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American Funds - DOL Fiduciary Rule Commentary 4/8

Mentions of American Funds

5 Advisor Views On New Fiduciary Rule
Apr 8, 2016 | ETF.com
By Cinthia Murphy

-Financial advisers offer a host of opinions on the new fiduciary standard, ranging from opposition to its overreach to cautious optimism that the rule is a valuable compromise to hostility to its perceived ineffectiveness. Those opinions predictably fall along the lines of stakeholders and beneficiaries of the new rule. -American Funds is mentioned once in passing. -Third parties quoted or mentioned:Joe Goldberg, Director of Retirement Plan Services, BAM Advisor Services; Michael Kitces, Partner & Director of Wealth Management, Pinnacle Advisory Group; Jon Stein, CEO & Founder, Betterment; Joshua Brown, CEO, Ritholtz Wealth Management; Allan Roth, founder, Wealth Logic LLC; Edward Jones.

Winners vs Losers

Fee-Only Advisers Get a Break—and More Competition—Under Fiduciary Rule
Apr 8, 2016 | Wall Street Journal
By ANNE TERGESEN

-The new rule will greatly increase competition in the wealth management industry and incentivize fee-only compensation structures. Some people in the fee-only community believe the new rule may initially create more opportunity for fee-only planners. -No mentions of Capital Group's direct competitors. -Third parties quoted or mentioned: Ron Rhoades, director of the financial planning program, Western Kentucky University; Michael Kitces, director of financial planning, Pinnacle Advisory Group Inc.; Brian Graff, CEO, American Retirement Association; Brian Graff, CEO, American Retirement Association; Harold Evensky, professor of personal financial planning, Texas Tech University.
A Seismic Shift: Industry Reacts to Fiduciary Rule
Apr 8, 2016 | Financial Planning
By FP Editorial Board

-Financial advisors disagree over the effects, intent, and consequences of the fiduciary standard, though most characterize it as relatively benign. -No mentions of Capital Group's direct competitors. -Third parties quoted or mentioned: Lisa Kirchenbauer, President, Omega Wealth Management; D. Scott McLeod, President and CEO, Brown Financial Advisory; Mike Forker, Chief Compliance Officer, CLS Investments; Shane Morrow, Private Wealth Advisor, Ironbridge Wealth Counsel; Michael Nathanson, Chairman & CEO, The Colony Group; Thomas Muldowney, Principle, Savant Capital Group; Rachel F. Moran, Financial Planner, RTD Financial Advisors; Jarrett Solomon, Director, Connecticut Wealth Management; Sara Botkin, President, Botkin Family Wealth Management; Paul Borden, Attorney and Partner, Morrison & Foerster; Peter Mallouk, President and CIO, Creative Planning.
Insurers warned of downgrade risk from US retirement shake-up
Apr 8, 2016 | Financial Times
By Alistair Gray

-US insurers have been put on notice over how the Obama administration’s shake-up of pensions advice will hurt their businesses after a leading credit agency warned the reforms could put their ratings at risk. -No mentions of Capital Group's direct competitors. -Third parties quoted or mentioned: Standard & Poor’s; David Hirschmann, who runs the US Chamber of Commerce’s Center for Capital Markets Competitiveness; Beth Campbell, an S&P credit analyst; AIG; MetLife; Prudential Financial; American Equity Investment Life
Wirehouses seen winning in DOL's final fiduciary rule
Apr 7, 2016 | Investment News
By Christine Idzelis

-Financial advisers commended the inclusive and democratic process by which the fiduciary rules were made, saying that the DOL listened to their concerns and revised the rule accordingly. Still, some said that the rule is far from perfect and could wind up doing more harm than good both in the increased compliance costs and in creating new opportunities for abuse. -No mentions of Capital Group's direct competitors. -Third parties quoted or mentioned: Secretary of Labor Thomas Perez; John Thiel, head of Merrill Lynch Wealth Management; Ken Fisher, founder, Fisher Investments; John Anderson, head of practice management solutions, SEI Advisor Network; Morgan Stanley; Wells Fargo; UBS.

Did the Rule Go Far Enough?

Retirement Savings Made Safer
Apr 7, 2016 | New York Times
By NYT Editorial Board

-The rule will protect consumers' interests with common sense reform. Despite objections from some trade groups, the new fiduciary standards will make disclosures simpler by making them more transparent. -No mentions of Capital Group's direct competitors. -Third parties quoted or mentioned: White House Council of Economic Adviser, Secretary of Labor Thomas Perez.
DOL Issues Final Fiduciary Rule, Does It Fall Short?
Apr 7, 2016 | Forbes
By Ashlea Ebeling

- Because the DOL bowed to pressure from lawmakers and the finance industry, the new rule may be too soft to be effective. The relatively measured response from much of the industry has been taken as a sign that rules will not much affect them. Nevertheless, some financial advisers have been highly critical of the "capricious" nature of the rule. -No mentions of Capital Group's direct competitors. -Third parties quoted or mentioned: Jeff Zients, Director, White House Economic Council; Sen. Elizabeth Warren, (D) Mass; Department of Labor Secretary Tom Perez; Center for American Progress; Alston & Bird; Miller & Chevalier; Cathy Weatherford, president and CEO, Insured Retirement Institute;Tim Pawlenty, CEO, Financial Services Roundtable; Sen. Cory Booker, (D) NJ.
DOL acting before SEC on fiduciary rule is 'failure in public policy'
Apr 7, 2016 | Investment News
By Greg Iacurci

-Critics of the fiduciary rule have argued that in creating it, the DOL has vastly overstepped its bounds. It is only the SEC, they say, that has the discretionary authority to regulate the securities industry, according to Dodd-Frank. -No mentions of Capital Group's direct competitors. -Third parties quoted or mentioned: Ira Hammerman, EVP and general counsel, Securities Industry and Financial Markets Association; SEC chairwoman Mary Jo White
How Come It’s Still Harder to Become a Hairdresser than a Financial Adviser?
Apr 8, 2016 | Wall Street Journal
By Jason Zwieg

-The requirements for becoming a broker-dealer are disturbingly such that the field requires little to no training or expertise - the implication being that mandating fiduciary status will not legislate competence. -No mentions of Capital Group's direct competitors. -Third parties quoted or mentioned: Patrick Lach, finance professor, Eastern Illinois University; Leisa Flynn, marketing professor, University of Southern Mississippi; G. Wayne Kelly, finance professor, University of Southern Mississippi;
The entire financial advice profession needs to be fixed
Apr 8, 2016 | Marketwatch
By Robert Powell

-It is not enough to improve one element of one corner of the financial industry. Instead, all financial advisers should face requirements and regulations similar to CFPs, much like how doctors, lawyers, and accountants are held to universal standards. Similarly, the patchwork of regulators and watchdogs should be brought under one roof, simplifying regulations and lowering the enforcement costs for government and compliance costs for businesses. -No mentions of Capital Group's direct competitors. -Third parties quoted or mentioned: n/a
U.S. Chamber of Commerce Raises Possibility of Lawsuit to Block ‘Fiduciary Rule’
Apr 8, 2016 | Wall Street Journal
By Dave Michaels

-The US Chamber of commerce has been highly vocal and harshly critical of the new fiduciary rule, claiming that it will hurt small businesses. Given the likely inability of Congress to overturn the rule in the face of a presidential veto, the Chamber, along with a few other trade groups, is contemplating legal action. -No mentions of Capital Group's direct competitors. -Third parties quoted or mentioned: David Hirschmann, Director, US Chamber of Commerce Center for Capital Markets Competitiveness; American Council of Life Insurers; Tom Perez, Secretary of Labor; Rep. Peter Roskam, (R) Illinois; Rep. Phil Roe, (R) Tennessee; Rep. Richard Neal, (D) Massachusetts; Rep. John Larson, (D) Connecticut; President Obama.
DOL final fiduciary rule: Much ado about nothing
Apr 8, 2016 | Benefits Pro
By Nick Thornton

