The Department of Labor’s “Conflict of Interest” rule holding advisors to a fiduciary standard of care has raised the bar on every registered investment advisor (RIA) managing retirement accounts, RIA owners and financial experts say.
Even fee-only advisors that have followed a fiduciary standard for years and who may feel like they are better positioned for the changes will find it more difficult to do business, experts say. But it is also likely to mean a better world for investors.
“I think RIAs who are true fee-only are better positioned, but even those folks will have to accommodate new standards of care,” said Craig Lemoine, associate professor of Financial Planning with The American College in Bryn Mawr, Pa.
“The landscape changes for fee and commission-based advisors; commission-based advice will see a higher burden,” he said in an email to InsuranceNewsNet. “All advisers will need to develop a deeper understanding of the source of retirement funds, if suggesting a rollover from a profit-sharing plan is actually in the best interest of the client.”
The new rule could also lead to a realignment of RIAs and their broker-dealers through which securities are bought and sold. RIAs might buy and sell through a discount broker, but commission arrangements would only fall to the discount broker without RIA involvement.
IRA and tax expert Ed Slott, founder of Ed Slott and Co. in Rockville Centre, N.Y., said the fiduciary responsibility imposed on retirement-related transactions means that advisors had better know the new rules.
If not, RIAs risk going out of business because they are competing with big companies offering fee-based managed accounts, Internet investment algorithms and mutual complexes that can charge smaller and smaller commissions.
RIAs that decide to retain their commission-based revenue model had better be good at providing a service and justifying their rates.
“You can still do commission-based products but you will have to earn it,” Slott said.
With the final version of the fiduciary rule in print, lawyers, financial experts, plan sponsors, brokers and anyone with a hand in managing the trillions of dollars held in retirement accounts were poring over the details this week.
“It’s a case-by-case issue for each advisor depending on the book of business and the mix of business,” said Susan Krawczyk, a partner in the Washington, D.C., office of Sutherland, Asbill & Brennan.
A More Level Playing Field
Fee-only, SEC-registered RIAs who earn a living charging a flat fee or a percentage of assets under management, and are under a fiduciary mandate to provide advice in the best interest of clients, say they have finally gotten their due.
Setting aside the grumbling about higher compliance-related back-office expenses, the fee-only community welcomes the fiduciary standard for retirement accounts.
“It levels the playing field between a little bit between the RIA, the broker-dealer and the insurance agent,” said Robert Wesley Shannon, CFP, founder of SJK Financial Planning in Hurst, Texas, in an interview with InsuranceNewsNet.
Here’s why Shannon likes the conflict of interest rule: He has already signed a contract with clients upfront vowing to represent his client’s best interests. In exchange for that promise, he charges a flat fee and a percent of assets under management.
So when he was asked by a client who changed jobs recently what to do with her 401(k) assets, Shannon gave her options: she could roll over her assets into an individual retirement account, she could keep them in her old 401(k), or she could move her assets into her new employer’s 401(k).
His client eventually made her own decision, one in which Shannon had no economic stake.
If his client had relied instead on a broker-dealer or an insurance agent representing a carrier, the broker or agent would only be required to offer a suitable investment, an individual retirement account, or IRA, for example, leaving out other options.
Brokers or agents earning a commission from the mutual fund provider or variable annuity issuer have an incentive to steer the investor toward an IRA.
In all likelihood, the client would have been unaware of what such a transaction would have cost, how much the broker was being paid, and by whom.
The DOL rule is designed to prevent that so that insurance-licensed agents, for example, aren’t “running around out there” steering rollovers into IRAs loaded with fixed indexed annuities with no disclosures, Shannon said.
For advisors and agents who want to sell commission-based products, they will have to do so under an exemption, and the DOL has just raised the bar for that exemption.
“This is a long time coming,” Shannon said.
For Fee-Based RIAs, Hard Choices Ahead
Many RIAs employ a hybrid model: they receive income from fees and from commissions, and the commission-based revenue stream is likely to be the most affected by the new rule, industry experts said.
Advisors looking to continue selling high-commission variable and fixed indexed annuities into retirement accounts will need to comply with the Best Interest Contact Exemption.
They will have to present the contract to their clients and since it stipulates a high level of transparency with regard to fees and commissions, advisors will have to make a much stronger case to investors for why the product they are recommending is worth buying.
“When it comes to rolling over a 401(k) to an IRA, that may affect people across the board because if we can't justify that our fee is better than what they are receiving, that will affect money coming into our firm,” said Brent D. Dickerson, proprietor of an RIA in Lubbock, Texas.
When investors see what kind of fees they are paying and how advisors and brokers are remunerated, commission-based models will see “dramatic fee compression,” and that’s when clients may balk, said Tom Balcom, founder of 1650 Wealth Management, an RIA with offices in Miami and Ft. Lauderdale.
“You’d be shocked by how many times I ask, ‘How much to do you pay your advisor?’ People don't know and just don't ask how much it costs,” he said.
In anticipation of the new DOL rule, many segments of the industry were already moving toward a fee-based model. RIAs have talked about restructuring compensation so that advisors are remunerated entirely through fee-based models, Krawcyzk said.
Fee-based RIAs could easily restructure as fee-only RIAs, though arrangements would have to be made for existing commission-based accounts.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].