Final Countdown to the Fiduciary Rule

By Cyril Tuohy

Financial planner Rose Swanger compares a new fiduciary rule that takes effect at 11:59 p.m. Friday as a bullet fired in the movie the Matrix: the slug is headed for her, but it’s traveling in slow motion.

She can’t get out of the way, but she’s had time to prepare so the impact will be far more muted than a bullet traveling faster than the speed of sound.

“You see the bullet coming but it's in slow motion,” said Swanger, who works in Knoxville, Tenn. “For all those out there saying that the rule is gone or going (away), that’s wrong. It’s coming.”

The effects of the Department of Labor’s fiduciary rule won’t be felt until Monday.

For retail advisors working through large broker/dealers and independent marketing organizations that have spent the past year preparing, life won’t change much and Monday is likely to be just another day at the office.

But for reps and broker/dealers that haven’t been at the forefront of preparedness, Monday is potentially the beginning of the end. Many small shops are expected to reassess their business models and either merge with their larger neighbors or decide to quit the business.

More punitive requirements of the rule, which raises investment advice standards into retirement accounts, are set to kick in on Jan. 1, 2018.

Large broker-dealers with robust compliance departments have kept their advisors apprised of how to meet the requirements with a steady stream of written communications, conference calls, webinars and background briefings.

Millions of dollars spent retooling technology platforms have taken place at the insurance company and distributor firm level, but not at the retail advisor level.

Account Conversion

Mosaic Financial Partners, a registered financial advisor (RIA) in San Francisco, is ready for the Friday deadline.

The RIA decided months ago it would implement procedures to meet the requirements, whether the rule survived or not.

It’s been several weeks that clients have been asked to sign off on disclosure forms, said Steve Branton, senior financial planner with Mosaic.

“So there has been little or no hiccup for us,” he said.

Mosaic charges a flat fee for its services.

One area that will undergo significant change in asset management is the conversion from the commission-based accounts into fee-based accounts, said Swanger, founder of Advise Finance.

The biggest challenge is to find the right platform for smaller accounts that do not meet the minimum balance for an advisor's management.

“I'm hopeful once we adapt into the new era of the fiduciary asset management, many broker/dealers-third-party management will offer a plethora of portfolio designs for those smaller accounts," she said.

Some clients, unfamiliar with fee-based management, are sorry to see the old-fashioned commission-based approach fade away, she said.

Once clients understand that fee-based methods provide more transparency, and that advisors paid as a percentage of assets share the same interest with clients in growing the portfolio, clients welcome the change, she said.

“It's all about educating the client and I've got no resistance from clients,” Swanger said. “They reminisce about the past but they don't regret it. They are looking forward to the future.”

Forms and Funds

Advisors say they are preparing to have their clients sign forms, lots of them.

“If I do a rollover starting Friday, whether IRA to IRA or a 401(k) transfer or any qualified plan, there’s four to five pages of client documentation,” said Bob Quinlan, owner of Quinlan Insurance & Financial Services in Winona, Minn.

In July, his broker/dealer will be charging him for funds held directly with the company where client assets are held.

To avoid that, he plans to transfer his client accounts from mutual fund companies like Oppenheimer and Franklin Templeton to a brokerage account.

“I have to set up another account on the system for everybody,” Quinlan said.

Commission structures will be simplified and “levelized” on many mutual funds and annuities, he said.

Instead of having all commission upfront without any trailing commission, or lower upfront commission with higher trailing commissions, he expects the future to be more even or level.

“For mutual funds, they are looking at one (commission) level and with annuities slimming down to two commission options down from four or five,” he said.

Brokerage firms are culling thousands of mutual funds brokers can sell because the funds don't meet standards of due diligence.

By Jan. 1, 2018, the final structures should be in place if the rule stays as-is and smaller broker/dealers that haven’t been at the forefront of implementation will have to be ready.

“No behavior change, just more paperwork that the client will sign that we’ve always told them we’ve done anyway,” he said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].