-The DOL toned down the initial proposal for the fiduciary rule, earning the approval of much of the finance industry, which now regards the rule as a compliance issue rather than a fundamental change to their business models. -No mentions of Capital Group's direct competitors. -Third parties quoted or mentioned: Erin Sweeney, Miller & Chevalier; Secretary of Labor Tom Perez; Jean-David Larson, director of regulatory and strategic initiatives, Russell Investments; US Chamber of Commerce; Brad Campbell, ERISA attorney, Drinker Biddle & Reath; David Hirschmann, CEO, Center for Capital Markets Competitiveness; Knut Rostad, president, Institute for Fiduciary Standard;

Political Commentary

You — Not the Government — Are Responsible For Your Retirement Savings
Apr 8, 2016 | Wall Street Journal
By Jason Zweig

-Zweig argues that regardless of the law, it is everyone's own responsibility to take charge of their finances and ask the right questions, when choosing a financial advisor. Government regulation can only treat symptoms, he says, not causes - the obvious corollary being that mandating fiduciary status will not legislate competence, nor could or should it. -No mentions of Capital Group's direct competitors. -Third parties quoted or mentioned: Tamar Frankel, securities-law professor, Boston University.
Is Your Adviser a Fiduciary?
Apr 8, 2016 | Pragmatic Capitalism
By Cullen Roche

-Roche argues that "the new rule looks more like a lot of talk and little effective action." -Vanguard is mentioned in passing -No quotes from or mentions of third parties.

Mentions of American Funds

5 Advisor Views On New Fiduciary Rule

Apr 8, 2016 | ETF.com

By Cinthia Murphy

The Department of Labor’s new fiduciary rule aimed at retirement investing elicited both applause and groans from industry participants who have been closely watching the DOL’s efforts to draft regulation aimed at protecting investors.
The rule, unveiled this week, and now headed for Congressional approval, would not be fully effective until January 2018. But assuming it is approved and implemented, it could shake up some long-standing commission-based business models often used in retirement investing. Perhaps most impacted by this regulation will be brokerage firms. Registered investment advisors (RIAs) are already required by the Securities and Exchange Commission to act as fiduciaries.
We caught up with a few experts for their view on the rule.

Joe Goldberg, Director of Retirement Plan Services; BAM Advisor Services
It’s progress from where we were. But there’s a lot of ability to maintain the same practices with just a little more disclosure and more transparency. It seems they loosened up the utilization of the best-interest contract—with pre-existing clients—so I think the rule is going to impact more new business for different service providers.
The financial impact is going to be greatest on smaller IRA rollover people who are poached to be sold loaded mutual funds with their rollover dollars. It’s going to be harder for producers to do. The industry as a whole for retirement plan advisors working qualified plans has moved more towards a fiduciary practice, but the real impact here is on the IRA business model, and the amount of annuities and products that are sold to people when they’re incentivized to roll their money out of retirement plans.
It will be interesting to see what a firm like Edward Jones does. The entire business model is built upon IRAs that sell loaded mutual funds and have massive contracts with companies like American Funds. The truth is that it’s hard to operate and help serve the small IRA client in a fee-based environment.
I wonder how much these best-interest contracts will influence where those dollars go. Today a lot of them go into annuities that are commission-driven. Anyone who’s under the age of 50 who’s been sold annuities for their IRA is 100% driven by commission versus what’s in their best interest. The variable annuity market is going to be impacted.
I did think the best-interest contract, which will require more disclosure, is maybe a little more lenient than I would have thought. There’s certainly a benefit to the investors. The majority of their liquid net worth is in IRAs and 401(k)s. To put in place a rule where most service providers have a legal obligation to act in the best interest of clients, and those who want to operate in a commission-based structure have to face more hurdles and disclosures—that’s a good thing for investors.
But we went into this knowing that this is a large enough industry with enough lobbyists where the rule wasn’t going to be perfect. For example, the best-interest contract doesn’t have to be presented upfront in the sales process, just at the time of any service agreement. If we want people to be educated consumers, there should be a clear statement from the beginning that says, “I’m not working under a fiduciary standard.” But as far as this iteration, I don’t think I could have expected any more.
What’s telling to me is that the rule would not be implemented until 2018. To say that a company not acting as fiduciary has a year and a half to find a way to disclose what it needs to disclose, makes you scratch your head. How difficult can it be for a company to explain what kind of revenue it derives from its clients? The majority of the financial services industry has never had any requirement to serve in the best interest of clients.

Michael Kitces, Partner & Director, Wealth Management for Pinnacle Advisory Group; publisher of the financial planning industry blog Nerd’s Eye View
Overall, this looks like a well-made rule. The DOL clearly listened closely to comments from both sides, and found numerous ways to improve and simplify the implementation of the final rule, in a manner that didn’t undermine the key consumer protections.
The introduction of the “Level Fee Fiduciary” eligible for a streamlined exemption is significant. It recognizes that RIAs already operating as fiduciaries with clients don’t necessarily need significant additional layers of fiduciary oversight.
As a result, those most impacted by the new rule are truly “just” the brokers who were acting as “financial advisors” and holding out to the public as such, but weren’t actually held to a fiduciary advice standard. In fact, the new Level Fee Fiduciary exemption may well serve as an encouragement and nudge for many brokers to finally make the transition to being fiduciary RIAs.
Ultimately, the rules still only cover retirement accounts—employer retirement plans and IRAs. It still doesn’t cover a typical taxable brokerage investment account. As a result, we now have two different standards for investment accounts, depending on whether they’re taxable (bank or brokerage) or tax-deferred (IRA or employer retirement plan).
This isn’t the DOL’s “fault,” per se—its jurisdiction is limited to retirement accounts in the first place. But the implementation of the new fiduciary rule will place a new level of pressure on the SEC to finally act, and make fiduciary advice protections uniform for all types of investor accounts, not just the ones that happened to be tax-deferred for retirement.

Jon Stein, CEO & Founder; Betterment

Many investors are unaware that their retirement account managers and advisors—including brokerage firms and mutual fund companies—are currently under no obligation to act in their best interest.
Investors are also often unaware of the fees they’re charged, because those fees may be hidden in the fine print. Once the new rule is implemented, investors will receive additional disclosures regarding fees, compensation, and potential conflicts of interest when they receive investment recommendations concerning their retirement accounts.
The fiduciary rule should also help prevent instances of product steering, which occurs when brokers and advisors direct clients to invest in more expensive investment products—including their own branded products—over others.
Opponents of the rule cited implementation costs—such as the costs to retrain advisors or update legal procedures and technologies—as a reason to not support it. They also argued that, if forced to abide by the fiduciary rule, they would no longer find it economically feasible to provide services to lower-balance accounts.
But we believe the rule’s opponents actually pushed back because they wanted to preserve an outdated status quo—one that did not always put customers first, or prioritize transparency, innovation and unconflicted advice.
In plain speak, opponents were focused on the potential impact the fiduciary rule would have on their bottom lines.
We’re optimistic about the DOL’s rule-making and what it represents.

Joshua Brown, CEO, Ritholtz Wealth Management; author of the blog “The Reformed Broker”
My initial read on the DOL's final fiduciary rule: Literally nothing changes. I don't hate [the rule]. I’m glad they preserved the choice for advisors in terms of fund cost, so that not everyone has to buy an index fund. But these provisions mean nothing much will really change, on the ground. Same products, same conflicts, just a touch more disclaimers on the paperwork that no one will read.

