Jan. 09--As head of the largest independently owned financial advising firm in the Pittsburgh region managing billions of dollars in clients' money, Kimberly Fleming is feeling the weight of responsibility to get her staff trained on procedures to meet sweeping rules the federal government plans to impose in April.
"This has felt like my life. It's so important to me. I want us to deal with it constructively," said Ms. Fleming, chairman of the Hefren-Tillotson financial planning firm, Downtown.
The new regulations handed down in April 2016 by the U.S. Department of Labor are designed to tackle the problem of conflicted advice in the financial services industry.
By April 10, all advisers working with clients' retirement accounts are expected to act under a stricter "fiduciary" standard, where previously they had a choice of acting under a less rigorous "suitability" standard when offering advice on IRAs, 401(k)s and 403(b)s.
The government's goal is to create uniformity so that there will no longer be two different groups of financial advisers working under two different standards.
Advisers working under the suitability standard are only required to recommend investments that are suitable for clients. That doesn't always mean the advice is bad but it opens the door to a number of abuses, such as unnecessary high commissions and fees for investment products and advice.
The White House Council of Economic Advisers estimates $17 billion is drained out of retirement accounts each year due to conflicts of interest by investment advisers who sell commissioned products to their clients.
The fiduciary standard requires advisers to act solely in the client's best interest when offering financial advice.
Advisers at Hefren-Tillotson have operated under both standards, letting the client choose how to work with advisers. Ms. Fleming would not say what percentage of her firm's business is generated by commissioned sales versus fee-based financial advice, but with $11 billion in client assets under management, even 10 percent would be a sizable amount.
"We've operated under suitability, or what we think is in the best interest for [clients], but in a flexible way," said Ms. Fleming. "This really narrows the choices that clients have and how they work with advisers.
"[The new rule] has really turned over the whole industry in ways," she said. "Some are good and some are not. I would say we've always felt like fiduciaries. We do comprehensive planning and we really understand our clients."
Bracing for impact
Four months before the fiduciary rule is due to go into effect, many advisers and firms across the country are struggling to understand the full scope of how the rules will affect their business.
But the impact is already being felt.
Merrill Lynch recently announced it will no longer sell commissioned products in retirement accounts. Some smaller firms hope to survive by merging with larger ones to afford the high cost of implementing changes. Others are getting rid of divisions within their business that are driven by commissioned sales. Some advisers who make a living selling commissioned products are exiting the business altogether.
According to Limra, a worldwide association of insurance and financial services companies based in Windsor, Connecticut, 54 percent of broker-dealers surveyed late last year believe some of their advisers will retire rather than adapt to the fiduciary rule.
"Because the rule increases advisers' liability, broker-dealers also expect their advisers to stop providing advice to clients with lower IRA account balances," said Kathy Krozel, research director for Limra Distribution Research. "At a time when more Americans need access to advice, it appears that the new DOL rule may actually reduce access for middle income consumers."
Meanwhile, many investment firms are hoping President-elect Donald Trump's administration will either kill or replace the fiduciary rule based on his general intention to drastically reduce government regulation. But Mr. Trump has made no public comments on the issue.
"Until something changes, everyone's working assumption is the rule will be implemented in April, said Tim Kober, chairman of the National Association of Personal Financial Advisors in Chicago.
"The big takeaway is, regardless of what happens with the rule based on the political environment, consumers now have an increasing awareness of the two types of standards," Mr. Kober said. "That, for us, is the bottom line. That is why we have a conviction that regardless of the regulatory path, consumers will demand advice delivered under a fiduciary standard of care."
Investing in training, paperwork
From Ms. Fleming's standpoint, her firm has provided clients with the best of both worlds. Clients have had the flexibility to work with advisers either on a fee-basis or a commissioned basis.
Many may have paid commissions on investments made years ago and have held onto the investment. In order to convert to a fee basis, they may incur another commission to sell the investment and then be charged an annual fee based on the size of the account.
