Pres. Trump’s Hold on the Fiduciary Rule

Well, there is a whirlwind in the oval office these days, and one of the recent actions was to put the new DOL fiduciary rule on hold as part of a review ordered on the reasonableness of provisions in the enormous Dodd-Frank bill passed in 2009.

The fiduciary rule was only finalized in 2016 and was only indirectly tied to Dodd-Frank. The bill had mandated that the S.E.C. look at conflicts of interest among financial institutions as they related to clients and come with up solutions. When the S.E.C. could not get it done due to internal conflicts, the Dept. of Labor stepped in and issued a fiduciary rule that affects retirement accounts, like different types of IRAs.

I am 100% in favor of the spirit of the rule and if I were king, I would have it take effect in April as scheduled. The fact that insurance companies, brokerage firms and banks fought it with everything they had says all you need to know about the trustworthiness of their business models.

I remember being shocked as a young broker at Merrill Lynch back in the 1980s and discovering that the firm tracked commissions by the hour but did not bother to track client account performance at all. That is precisely why I left the brokerage industry in 1995 to be an independent fee-only advisor working in the sole best interest of clients from day 1.

Having said, the rule’s requirements for documentation are as typical Washington – more difficult than they should be and creating unnecessary paperwork burdens that are difficult and expensive to comply with, especially for smaller firms. If the rule is held up and/or changed in some way, one hopes it will be to correct those issues.

The specter of the new rule has prompted a good deal of change for the better in the industry and much of that will stick one way or the other. One example is Merrill Lynch changing all accounts to fee-based accounts rather than commissions. Across the industry, firms have recently told advisors without experience or a reasonable number of retirement plans to work in partnership with those who do, though that doesn’t necessarily mean that the bigger advisors know what they ought in order to properly advise companies sponsoring retirement plans.

I continue to see much evidence to the contrary and I continue to see nearly everyone but me continue to charge plans a % of assets in plans under $25 million. That is a terrible thing for plan fiduciaries and participants because plan fees grow just as fast the plan does, often 7% to 10% per year, for the same flat level of service. That service provided is sadly low and inept in the vast majority of those smaller plans.

If fees are taken out of plan assets, which they typically are, it is a dereliction of duty for plan sponsors to allow fees to grow 7% to 10% per year for any static level of service. It is almost criminal to pay it for the level of service most small plans receive, which is a trustee meeting or two a year, usually no participant education, rarely a change to under-performing funds and no advice to plan sponsors on how to properly monitor vendors or plan investments and document it.

I just did a presentation to a very small plan, under a million dollars in assets, in which my flat fee was currently about $5,000 less than than their current fees. Since the plan was being charged a % of assets by the other company, the difference in money saved by participants over the next 10 years was projected to be over $50,000 and in 20 years over $200,000. That’s the power of a flat fee. And, the service I will provide is in a whole other league from what they had been getting.

That’s putting the client first. The other firm was more interested in an additional $200,000 in compensation from one small plan. That’s the problem, and unfortunately, the new fiduciary rule does not even address it. Still, it is time financial firms were required to act in the best interest of clients. We can then work on little issues like excessive compensation and poor service.

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