Allan Roth, founder, Wealth Logic LLC, an hourly based financial planning firm
I’m of the belief that consumers are actually harmed if they are told by their advisor that they must put the client’s interests ahead of their own and then don’t. It builds a trust that might not be there if a lower standard is communicated.
The question remains as to whether any regulator or credential licensor (such as the CFP Board) will actually begin to enforce the fiduciary standard.
In my view, if past is prologue, then there is little reason for optimism that this will ultimately be good for consumers. But perhaps the Department of Labor's approach will be different. After all, they at least think something going on right now is wrong, and I couldn’t agree more.

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Winners vs Losers

Fee-Only Advisers Get a Break—and More Competition—Under Fiduciary Rule

Apr 8, 2016 | Wall Street Journal

By ANNE TERGESEN

The Labor Department’s new fiduciary rule is an implicit endorsement of the business model that fee-only financial advisers have used for decades: getting paid only by their clients, to limit their potential conflicts of interest.
The rule released Wednesday includes a provision under which these advisers won’t have to sign new “best interest” contracts with clients before they can recommend rolling money from a workplace 401(k) plan to an individual retirement account. As registered investment advisers, fee-only practitioners are already “fiduciaries” required to act in clients’ best interests. By contrast, those contracts will be required for brokers and insurance agents who are paid commissions and other compensation that varies with the investments they suggest.
But the new Labor Department standard also means that fee-only planners will face more competition over time, as more brokerage firms emphasize fee-based accounts over traditional brokerage accounts with commissions.
By virtue of having successfully advocated “for a fiduciary standard to be employed more widely, we will transform our competition to look more like us, and as a result there will be a lot more competition,” said Ron Rhoades,director of the financial planning program at Western Kentucky University.
Michael Kitces, director of financial planning at Pinnacle Advisory Group Inc. in Columbia, Md., said it is going to be even more challenging for fee-only planners to differentiate themselves from the competition “because now we’re all going to be competing on a similar playing field.”
Slated to go into effect in phases starting in April 2017, the Labor Department regulation toughens standards for retirement-account advice by extending to IRAs a revamped version of the fiduciary standard that governs corporate retirement plans. The rule is expected to have a substantial impact on most brokerage firms, whose recommendations now are generally required only to be “suitable.” But for fee-only planners, it mainly requires changes on rollovers.
Recommendations to roll money from a 401(k) to an IRA create a potential conflict for advisers—including fee-only advisers—since they stand to earn fees or commissions on the dollars shifted into IRAs. Under the law that governs workplace retirement plans, such conflicts must be avoided and certain transactions are prohibited—unless they can be handled under one of several officially sanctioned exemptions.
For fee-only planners, the new rule creates such a “streamlined pathway for rollovers,” says Brian Graff, CEO of the American Retirement Association, a nonprofit organization for professionals who work with corporate retirement and benefit plans.
In contrast, advisers who receive commissions and other forms of variable compensation would have to go through the more involved “best-interest contract exemption,” which requires them to ask a client doing a rollover to sign a contract that requires the adviser to act in the investor’s best interests and includes information about the firm’s conflicts of interest.
Still, that doesn’t necessarily mean that fee-only advisers can continue to handle rollovers as they always have.
Geoffrey Brown, CEO of the National Association of Personal Financial Advisors, said many of the organization’s 2,600 members—all fee-only advisers—may feel that because they are already subject to a fiduciary standard, the new rule “doesn’t apply. But it’s going to affect them,” he said.
Under the new provision for advisers whose compensation doesn’t vary with the investments they use, these advisers must conduct a detailed analysis of whether a rollover is in a client’s best interest. The new rule requires advisers to consider whether the client might be better off remaining in his or her 401(k) plan and weigh fees as well as services and investment options available under each alternative. The Labor Department is requiring advisers to document this analysis—although it has not specified “any particular format or method for generating or retaining the documentation,” the rule says.
Mr. Rhoades said he expects fee-only firms to adopt a formal checklist of items to consider when performing a rollover analysis. “There is going to be some formalizing to the process,” agreed Mr. Brown, who added that advisers will also “have to be more intentional about conversation around rollovers.”
By and large, fee-only advisers are pleased with the new fiduciary rule, said Mr. Brown of NAPFA, whose organization lobbied in favor of it.
Some people in the fee-only community believe the new rule may initially create more opportunity for fee-only planners. Media coverage of the fiduciary rule may have raised public awareness that “there is a difference between brokers and registered investment advisers,” said Harold Evensky, a fee-only financial adviser and professor of personal financial planning at Texas Tech University who has long advocated for such a rule. The fiduciary standard “has been part of our DNA from the beginning,” notes Mr. Brown.
Fee-only advisers can point out to prospective clients that they act as “fiduciaries in every respect,” said Mr. Evensky. In contrast, brokers are still free to operate under a suitability standard when dealing with taxable accounts.
Still, as brokerages shift increasingly toward fees, the growing competition is also likely to drive down advisers’ fees and “force everyone to up their game,” said Mr. Rhoades.

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A Seismic Shift: Industry Reacts to Fiduciary Rule

Apr 8, 2016 | Financial Planning

By FP Editorial Board

flurry of opinions has engulfed the industry ever since the Department of Labor began its pursuit of a fiduciary rule six years ago. After Labor Secretary Tom Perez and a host of other officials unveiled details of the rule on Wednesday, advisors and industry experts are absorbing the details and dissecting what it will mean for their companies and/or their practices.
But how do advisors really feel? Read on to see their reactions.
Lisa Kirchenbauer, President, Omega Wealth Management
"As I said to my team today, I think that there is 'a darkness sweeping over the realm'... the realm being financial services. I worry a bit about the clients who will be dropped along the way or choose not to pay AUM fees and miss the chance to get proactive financial advice."
D. Scott McLeod, President and CEO, Brown Financial Advisory
"Every financial advisor should be motivated to provide the highest level of care to every client, whether it is inside or outside a retirement plan. The devil is in the details of course, but establishing a fiduciary standard of care is simply the right thing to do."
Mike Forker, Chief Compliance Officer, CLS Investments
"The final rule appears to be much weaker than the proposed rule. However, "weakened" doesn't necessarily mean that clients aren't protected or that they would have better protection under the proposed rule. The final rule still provides investors with greater recourse against advisors who do not put their clients' interests first than currently available. By expanding the definition of investment advice, the liability provisions within ERISA are now available to more investors."
Shane Morrow, Private Wealth Advisor, Ironbridge Wealth Counsel
"I welcome the first steps in providing better protection for clients and greater transparency across the industry. At some point I hope there will be even better clarification around who can use the term "advisor." Our Industry should continue to hold itself to a higher standard for advice, credentials, and our clients' financial well-being. I welcome this as a step in that direction."
Michael Nathanson, Chairman & CEO, The Colony Group
"At first glance, it appears the DOL has made some favorable concessions to the wirehouses, giving them more time to implement and fewer disclosure requirements. We believe it may still be difficult for them to comply and that they may continue to try to dampen the rules and elongate timelines."
Thomas Muldowney, Principle, Savant Capital Group
"The relationship of an investor with a fiduciary is expected to be of the highest order of loyalty, integrity, openness, candor and truthfulness - without having to go to a 'check the box' definition of fiduciary. Any investment advisor should not be considered "a fiduciary" under one set of circumstances and "a professional salesperson" under another set of circumstances.. even if and especially if the investment advisor is one and the same. It was a nice idea. It was executed poorly. The DOL rule appears to have satisfied the needs of the professional salesperson and the professional lobbyist. Once again, the consumer is the natural prey of the system."
Rachel F. Moran, Financial Planner, RTD Financial Advisors
"This ruling lays the groundwork for a younger generation of planners to begin building relationships on the basis of trust, changing the way the public perceives our industry and removing skepticism and confusion in differentiating the standard to which advisors are held."
Jarrett Solomon, Director, Connecticut Wealth Management
"While it may be true that smaller investors will not be able to access advice in the manner they were before, we beleive that this current manner is subpar. We believe that innovation and the free market will figure out a more effective way for smaller investors to receive advice and that they will not be left out in the cold."
Sara Botkin, President, Botkin Family Wealth Management
"[The rule] has raised awareness among the public about the fiduciary standard. We've had current and prospective clients ask us if we are acting in a fiduciary capacity. That's not a question we've received prior to the press coverage of the DOL's rule."
Paul Borden, Attorney and Partner, Morrison & Foerster
"The industry has been concerned for some time that while the final rule was pending that it would significantly increase exposure of broker-dealers and advisers to litigation. While the final rule has relaxed many of the restrictions contained in the proposed rule, I expect an increase in litigation exposure."
Peter Mallouk, President and CIO, Creative Planning
"The new DOL conflict of interest rule doesn't change the fact that the general public should always seek financial advice from an independent advisor. Since the new law simply says broker-dealers need to act as fiduciaries when dealing with retirement accounts, there is still only way to know if your broker-dealer is fiduciary all the time: don't work with a broker."

