Fee-Only with Future Flexibility: Sorting Out the Fiduciary Rule for Financial Advisors

Financial firms have been adjusting to a moving deadline for the so-called Fiduciary Rule for months. So there is a little irony involved when the first thing you notice on the U.S. Department of Labor (DOL) web page titled Conflict of Interest Final Rule is a phrase indicating the information contained there “may be subject to change.” Updates to the rule are applicable June 9, 2017 and will be in full effect January 1, 2018 – UNLESS a review ordered by President Trump results in other changes.

The DOL’s updated Fiduciary Rule says advisers to retirement investors will be treated as fiduciaries and have an obligation to give advice that adheres to “impartial conduct standards”. In a news release DOL said “These fiduciary standards require advisers to adhere to a best interest standard when making investment recommendations, charge no more than reasonable compensation for their services and refrain from making misleading statements.”

DOL has jurisdiction over Employee Retirement Income Savings Accounts (ERISA) which covers nearly every qualified plan including IRA’s, SIMPLE plans, HSA accounts, Coverdell accounts, and a handful of others. These types of qualified accounts did not exist as retirement savings vehicles when the ERISA rules were originally written in 1974 and therefore were not covered by ERISA until the issuance of this rule. However, 529 plans, 457 plans and most 403b plans are not covered.

What it Means for Independent Advisors: Fee-Only Retirement Account Structure

At Cutter & Company, an independent Broker-dealer and Registered Investment advisor, we have always believed we act in the best interest of all our customers. While we have always provided unbiased and objective advice to our clients, the more than 1,000-page rule will force us to modify our business arrangement as it relates to compensation.

Cutter & Company, along with others in the industry, is moving to a fee-only structure for retirement accounts and will discontinue offering commission-based services to new qualified accounts. However, we will be flexible on commission-based products as more uniformity in that area is identified in the future. Just a few key points include:

  • Discretionary fee-based accounts must charge level rates on all assets classes.
    • The rate must be the same across the entire account.
  • Special arrangements, like waiving fees for money market accounts or specific assets, must be eliminated from discretionary accounts effective June 9, 2017.
  • Cutter & Company will “grandfather” most qualified accounts that exist as of June 9, under a provision called the “exemption for pre-existing transactions” for any investment advice rendered prior to the rule’s applicability date.
    • One of the most important caveats is that an adviser can’t provide additional advice on a pre-existing investment in the grandfathered account if the recommendation increases the adviser’s compensation. There is additional explanation in this Investment News

The rule allows an exemption for certain prohibited transactions with a best-interest contract exemption (BICE). Implementing the BICE will permit firms to use many of their current compensation models if they acknowledge their fiduciary status, give prudent and impartial advice, disclose information about their revenue model and potential conflicts of interest, avoid misleading statements and receive no more than reasonable compensation. Some customers may receive notification that their qualified account is not eligible for the BICE and will be instructed about their future options.

The DOL rule basically states commission-based accounts create too many conflicts for the financial representative to choose what is right for the client – rather they will choose what pays them the most.  The DOL unabashedly favors a flat retainer fee, an hourly fee or a fee as a percentage of assets under management because these fees do not change regardless of the product or service provided.  In their view, this virtually negates any potential conflict a representative may have to sell one product over another, incentive to enter an order to buy or sell, and so forth.

Eying the Future with Flexibility

Prior to January 1, 2018 when the rule is supposed to be fully implemented, DOL officials intend to complete the review ordered by the President. They could decide to make or propose further changes to the fiduciary rule or to associated exemptions. The stated intention of the review was to ensure the rule does not adversely affect the ability of Americans to gain access to retirement information and financial advice.

On one hand, the new rule will create greater transparency and likely lower costs. However, it’s all but certain to reduce client choice and be bad for small account holders. For example, IRA account minimum balances will likely increase due to the significant increase in documentation required for each ‘fiduciary’ recommendation made and because of the increased legal risk included as part of the rule language. Small balance accounts will likely have few outlets left to obtain advice and will potentially end up in a “do-it-yourself” model offered either by technology providers that offer investment services (“Robo advisors”) or discount brokerage firms.

It remains possible that increasing uniformity of commissions paid by product category and/or fee-based options will emerge for product areas like funds and annuities. Cutter & Company intends to be positioned to offer them again if that is the case. We are open to making changes that will allow our independent financial advisors and their clients better options as they are introduced.

https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2

https://www.dol.gov/newsroom/releases/ebsa/ebsa20170404

http://www.investmentnews.com/article/20160520/FREE/160519901/dont-let-the-dol-fiduciary-rules-grandfathering-provision-trip-you-up

Top Shelf Compliance Support from Cutter & Company

At Cutter & Company we take the role of compliance seriously. We believe that protecting the firm and your business are essential – but also understand the importance of marketing and advertising. Our compliance staff, with more than 40 years of combined experience, understands your need to express yourself in a personal way. In our reviews, we work with you to try to provide the flexibility you need, while protecting you from crossing over into something that could ultimately get you into trouble.

In this short video, experienced independent financial advisors discuss what they like best about Cutter and Company’s support in the complex area of compliance.

Compliance Support: https://www.youtube.com/watch?v=Y6NZ09eFlw0

 

Welcome to the Cutter & Company Financial Advisor blog!

Over the coming months we will be sharing our thoughts, information and resources about the opportunities that exist in an independent financial services practice.

Our firm was founded over a quarter century ago, built from day one with experienced, independent financial advisors.  In sharing our knowledge and experience, we will attempt to take the mystery out of “what it takes to be independent” for other financial advisors considering this option.

Two significant benefits of being an independent financial advisor are freedom and flexibility-allowing you to act in your client’s best interests.  Rather than be tied to the corporate mandates and quotas that employees of a corporation are so often required to do, you choose the products and services that are right for your client.  In the process, our independent financial advisors are building their own business with the ability to harvest the rewards of their efforts.

We know advisors who are contemplating a move to independence have a lot of questions but may not know where to look for answers. This blog will attempt to fill that gap with information that can help financial advisors discern whether setting up their own business is best for them. Frankly, it’s not for everyone.  But many have said they wish they had made the move sooner.

Some of the first topics we plan to cover include:

  • Independent Financial Advisors: Where Opportunity and Experience Meet
  • The Pathway to Success is Paved with a Solid Plan
  • Tangible Value for Your Hard Work
  • Why There Are Big Opportunities Working with Small Firms
  • Will My Clients Move with Me?
  • Independence: An Investment in Yourself and Your Clients

We will also be sharing a number of videos on these and additional topics. Most importantly, we want financial advisors curious about what it would be like to set up their own business to reach out. We offer straight talk, sound advice, and the voice of experience. Cutter & Company is dedicated to making sure our independent financial advisors succeed at every level. We hope you check back frequently for updates. Or better yet, give us a call directly at 1-800-536-8770!