A recent Eaton Vance survey of 1,000 FAs, released in February of this year, shows that 71% don’t understand the Department of Labor Fiduciary Rule. If you’re a Financial Advisor, it’s time you understand it.
Yesterday the Obama Administration released its fact sheet on the DOL’s Fiduciary Rule that “cracks down on conflicts of interest in retirement savings plans, ensuring that retirement savers get investment advice in their best interest” (their words not mine). The rule is supposed to help Americans save more for retirement and reduce fees and commissions.
Opponents say the rule is altogether unnecessary, a death sentence for some companies, and a rule that defeats its intended purpose by making it more difficult for savers and investors to get advice. The jury is out, and only time will tell. But in the meantime don’t expect there to be many, if any, modifications to this regulation that’s been six years in the making.
Why? Once published in the Federal Registry (this will take place tomorrow), Congress has sixty days to kill the rule. The chances of this happening are about as good as Lionel Messi having a penalty kick blocked by a middle school goalkeeper. If it does happen, Obama will veto it.
These quotes from Labor Secretary Thomas Perez and director of the White House National Economic Council Jeff Zients, illustrate how adamant government officials are about these alleged conflicts of interest:
- “Putting clients first is no longer a marketing slogan, it’s the law.”
- “A consumer’s best interest must now come before an advisor’s financial interest.”
- The current offering for consumers is “a business model [that] rests on bilking hard-working Americans out of their retirement money.”
The White House’s fact sheet essentially says that retirement savers will now get investment advice that’s in their best interest. It also states that investors will now have protection from firms that incentivize advisors to steer some $1.7 trillion of client assets into products with high fees and lower returns. The White House says this costs Americans an estimated $17 billion a year.
What’s an Advisor at a broker-dealer to do?
According to Dalbar’s CEO Louis Harvey, Financial Advisors will have to decide whether financial advice will be a focus of their business. Harvey says Advisors whose clients are not already in fee based advisory accounts have 3 choices for the retirement assets of their clients (including IRAs):
- Become a fiduciary – convert your clients to advisory accounts
- Continue to offer commission products with a caveat – have clients sign a “best interest contract exemption” (BICE)
- Become a pure educator – a Series 7 broker who just “educates clients and put things on the table for them to buy”
(Link to full story and interview with Mr. Harvey)
If Mr. Harvey is right, here are my thoughts:
- Choice #3… I can’t imagine any of the Advisors I work with choosing to be a “pure educator”, so enough on this.
- Choice #2 would appear to be a viable alternative, but the BICE agreement appears to contractually obligate the Advisor to a “fiduciary” responsibility on the product being offered, which would allow investors to take legal action against the Advisor for failing to act as a fiduciary, making it easier to win a claim against the FA.
- Choice #1 carries less risk for the Advisor and the firm, and it’s the way the industry has been moving for a long time.
Whether you like the rule or not, you have to agree with Bob Dylan, “The times they are a-changing.” And they are “a-changing” faster than ever!
I find that most of the Advisors who haven’t moved, in earnest, from traditional commission business to advisory models aren’t really opposed to the idea. In fact, many want to make this transition. More often they are struggling with what to say to a client they’ve been working with for many years. Essentially they fear having the conversation.
Here are 2 suggestions for tackling this fear and moving on with the times:
- Read “Getting Naked” by Patrick Lencioni – a book about getting over the fear of being embarrassed and feeling inferior in front of your clients (link to book summary)
- Consider hiring an executive coach who is experienced in working with Financial Advisors to help you transition to an advisory model and take your business to the next level (see what former Google CEO said about hiring an executive coach: “The best advice I ever got.”)
American investor and former head or research at GM, Charles Kettering, said it well; “The world hates change, yet it is the only thing that has brought progress.”
Are you ready for some change progress?
Bill Edmonds is an “Outside-Insider” (an Executive Coach and Consultant), who works with Financial Advisors to help them reach their full potential in the areas of organizational and personal development. A former Financial Advisor himself, Bill spent 24 years with Merrill Lynch until his retirement in 2014, where he led a $100+ million per year revenue wealth management business unit as a Director with the firm.
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