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Insurers warned of downgrade risk from US retirement shake-up

Apr 8, 2016 | Financial Times

By Alistair Gray

US insurers have been put on notice over how the Obama administration’s shake-up of pensions advice will hurt their businesses after a leading credit agency warned the reforms could put their ratings at risk.

Standard & Poor’s cautioned in a report that a new “fiduciary” retirement standard published this week would hit sales of some of life insurance companies’ principal products.

The sweeping changes demand that financial professionals act in the best interests of retirement savers — toughening existing rules, which require only that they make “suitable” recommendations.

S&P’s assessment underscores how the reforms could still reshape the US retail financial services landscape, even though the industry secured important concessionsfrom regulators.

The final version of the rules are not as strict as those regulators originally proposed. Nevertheless, industry lobbyists heavily criticised them — raising the prospect that they will launch a lawsuit to challenge the reforms.

“Unless we see fundamental changes, this rule will remain unworkable,” said David Hirschmann, who runs the US Chamber of Commerce’s Center for Capital Markets Competitiveness.

He added: “We will consider every approach to address our concerns.”

Insurers are expected to be hit because the changes will apply to so-called variable annuities and fixed-indexed annuities — popular retirement products that generated about $190bn in revenues last year.

“This could meaningfully affect sales of VAs and FIAs in the near term,” said Beth Campbell, an S&P credit analyst, of the new regime, which begins next April.

S&P said it did not envision changing insurers’ credit ratings “at this time”. But the agency added it anticipated “potential rating implications in the next couple of years, depending on how life insurers adapt”.

US-listed insurers AIG, MetLife and Prudential Financial are big sellers of such products, according to data from the trade body Limra.

Their European rivals are also likely to be affected. American divisions of the UK’s Prudential, France’s Axa and Germany’s Allianz rank among the 10 largest US annuity writers.

S&P added: “If insurers selling VAs and FIAs are unable to adapt to higher compliance costs and potential litigation liability, resulting in weaker profit margins, their credit quality could suffer.”

Even so, several of the companies have said that even a particularly adverse scenario would be manageable and could also provide an opportunity to take market share from rivals.

Fitch, another big rating agency, highlighted the rules were “less onerous than expected” — although it was cautious about the implications for companies that sell fixed indexed annuities.

FIAs were one area in which officials toughened the rules since they published a draft last year. Shares in American Equity Investment Life — the fourth-largest seller of fixed indexed annuities according to Limra — dropped 15 per cent after the changes were unveiled.

“Many of the negative aspects of the new regulations will have a greater impact on them,” Fitch said of FIAs, although it added that “over the longer term, both FIA and VA writers will be able to adapt”.

The regulatory overhaul in the US comes at a delicate time for the global life insurance sector.

Rock-bottom interest rates have pushed up the value of the companies’ liabilities and made it harder for them to generate adequate returns on their investment portfolios.

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Wirehouses seen winning in DOL's final fiduciary rule

Apr 7, 2016 | Investment News

By Christine Idzelis

Concessions in the final version of the Department of Labor's fiduciary rule will allow Wall Street brokerage firms to continue to sell proprietary products, something they originally feared they may no longer be able to do.
Secretary of Labor Thomas Perez released the revised rule Wednesday requiring advisers to act in the best interests of investors when providing investment advice for their retirement accounts. They've also gained an additional four months to implement the rule, with the DOL now giving them a full year.
The revised rule clarifies how a financial institution that limits its offerings to proprietary products can satisfy the best interest contract exemption, known as BICE. Essentially, they have to let investors know what commissions they're charging.
“We are pleased that Secretary Perez and the Department of Labor staff have worked to address many of the practical concerns raised during the comment period,” John Thiel, head of Merrill Lynch Wealth Management, said in an emailed statement.
”As we study the details of the final rule, we hope to continue what has been a constructive dialogue with the department about how to implement a best interest standard effectively and efficiently for the benefit of our clients, advisers and shareholders,” he said.
The long-awaited regulation means brokers will have to disclose commissions they reap from sales of investment products to investors saving for retirement, leaving it up to investors to read the communication of those details, according to Ken Fisher, founder of Fisher Investments, one of the largest registered investment advisers in the U.S.
“The strength of this is in the disclosure,” he said. “The weaknesses are everywhere else.”
The final version of the rule leaves room for “potential abuses” given that high-fee investments such as annuities that benefit brokers can still be sold into retirement accounts, according to Mr. Fisher. Investors who take heed of the required disclosure “will be mightily armed,” he said.
Brokers who comply with the fiduciary rule by informing clients in an email that they're choosing to be paid commissions may continue to benefit from higher-cost proprietary products, particularly if the investors don't bother to read the notification, according to John Anderson, head of practice management solutions at SEI Advisor Network.
That's a win for the wirehouses, he said, as it “allows them to sell their internal products in a much easier way than in the original way the rule was written.”
Still, individuals will now have the disclosure requirement to lean on should a dispute arise about whether a broker is complying with the new rule, according to Mr. Fisher.
“It's a step in the right direction,” he said. “Regulation can't be perfect.”
With the list of approved investment products for retirement accounts removed, effectively allowing any type of investment to theoretically be sold, the final rule also clarifies that the best interest contract exemption doesn't have to be signed until an account is opened. While firms will have a full-year for initial implementation, full compliance won't be required until Jan. 1, 2018.
While it will take time to analyze all the final details, Morgan Stanley has been planning for the fiduciary rule since it was initially proposed by the Labor Department, according to Christine Jockle, a spokeswoman.
The firm is “making investments in the systems and technology that will enable us to offer compliant solutions to clients whose retirement accounts are affected,” she said in an emailed statement. “Putting clients' interests first is a core value of Morgan Stanley.”
Wells Fargo, which has plan in place for reviewing the final rule, “has long supported a best interest standard and believes that professional financial advisers have a crucial role to play in encouraging retirement saving and investing,” Tony Mattera, a spokesman for the firm said in an emailed statement.
Gregg Rosenberg, a spokesman for UBS, declined to comment as the rule was still under the firm's review.

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Did the Rule Go Far Enough?