"A number of those accounts are well positioned and they might fall under what is called a grandfather provision, which would enable those accounts to stay as they are," Ms. Fleming said.
The company is evaluating the way the commissions are structured to make sure they make sense. "If they do, and we feel it is in the clients' best interest ... we will continue to operate with them with commissions. If not, we have the fee-based advisory that is available."
Meanwhile, Hefren-Tillotson is investing in training and new programs that will make it easier for advisers to work within the new rules.
A lot of the preparation also has involved distributing information that the firm is required to disclose to clients and creating documents declaring that advisers at the firm are fiduciaries.
"This has been a huge undertaking," Ms. Fleming said, "for the whole industry, not just for Hefren-Tillotson."
Hefren-Tillotson employs a staff of 220 total employees, including 80 financial advisers.
'Good for our industry'
Other independent advisory firms in the Pittsburgh region are paying close attention.
Some of them have always been fiduciaries and sell no commissioned products. Some who offer fee-based and commission-based services have converted most of their accounts to a fee-only status. Some will rely on an exemption, which allows firms to continue selling commissioned products with the client's permission.
"If clients want to continue using commission-based products, we will allow that, but the vast majority of our accounts are fee-based," said John Jones, the chief operating officer for Bill Few Associates in the firm's Ohio Township office. "The rule in and of itself doesn't have a significant impact on us."
Bill Few Associates, with $800 million in client assets under management, has a broker-dealer component of the business called Bill Few Securities, which sells commissioned products. The company said that was never a significant part of its total revenue.
Bill Few processes about 25,000 trades a year and 23,000 of those are placed by advisers who operate under the fee-based system.
DOL regulations will allow firms to sell commissioned products to clients as long as the account is a non-retirement account or if clients are willing to sign an agreement called a best interest contract or BIC.
The exemption will permit firms to sell commissioned products such as annuities and managed account programs as long as the firm acknowledges its fiduciary status, gives prudent and impartial advice, discloses potential conflicts of interest and information about the revenue model, avoids misleading statements and receives no more than reasonable compensation.
Large national firms such as JP Morgan and Morgan Stanley have said they will continue selling commissioned products in retirement accounts under BIC exemption.
Robert Fragasso, chairman and CEO of Fragasso Financial Advisors, Downtown, said the BIC exemption contracts are Band-Aids, and there is no guarantee they will protect firms against a class-action suit. He said insurance companies in the retirement planning business face the greatest risk selling variable annuities, which have a reputation for high commissions.
"There's a question of whether they are appropriate," said Mr. Fragasso, whose firm has $1.1 billion in client assets under management and does not sell commissioned products. "I come down on the side of inappropriate."
Although variable annuities are tax-protected until clients pull the money out, he said, "A retirement plan is already tax-deferred. So why would you pay all that extra internal expense to put a double wrapper of tax-deferral around the asset?"
Green Tree-based Fort Pitt Capital Group with $1.9 billion in assets under management, is a fee-only investment adviser. Still, the firm is working with an outside consultant to make whatever changes are necessary to comply with the rule, said Todd Douds, director of operations.
"Our philosophy is we always have our clients' best interest in mind and we think these changes are good for our industry," Mr. Douds said.
Hefren-Tillotson, unlike many large fee-based firms, does not have an account minimum, and Ms. Fleming said she has no plans to change that, although she believes the Department of Labor rules will make it more expensive for firms giving investment advice to do business.
"That part doesn't work to the benefit of the client," she said, adding that firms that don't charge commissions are likely to turn down business from people with small accounts.
"I think what we've done is we have looked at different ways that we work with clients and there aren't any ways we're working with clients that we think we have to stop," Ms. Fleming said.
She said her firm has been transitioning clients to a fee-based services since 1998 and the fiduciary rule makes that business approach make more sense for more of the firm's accounts.
"We are trying to retain the flexibility for advisers and clients to work together in a way that they feel makes the most sense for that particular client."
Tim Grant: Tgrant@post-gazette.com or 412-263-1591.
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