Fiduciary Standards

Ok folks, this is a long one but an important one. I have been thinking about this post for a few weeks and trying to figure out how to explain the new Department of Labor Rule and its impact. Then lo and behold, someone did it for me in a format that you might actually enjoy. If you missed John Oliver's piece on retirement savings and the Department of Labor's Fiduciary rule then you should watch it to get a comical yet fairly accurate view of a mini-war that has been raging in the financial industry for the past several years. Everything we write here should be considered our opinions of what we think will happen in our industry.

The Department of Labor's fiduciary rule is something that we are wholeheartedly behind, despite many firms in our industry fighting very hard against it. Although it is a little more complicated than many articles make it out to be, the heart of the rule is what is important. Client interests should be ahead of anyone else's. Currently, we are a hybrid firm. This means we are fiduciaries for a lot of accounts and not for others. Confusing, right? Not only that but we may be a fiduciary on one account for a client and not on another one for the same client. Thus the DOL rule.

Some investments only pay commissions and even if we think they make sense for a client the investments may not fall under a fiduciary standard because they are under the purview of FINRA. We utilize a broker dealer for these types of things. On the flip side we use the Registered Investment Advisor side of the broker dealer for our fiduciary business. This falls under the purview of the SEC which calls for a fiduciary standard. Most of Divergent Planning's business is "fiduciary business" or "fee based business".

Why would anyone fight this rule?

Large organizations don't like change. Change is expensive. One thing to keep in mind while watching Oliver's video is that the "Financial Services Industry" did not all fight the rule. In fact it was pretty much only large brokerage firms, banks and insurance companies. They have their public reasons and then they have what we feel are their real reasons. 

The biggest argument they are trying to make is that it will lead to a large amount of investors who won't be a able to find advice. We feel this is not only false but see the rule potentially spurring a growth in tiny independent advisors who serve "smaller" clients in an efficient and technologically driven way. Just because a large brokerage firm isn't structured to make a profit on a "small" client doesn't mean a small independent firm can't

The more truthful reasons, in our opinion, is not surprisingly money. There are a lot of fees that are hidden in investments. They are outlined in  prospectuses but since investors don't pay these fees directly they may forget the fees are there. These fees are huge in terms of revenue for many large firms. These fees were in jeopardy during the DOLs various iterations of their rule. The final rule actually allows for these fees to potentially stay in play but not without further disclosures and tougher administration which means a great expense to the companies. 

Individuals don't always love change but a firm like ours is very nimble and forward looking compared to the large brokerages and wire houses. Advisors who work for banks, brokerage firms, insurance companies and don't do fee-based business will have to make some major decisions in the coming months. One fear for them is a potential disruption to their commission based business. It may not be as easy for them to see an immediate "payoff" from a big client like they have become accustomed to. In a commission based system a $5 Million dollar client could mean a big paycheck is coming to the advisor. Under a fee based system there is no big paycheck from this client. Instead it is a stream of much smaller fees over a period of time. Personally, we would have liked to see a complete elimination of commissions on all investments. The UK did this years ago and Australia has a similar rule in place and guess what? Their advisors aren't starving. 

There are also some organizations we feel are on the wrong side of this. For example, the Financial Services Institute which we are members of (probably for the last year) are against the rule and have fought hard against it. They are mostly funded by large organizations. On the flip side the Financial Planning Association and the Certified Financial Planner Board are for the rule. These organizations are funded by due paying individuals. 

In our opinion the only real downside to the rule we see was illustrated in Oliver's piece when he discussed annuities. There is no doubt that annuities can be misused but they also can be very helpful for certain portions of a clients investments. The issue is when someone puts too much money into these. Many annuities pay up front commissions but the good news is many more are starting to stop up front commissions and move to a more fee based approach. Hopefully this will help annuities to not be vilified so much. Its the fees and commissions that make them the easy target. 

There will be industry changes. Commissions will start to decrease if not disappear. Fee based firms will become more prevalent. Fees will become more competitive which means fees could start to decline. That is good news for investors. As for us, we won't starve.

As always, let us know if you have any questions.