Retirement Savings Made Safer

Apr 7, 2016 | New York Times

By NYT Editorial Board

The road to retirement will be less rocky under new rules issued this week by the Labor Department. The rules require financial advisers to act solely in a client’s best interests when giving advice and selling investments for retirement accounts. The best-interest requirement, also known as a fiduciary duty, will be a big improvement on current practice, in which many advisers are free to steer clients into high-priced strategies and products even when comparable but cheaper ones are available.
Better advice will mean better returns for investors. A report last year by the White House Council of Economic Advisers found that biased advice drained $17 billion a year from retirement accounts in excessive fees and inflated commissions. Under the new rules, which are scheduled to take effect a year from now, much of that money will remain with investors.
That’s alarming for financial firms and insurance companies that profit from the current system and don’t want to change. When best-interest rules were first proposed six years ago, industry lobbyists buried them under a pile of legalese. The lobbying blitz resumed when the White House revived the effort in 2015, with many Democrats joining Republicans in opposition. Late last year, 47 House Democrats asked the administration to delay the rules, while a bipartisan group in the House proposed a bill to kill them before they emerged from the Labor Department.
The White House remained firm, instead giving full backing to Thomas Perez, the labor secretary, who moved methodically to address the industry’s objections. Among them was that imposing a fiduciary duty could outlaw advertising and other marketing. The new rules plainly distinguish between marketing, which does not require adherence to a fiduciary duty, and giving advice, which does.
Another objection was that a fiduciary duty would outlaw commissions and other established pay practices. The new rules do not outlaw commissions. They simply require that commission-based advisers sign enforceable contracts pledging to put a client’s interests first.
There were also concerns that the rules would be burdensome. In fact, the final rules simplify the disclosures required of advisers because, with a fiduciary rule in place, investors won’t need as much performance and cost data to try to figure out if advisers are acting in their best interests.
Despite these accommodations, financial firms, insurance companies or their trade groups are expected to challenge the new rules in court — suggesting that their aim all along was not an improved rule but no rule. For now, they have lost that battle. But until the new rules are fully in effect, investors must stay alert.

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DOL Issues Final Fiduciary Rule, Does It Fall Short?

Apr 7, 2016 | Forbes

By Ashlea Ebeling

Sen. Elizabeth Warren cried out “Woo-hoo!” and praised Department of Labor Secretary Tom Perez after he announced the long-awaited final fiduciary rule meant to protect retirement investors from conflicted financial advice at the Center for American Progress. “Putting clients first is no longer a marketing slogan, it’s now the law,” said Secretary Perez. There will no longer be “slick-talking advisers pushing complicated products,” promised Sen. Warren (D.-Mass.).

In short, the rule requires any investment adviser receiving compensation for making individualized investment recommendations to a retirement plan participant or Individual Retirement Account owner to put their client’s best interest first. As a fiduciary, they’ll be held to a higher standard than what most retirement advisers adhere to today—a lesser “suitability” standard that lets them recommend products that are suitable but not necessarily in their clients’ best interest.
The “streamlined” (per Secretary Perez) rule is a 1,028-page tome, with 208 pages devoted to defining who is a fiduciary, and 317 pages devoted to what’s called the best interest contract exemption. The BIC lets advisers continue to get otherwise prohibited compensation if there’s fine print in a contract that says they’re acting in the client’s best interest and the adviser adopts policies and procedures designed to ensure that the advice is provided in the client’s best interest.
“I’ve killed a small forest in my office,” says Erin Sweeney, an employee benefits lawyer at Miller & Chevalier who spent yesterday poring over a print-out of the new rule. Her initial take on it: “The proposal was terrifying to the industry, but the final version is so much more watered down.” Still, she predicts opponents (“Wall Street interests and their Republican colleagues” as Jeff Zients, director of national economic council for the president labeled them) will continue to try to block the rule.
“There will almost certainly be a wave of expensive and unpredictable litigation,” says Patrick DiCarlo, an employee benefits lawyer at Alston & Bird. The new rule is a dramatic expansion of fiduciary status and creates a lot of uncertainty, he says.
The DOL gave naysayers a big opening to attack the new rule. One of the major concessions was a delayed effective date. Under the proposal, the new rule would have been effective before President Barack Obama’s term is up. But instead of being effective in eight months’ time, some provisions are effective as of April 2017, with the rest going into effect on Jan. 1, 2018. That gives lawyers time to write new contracts and disclosures. It also gives time for a new political party to potentially dismantle the whole thing.
The DOL has a chart here that outlines the major changes from the proposed rule to the final rule.
The new rule eliminates some of the most contentious requirements from the proposal concerning the BIC exemption, making it easier for financial services firms and advisers to use. For example, it eliminates investment projections and annual disclosures to investors. It eliminates the contract requirement for 401(k) plans. And in the case of IRAs, it says that the contract can be completed at the same time as other paperwork, such as when you open an account or after a sales spiel when you’re ready to sign on the dotted line and hand over your money.
The new rule also eliminates biases against proprietary products. Advisers recommending any asset—not just those on a specific list—can take advantage of the BIC exemption. It also makes some common sense clarifications. Marketing oneself or one’s services without making an investment recommendation is not fiduciary investment advice. Newsletter or talk show commentary is also expressly not fiduciary advice. And employers can provide asset allocation models identifying specific investment products without that being considered fiduciary advice.
Still industry groups aren’t sure their concerns have all been met. “We have to see if the BIC remains unworkable as in the proposal; with all these changes, we’re going to dig in with an open mind,” says Cathy Weatherford, president and ceo of the Insured Retirement Institute whose member companies offer lifetime income products including fixed indexed annuities and variable annuities which can only be sold under the BIC exemption under the new rule.
“Policymakers should do everything they can to help Americans be more prepared for retirement and not create red tape that makes saving for retirement more difficult,” said Financial Services Roundtable ceo Tim Pawlenty, adding that the industry group will be analyzing the final rule to determine any appropriate further action.
Meanwhile, Secretary Perez and his friends are ready to defend the rule. At the Center for American Progress meeting, Sen. Cory Booker (D.-N.J.) took to the podium and declared that while there will be some who will try to undermine the rule, “Those of us who still believe, who haven’t surrendered to cynicism, we have to be girded and ready for a fight!”

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DOL acting before SEC on fiduciary rule is 'failure in public policy'

Apr 7, 2016 | Investment News

By Greg Iacurci

The Labor Department yesterday issued the final version of its “conflict of interest” rule, which raises investment advice standards for retirement accounts by making a fiduciary of anyone giving advice to 401(k) plans and individual retirement accounts.
Critics of the rule, such as the Securities Industry and Financial Markets Association, had long championed the notion that the DOL should wait until the SEC undergoes a fiduciary rulemaking exercise before going ahead with its rule.
“From SIFMA's standpoint, to have the DOL issue this now-final rule is bit of a failure in public policy,” said Ira Hammerman, executive vice president and general counsel at SIFMA.
The Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law in 2010 gave the SEC, as the primary regulator of the securities industry, discretionary authority to regulate a uniform fiduciary duty for investment advice, Mr. Hammerman said, adding that its inability to do so constitutes the policy failure.
SEC chairwoman Mary Jo White has indicated she supports a uniform fiduciary standard, but told legislators there's no guarantee the commission will draft its own rule.
The DOL's final rule could increase the pressure on the SEC to do so, but they won't necessarily have to, according to Mr. Hammerman, who spoke Thursday at SIFMA's private client conference in New York.

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How Come It’s Still Harder to Become a Hairdresser than a Financial Adviser?

