industry opposition with an assist from regulators. The simplifying solution is fiduciary duty with no exceptions in deference to industry interests. Simple but complex as the industry must subordinate its self interest to the best interest of the investing public ("retail investor"). I appreciate your interest and constructive insight. SCW
Hoosier Counsel

Hoosier Counsel

July 6, 2017 — 8:27 PM
Stephen - I would merely ask you to exempt investment advisers from the concept of "industry opposition." We have been operating under the original intent of the ERISA fiduciary standard by providing non-conflicted advice to our clients for many years without complaint. Because the new rule did not directly affect us for the most part, you did not see a lot of opposition from our branch of "the industry." However, the result we now have is exactly the opposite of what the prior administration intended and the market was already bringing about - a clear distinction between conflicted and non-conflicted recommendations. Therefore, it should not be surprising investment advisers are upset the prior administration ended up turning the concept of fiduciary duty on its head through its own hubris and lack of understanding as to how the industry was actually operating.
Stephen Winks

Stephen Winks

July 6, 2017 — 9:41 PM
Hoosier, I agree, yet many advisors working within a brokerage construct are precluded from acting in a fiduciary capacity by virtue of the compliance protocol of their b/d. Totally agree with hubris of the industry and misunderstanding of the operational demands of expert advisory services. SCW

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