Apr 8, 2016 | Wall Street Journal

By Jason Zwieg

My column this weekend points out that in an online survey of nearly 500 investors last month, 51% said — incorrectly — that brokers must always act as fiduciaries. Only 44% correctly said that about investment advisers.
The survey was co-directed by Patrick Lach, a finance professor at Eastern Illinois University and a registered investment adviser, along with marketing professor Leisa Flynn and finance professor G. Wayne Kelly of the University of Southern Mississippi.
Nearly a sixth of the survey participants work or used to work in the investment business — but, says Mr. Lach, it is “alarming” that they were wrong nearly as often as the general public about which financial professionals have a fiduciary duty. The difference between the general public and people with investment-industry experience in answering those questions correctly was tiny and statistically insignificant.
“The people who are already handling investments can’t even identify who is a fiduciary and who isn’t,” says Mr. Lach. “How the heck can we expect a schoolteacher or fireman or physician to do it?”
The professors write in their paper: “In most states, the minimum level of education needed to become a broker or an investment adviser is lower than the education requirement needed to become a hairdresser or an electrician. Electricians are required to complete several years of apprenticeship work under the supervision of a licensed electrician while brokers and investment advisers face no such requirement. Most states do not require a high school diploma or a Graduate Equivalency Degree (GED) to become a broker or an investment adviser. No minimum education requirement exists to qualify to sit for the Series 7 or Series 65 exams [regulatory qualifying tests to be eligible to sell securities]…many people who work one-on-one with clients do not attain education beyond this level.”
The investing public has no clue how under-educated many securities salespeople are, according to the study.
According to the study, 71% of respondents believe that college education is a prerequisite for being a broker, and 85% believe an investment adviser is required to have at least some college education.
It is “disturbing,” says Mr. Lach, “that regulators seem to expect a high-school dropout who has passed an exam designed for entry-level professionals to have the education, training and experience to know when an investment decision is in the best interest of the client.”
The great journalist H.L. Mencken wrote decades ago, “The essence of a genuine professional man is that he cannot be bought.” And that, in turn, can spring only from a culture of exhaustive training and the highest standards of conduct. Professions like accounting, law and medicine took decades, often centuries, to advance to the point of requiring rigorous education and licensing for all their members. The field of investment advice remains a long way from being able to call itself a profession.

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The entire financial advice profession needs to be fixed

Apr 8, 2016 | Marketwatch

By Robert Powell

If you had to build the personal financial advice profession from scratch, it wouldn’t look anything like what we have today.
Instead, it would look more like other professions – not other industries. It would look more like the world of lawyers, doctors, and certified public accounts and not the world of car, pharmaceutical, and house siding sales.
What we have today is this mad mad world where consumers seeking financial advice can choose from any number of providers, some of whom are nothing more than pharmaceutical salesmen masquerading as physicians and some of whom are truly acting in your best interest, as fiduciaries.
What we have today is a financial advice delivery system that is quite confusing as various studies, including one conducted for the Securities and Exchange Commission in 2008, have shown. That study, for instance, found that consumers can’t tell the difference between a salesman (or what the industry routinely refers to as a producer) and an adviser.
Thankfully, the Labor Department has unveiled new rules that will help investors get advice for their retirement accounts that’s in their best interest from a fiduciary rather from someone who is merely recommending products that that are suitable and earning crazy commissions and fees. Read When financial ‘advice’ is really a sales pitch and other stories in MarketWatch’s special report, The Fiduciary Quagmire.
Unfortunately, the Labor Department’s new rules apply only to retirement accounts, such as IRAs and 401(k)s and not investments in taxable accounts managed by so-called advisers. With taxable accounts, the advice from many advisers need only be suitable. What’s more, the Labor Department’s new rule pertains, as does the Securities and Exchange Commission’s rule on fiduciary standards, only to investments and investment advice, not personal financial advice. Investments typically are a component of a comprehensive financial plan.The holy grail, which would raise standards for all types of financial advisers -- brokers, insurance agents, registered investment advisers, or something else -- has yet to be found.
So imagine this for a moment: You would never ask a lawyer or a CPA or a doctor if the advice they were giving you was in your best interest or merely suitable. But sadly, investors are being asked to make this distinction today with their financial advisers. And, sadly, most investors don’t have the tools to evaluate the differences between suitable and best interest. (Of note, Labor Secretary of Thomas Perez and others at yesterday press conference for the new conflict-of-interest rule repeatedly expressed similar sentiments.)A different sort of education required
So, if you had to build the financial advice industry from scratch, I would start with education. And just as with lawyers, doctors and CPAs, a person who wants to become a personal financial adviser would need to: have an undergraduate degree as well as a graduate degree (think law or med school); serve as an intern/resident in the near-equivalent of a teaching hospital; and pass a rigorous exam such as the bar or CPA exam. These exams, by the way, ensure that only qualified individuals enter those professions, which I should note have less to do with the selling of a product and more to do with the delivery of a service.
But that’s not what we have today. Today, there are essentially no educational requirements to become a personal financial adviser; no one is required to go to med school and learn all that there is to know about personal finance before being allowed to “practice advice” or become a specialist (a cardiologist, for instance). And there is no rigorous and standardized across-the-personal-financial-advice spectrum exam.
To be fair, there are educational requirements to earn certain designations such as certified financial planner (CFP), but it’s not an across-the-board requirement as it is for other professions - CPAs, lawyers and doctors.
What’s more, there are no teaching hospitals for those who wish to become personal financial advisers and then specialists; brokerage firms and insurance companies are in effect the teaching hospitals.
As many know, doctors first earn their doctor of medicine (M.D.) before becoming a specialist. But that’s not what we have today in the world of personal financial advice; today “advisers” first become specialists, often in the sale of a product – insurance, mortgages and the like – before becoming a generalist, if ever.
And that’s not what we need today. Today, we need practitioners who first understand how personal finance works before prescribing a course of action. Instead, we have folks who are hammers and every financial goal or problem looks like a nail. Today, they prescribe a reverse mortgage or single premium annuity or a bond ladder before understanding a person’s goals and needs, before creating a financial plan compete with trade-offs analyzed.
Of course, the compensation is to blame. Far too often, a so-called specialist is just hawking this or that product for the commission.
Another issue: We also have a hodgepodge of exams, many of which (the Series 7, for instance) test knowledge of a products (Repos and certificates of accrual on government securities) and laws (margin requirements) rather than the knowledge needed to provide financial advice.
Yes, the CFP and chartered financial consultant take exams that cover the entire body of personal financial planning knowledge, but there are way more registered representatives (stockbrokers) and insurance agents out there than folks who have those designations, which we might add are registered trademarks regulated by private self-regulatory organizations (SROs). More on this later. (Also of note, there’s not nearly enough CFPS to serve America just yet. Consider: There are roughly 2½ physicians for every 1,000 Americans. By contrast, there are just 0.25 CFPs for every 1,000 Americans.)Different regulations required too
Next, I would tackle the world of regulations and regulators. In the world of CPAs, lawyers, and doctors, the regulatory environment is fairly straightforward. State bars and boards oversee lawyers, doctors, and CPA. One profession, one regulator.
But alas that’s not what we have in the world of personal financial advice. Today, advisers might be regulated by any number of federal, state, quasi-public agencies as well as private SROs. And which organization or organizations are the responsible regulator depends on any number of factors – the firm, the product, the business model, the state in which an adviser does business and so on. It’s a crazy system for sure.
Of course, how we got here is easy enough to explain. We cobbled together a regulatory system that was built to address problems – the Investment Advisers Act of 1940 or the Securities Act of 1933 come to mind. And those laws, regulations and rules worked at one time.
But now we need a different set of laws, regulations and rule we shouldn’t get bogged down in turf battles. This is about giving people what they need.
Today, we need a regulatory system that does away with redundancy and regulates process as well as product. Today, many regulatory bodies are the near-equivalent of the Food and Drug Administration; they oversee the sale of a product, but not necessarily the professional conduct of doctors. What we need now is a one federal body (perhaps the Consumer Financial Protection Bureau) or state bodies (state boards of medical practice, being one model) to oversee what is increasingly becoming a complicated and confusing area for those seeking personal financial advice. One profession, one regulator.

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U.S. Chamber of Commerce Raises Possibility of Lawsuit to Block ‘Fiduciary Rule’

Apr 8, 2016 | Wall Street Journal

By Dave Michaels

The U.S. Chamber of Commerce on Thursday blasted a new rule that imposes stricter limits on brokers handling retirement accounts, raising the threat that the country’s biggest business lobby will sue to block the new protections.
Chamber executives said the final rule, announced Wednesday by the U.S. Labor Department, creates new obstacles for small employers seeking to buy 401(k) plans for their workforce. While the Chamber wouldn’t say definitively whether it plans a lawsuit, its leaders said they would sue if they decide the requirements are so onerous they disadvantage its members.
“Will small business continue to be able to provide employees retirement benefits and have access to investment advice without substantial cost? Unfortunately the answer is no,” said David Hirschmann, who leads the Chamber’s Center for Capital Markets Competitiveness. “This is an area where the DOL appears to have made things substantially worse.”
The Chamber’s negative positioning isn’t totally unexpected. The business lobby hassuccessfully sued to overturn other landmark regulations in recent years, including a 2010 Securities and Exchange Commission rule that would have made it easier for shareholders to nominate candidates to corporate boards of directors.
The Chamber is just one trade group contemplating a lawsuit. The American Council of Life Insurers has retained a law firm and is gathering evidence in advance of an expected court battle, according to its internal “30-Day Plan for Fiduciary Rule Release” obtained by The Wall Street Journal.
The Labor Department rule covers advice that brokers provide to both individual and corporate plans that hold retirement assets. Brokers who advise those savers would have a new legal duty to recommend investments that are in the best interest of clients.
The old standard allowed brokers to provide “suitable” guidance, meaning their recommendations generally fit a client’s risk tolerance and needs. Critics of that old regime, including Labor Secretary Tom Perez, said it allowed brokers to sell higher-fee and more complex investments when simple, passive mutual funds would do.
The rule also affects the market for 401(k) plans. Brokers that sell plans to small businesses would face stricter rules governing the investment options they select. That new standard would raise compliance costs for brokers and create the threat they could be sued for violating the rule, according to the Chamber.
“It’s going to cost more than it used to for those small business employers to make plans available to their employees,” said Bradford Campbell, a lawyer at Drinker Biddle & Reath LLP who is working with the Chamber.
Supporters of the change say small businesses may not employ an expert who can negotiate retirement plan options and need the protections that the Labor Department provided.
Republican lawmakers have sponsored a flurry of bills that seek to strike down the Labor Department’s rule. Rep. Peter Roskam (R., Ill.) said the full House could vote soon on bipartisan legislation he wrote with Rep. Phil Roe (R., Tenn.) and Democratic Reps. Richard Neal of Massachusetts and John Larson of Connecticut. The bill would stop the Labor rule from becoming effective unless Congress approved it. If lawmakers didn’t approve the rule, it would be replaced by a set of principles and disclosure requirements that Mr. Roskam and his colleagues drew up.
FBR & Co. said in a research note Thursday that it expects the financial industry to sue in federal court “in the coming weeks” to block the rule. The broker’s analysts wrote that congressional Republicans are also likely to “use every possible avenue to delay or eliminate the rule,” although it expects President Barack Obama would veto any legislation that tries to overturn the rule.

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DOL final fiduciary rule: Much ado about nothing

Apr 8, 2016 | Benefits Pro

By Nick Thornton

Early reactions to the more-than 1,000-page finalized fiduciary rule dropped by the Department of Labor yesterday suggest Labor Secretary Thomas Perez more than made good on promises to write regulation industrycould work with.
The proposed version elicited a litany of concerns from stakeholders, and doomsday predictions that commission-based sales on retirement accounts would effectively be banned and savers of modest means would be priced out of the advisory market.
But the final rule does neither, says one ERISA attorney.
“The final regulation has significantly retracted from where the DOL started with its proposed rule,” said Erin Sweeney, an attorney with Miller & Chevalier’s fiduciary litigation practice.
“They’ve taken an overarching, expansive and unwieldy proposal and scaled it back to a regulation that industry is going to be able to work with,” said Sweeney, who served in the DOL’s fiduciary division from 2003 to 2007.
“The huge tsunami that everyone thought was on the radar has fizzled out into a ripple in a whirlpool,” she added.
DOL critics feared the proposed rule would ban proprietary products, but new provisions in the final rule’s Best Interest Contract Exemption clarify how firms and advisors can sell proprietary products, so long as those options remain in investors’ best interest.
In a press conference this week, Perez underscored the rule’s latitude for proprietary investments, saying “they have an important place in the market.”
The final rule also addresses the question of commission-based sales and revenue sharing with more lenient language. The new version of the BIC exemption says brokers and service providers can continue to receive “common forms” of compensation, so long as the charges are reasonable, fully discloses, and the investments in the client’s best interest, according to a DOL fact sheet.
That language is likely to address critics’ claims that the proposal’s preference for fee-based compensation models would end up costing investors of modest means more money.
The rule also says advisors can present the best interest contract to clients along with the other paper work issued when opening an account, a more forgiving provision than some expected.
Sweeney says the rule’s outcome is a bit “ho hum.”
“It boils down to one more piece of disclosure in an already heavily regulated industry,” she said. “Ultimately, the market will adjust to it.”
Actively managed investments spared
As proposed, the rule was expected to significantly handicap more expensive actively managed investments, and accelerate the exodus of assets to cheaper index funds and ETFs.
For investment management firms such as Russell Investments, a safe harbor for low-cost investments was perhaps the most problematic aspect of the proposed version of the rule.
But that provision was stripped from the final rule. “We were concerned that would have created a race to the bottom, and regulatory arbitrage which would have had DOL steering investors to only low-cost products,” said Jean-David Larson, director of regulatory and strategic initiatives at Russell Investments.
That proposed safe harbor would have been in direct contrast with the fiduciary standard defined in ERISA, which expressly says prudent investments are not necessarily the cheapest.
Larson said all indications are that the DOL coordinated with the Securities and Exchange Commission and other regulatory agencies in creating a principles-based rule that does not favor one set of investment products over another.
“I believed all along that DOL had a mandate, and genuinely wanted to help improve the market,” said Larson. “With their proposal, they sincerely wanted industry’s feedback to build something better.”
Any regulation of this magnitude will be disruptive, said Larson, as brokers and advisors will likely have to narrow product offerings for smaller accounts.
But in allowing a level playing field for active and passive investments, the DOL may have actually created an opening for some actively managed products, even for smaller accounts in retail channels, thinks Larson.
Specifically, brokers and advisors may find target-date funds for all investors, small or large, could satisfy the need to balance tactical strategies while catering to clients’ best interests.
“The rule will change how clients are advised and force advisors to better understand their needs,” said Larson.
Questions remain for Chamber of Commerce
The Chamber of Commerce’s Center for Capital Markets Competitiveness was a forceful critic of DOL’s proposal and its potential impact on small business’ ability to provide workplace retirement plans.
The proposed rule’s seller’s carve-out said advisors to plans with 100 participants or fewer or less than $100 million in assets would be held to a higher fiduciary standard and extensive new disclosure requirements.
In exempting advisors of plans above those thresholds, the proposal effectively created an unfair disadvantage that would drive costs up for sponsors of small plans, potentially forcing some out of the 401(k) market, and dissuading other small businesses from sponsoring plans, argued the Chamber.
The final rule amended that provision. Now, the new requirements will be for advisors to plans with $50 million in assets or less.
That does small businesses and their advisors no favors, according to the Chamber’s take on the final rule.
In fact, by stripping the 100-participant threshold, the provision stands to impact more businesses than it otherwise would have, said Brad Campbell, an ERISA attorney at Drinker Biddle & Reath, in a press call.
“It’s a significant change,” said Campbell, who thinks all plans should be operating under the same rules.
Now, an employer with as many as 1,000 plan participants will be impacted, assuming the average account balance is $45,000.
“Access to advisors is key for small businesses. This means more businesses will face more strenuous regulations, and more advisors will face uncertain litigation risk,” he added. “That will increase the cost of advice and make it more difficult for businesses to offer plans.”
The final rule extends the implementation deadline by four months, but Campbell said that is still not enough time for advisors and providers to adequately comply.
“Other less complicated regulations have been given more time for implementation,” he said
David Hirschmann, CEO of the Center for Capital Markets Competitiveness, acknowledged DOL’s final rule is improved in some areas, but said in its rush to finalize a rule, “the DOL has made things worse for small businesses.”
Hirschmann said the Chamber is still weighing legal options.
Did DOL concede too much?
At least one leading advocate for the fiduciary standard was hoping for a more forceful final rule.
“DOL and Phyllis Borzi moved heaven and earth to do the right thing,” said Knut Rostad, president of the Institute for Fiduciary Standard.
“But this became a completely political process between the Administration and Congress,” he said.
Parts of the BIC exemption are brilliant, he said, but other parts “can not be overlooked.”
“Firms are given great latitude in determining what is in the customer’s best interest,” said Rostad. “This is not about being perfect, but is about whether we made a step forward to ensure investors that the advice they get is non conflicted.”
Rostad was hoping to see language saying that this regulation is part of process, and that more work needs to be done.
Ultimately, the rule’s effectiveness will come down to the question of enforcement, thinks Rostad.
“It’s a big question mark. There seems to be an unstated assumption that enforcement is going to be effective, but I don’t know if that is merited,” he said.
Until the largest providers show concrete evidence that they are willing to make the changes investors need, doubts about the rule will remain, said Rostad.
“I don’t know that we have seen those yet,” he added.

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Political Commentary

You — Not the Government — Are Responsible For Your Retirement Savings

Apr 8, 2016 | Wall Street Journal

By Jason Zweig

It’s still your job, not the government’s, to protect your retirement savings.
Under new rules imposed this past week by the Department of Labor, anyone being paid to provide specific investment advice on retirement accounts must do the right thing for his or her clients.
While the regulations are likely to reduce costs and improve returns for many savers and retirees, they raise a new risk: That investment salespeople will use the term “fiduciary” as marketing magic.
By law, a fiduciary must be impartial, seek diligently to avoid conflicts of interest, disclose any remaining conflicts and always serve the best interests of clients.
Until now, only registered investment advisers — not most stockbrokers and insurance agents — have had to be fiduciaries. From now on, all of them will be when they get paidfor specific investment advice on retirement accounts.
Is there any better sales pitch than “I have to do what’s right for you”?
But the new rules don’t oblige stockbrokers and insurance agents to act in your best interest on your other investments. Nor do the regulations prevent these salespeople from calling themselves “financial advisers” when they aren’t registered as investment advisers.
Confused? You aren’t alone. In an online survey of nearly 500 investors last month, 51% said — incorrectly — that brokers must always act as fiduciaries. Only 44% correctly said that about investment advisers.
Now that just about everyone getting paid to handle a retirement account must act as a fiduciary, it’s up to investors to ensure that he or she behaves like one.
Poke around on adviserinfo.sec.gov, and you will quickly find dozens of firms that charge advisory fees of at least 2% annually.
When you can own the entire U.S. stock market for as little as 0.03% a year, it seems bizarre that someone calling himself or herself a fiduciary would charge you at least 66 times that rate.
But it’s perfectly legal, says Tamar Frankel, a securities-law professor at Boston University. Acting in their clients’ best interests doesn’t require fiduciaries to sacrifice their own. “A fiduciary doesn’t have to be Mother Teresa,” she says. Fees should be reasonable, but the law doesn’t define that precisely.
So you should. Most investment advisers say their fees are negotiable, but most clients never try. Remind your adviser that in the long run, a balanced stock and bond portfolio is unlikely to return much more than 2% annually after taxes and inflation.
Even a 1% advisory fee — the industry standard — is half of that expected return.
Another wrinkle: The Labor Department rules permit fiduciaries, once they obey certain procedures, to sell investments that don’t trade regularly in public markets, such asprivate real-estate investment trusts andbusiness-development companies. While not all these assets are toxic, many are risky.

If an adviser recommends non-traded securities, that’s a red flag. Ask him or her to tell you — in writing — what these investments can do for you that publicly traded equivalents can’t. If he or she won’t, ask yourself whether you should get a different adviser.
Finally, remember that no regulation, and no adviser, can eliminate all conflicts of interest. Long ago, no less an authority than the U.S. Supreme Court held that the most insidious financial conflicts are unconscious — driven by biases that advisers themselves might deny.
Many, for instance, charge management fees even on clients’ cash balances — earning 1% for themselves on assets that take no skill to manage and, nowadays, return 0.1% or less. These advisers could generate a much higher, safer return for clients by moving the cash into bank certificates of deposit — but then they would forgo their own fees.
By the same token, many advisers help “manage” mortgage debt instead of urging clients to pay it off early. Clients often have to sell investments to extinguish a mortgage — which would reduce assets under management and, in turn, the advisers’ fee income.
So, when you talk to an adviser, cite examples like these. Ask whether he or she can think of similarly subtle, pernicious conflicts. An adviser who denies all possibility of conflict is dangerous. The one to hire is the one who thinks humbly and deeply about how your interests can diverge.
A fiduciary is, literally, someone in whom you place faith — and that kind of confidence ought to go down to the bone.

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Is Your Adviser a Fiduciary?

Apr 8, 2016 | Pragmatic Capitalism

By Cullen Roche

The new fiduciary standard rule has been all the rage this week on Wall Street. This new rule set out guidelines by which financial advisers must act in the best interest of their clients. Unfortunately, the new rule looks more like a lot of talk and little effective action.
The main problem with giving financial advice is that your compensation is often structured according to the products you sell. When I used to work for big financial firms back in another life I would get paid more to sell in-house products than something out-of-house. So, you wouldn’t necessarily sell a Vanguard ETF that costs 0.05% when you could sell a closet indexing mutual fund that costs 1% because you’d make more money selling the closet index fund. Because it generates higher fees the selling firm can afford to pay you more. It’s very likely a raw deal for the customer, but since we can’t definitively know that the mutual fund will be worse than the ETF then you can probably get away with this without feeling like you’re doing something that’s not in the best interest of the customer.¹
When you leave that business model you eliminate a lot of the conflicts that exist. For instance, I no longer have to worry about selling products that generate the highest fees. I worry about what’s going to keep my clients happy by ensuring that I am using the products that are in their best interest. The problem with the new DOL fiduciary rule is that it doesn’t stop this conflict. In fact, it signs off on it as A-okay because the rule slipped in a best-interests contract exemption (BICE) which will allow advisers to continue offering proprietary in-house products even if they’re not necessarily the best available option (although, of course, they’re supposed to believe they’re the best options).
In my opinion, a financial adviser or portfolio manager should look less like a car salesman and more like a personal trainer/shopper. A car salesman sells you whatever is on his lot, preferably the most expensive car. A good personal trainer/shopper constructs a personal plan for you and goes out and buys the products that will help you meet those goals. They don’t just go out and sell you the product that earns them the most money. They are experts in understanding what products will serve you best and constructing/maintaining the plan that will serve your best interest in the long-term. Over the course of my career I’ve transitioned from selling products that earn high revenues for the firm I work for to becoming an expert in the products and plans that serve my clients best.
So, how can you tell if your adviser is a fiduciary or not? Here are a few simple rules:Do they recommend products that consistently cost upwards of 1% or more? If so, they might not be a fiduciary.Do they primarily recommend products that are issued by the firm they work for? If so, they might not be a fiduciary.Does the adviser earn a commission or upfront fee from their product recommendation?
If you use a financial adviser you want an adviser who puts your interests ahead of their firm’s best interests. Although there’s a lot of gray area in this debate (even more so following the rule change) these simple rules will help you better understand whether your adviser is working in your best interests or someone else’s.
¹ – I am generalizing here, however, I think I am generalizing fairly.

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