My Take on DOL Fiduciary Rule (Maybe Not What You’d Expect)
Since the beginning of the year, there has been a lot of talk about the Department of Labor (DOL) and the so-called “Fiduciary Rule.”
I had never heard of Thomas Perez — the head of the Department of Labor — and I roll my eyes when I hear about Dodd-Frank in presidential debates, until a few weeks ago. A lot of my contemporaries have been lobbying the government pretty hard for this rule, because the more I look at it, the better it can potentially be for my business. BUT, in the interest of adhering to my company 10 Commandments, it’s not so black and white. Here are the facts:
Facts
(1) Subtitle A of The Dodd–Frank Wall Street Reform and Consumer Protection Act(known in colloquial language as Dodd-Frank) provides authority for the Securities & Exchange Commission (the SEC) to impose regulations requiring “fiduciary duty” by broker-dealers to their customers. That law was signed by President Obama in 2010. Six years later, the SEC has indicated they finally will submit rules for a vote by Congress within the next month. At the time of this writing, the pending DOL rule would be on track to go into effect as early as late 2016.
(2) Under the current rules, financial professionals (financial advisors/stock brokers/insurance professionals) are governed under a fiduciary standard that is narrowly defined as investment suitability. That is, when they recommend an investment solution, they are required to make sure that the solution is suitable to the client at the time of sale. They are not required to follow-up or adjust their recommendation at any time in the future.
(3) Under the proposed rules, these professionals would all be held to the new more broad fiduciary standard. This would mean that they would have to put clients’ best interests ahead of their own. The fiduciary would include a “duty to care”, which includes continuously monitoring a client’s financial situation and their investments beyond the point of sale. A fiduciary, under this definition, is required to invest their clients’ money in a manner consistent with their risk tolerance, goals, and changing financial circumstances.
(4) Firms will have to prove that their advisors are operating in a fiduciary standard, expanding compliance costs in the industry due to the added regulatory burden. A highly-contested area of the proposal would require clients to agree to lengthy and complex disclosures to continue with commission paying accounts, which are common in the insurance and advisory businesses.
Implications For The Industry
(1) Investment Advisors will have to review their “book of business” to determine which clients they can offer this new fiduciary standard to.
(2) Firms will raise minimums for advice to comply with the rule, and try to push lower balance clients into more automated products. We have already seen this recently with Merrill Lynch, Morgan Stanley, and RBS, and this pace will only accelerate. It would not surprise us to see average advice minimums of $1 Million across the industry within 5 years.
(3) Insurgent digital wealth managers like Hedgeable will step in to fill the vacuum that is created with the increasingly underserved market, as more and more clients are pushed away from established players.
(4) The big wirehouse firms will start cutting financial advisors, or try to push young advisors into call center roles. They do not need as many advisors if they have fewer clients to manage. This has already started to happen. RBS recently laid off 220 advisors.
(5) Compliance costs will continue to be a major factor in established firms’ bottom lines, as they struggle to adapt their businesses to the new rules.
(6) Investment Advisors will shift towards more investments that are transparent in pricing structure. They will move towards individual stocks & ETF’s in wrapped fee accounts and away from annuities, mutual funds, whole life insurance, complex structured products, and other things that pay commissions on sales.
(7) Annuities and other insurance products will be offered by digital wealth platforms under a wrapped fee structure.
(8) Companies will begin to investigate how they can change their employer-sponsored plans, which were designed under the “suitability standard,” for a fiduciary world. Platforms like Hedgeable, that offer an automated fiduciary compliant platform for Solo 401(k) and other small-business plans will benefit.
How Does Hedgeable Fit In?
Our company culture and 10 Commandments stresses transparency and no B.S.
It is my job as Master Sensei to guide our company culture and to make sure we are aligned with our clients on the same journey to disrupt Wall Street.
It would be a lie to say that we believe the new fiduciary rule will be bad for our business, it most likely will help us to scale much faster than otherwise thought. But, we are not on Capital Hill lobbying the SEC and Congress to pass these rules, as potentially some of our competitors are. We do not cozy up to elected officials, it’s just not our style — in fact it makes me uncomfortable. Instead we focus all of our time on building awesome products. We will comply with whatever laws are enacted as law-abiding taxpayers and continue to fight for our clients if we feel these laws are unjust.
We will make any modifications to the platform as necessary to help as many people as possible get access to an awesome solution. The worst thing that can happen is millions of customers are forced to use sub-optimal crap that the large firms hurriedly push out to the market so they don’t lose market share.
We already have no minimum, which can’t be said about our competitors, so we can service any client that comes our way. Our new API functionality is a game changer will make it easier for partners to hook into our platform so they can better service their younger or smaller customers.
My Conclusion
Dodd-Frank was created in the aftermath of the financial crisis to attempt to stop another one from happening. This is not the forum to argue for or against this or any regulation, and frankly (pardon the pun) it sometimes takes years to realize the full effect of reforms. Just remember, many of the laws affecting 401(k) and IRA accounts were established in the 1970′s, and we are still seeing the effects, both positive and negative, 40 years later.
From The Wolf of Wall Street to The Big Short — 99% of Americans aren’t too fond of the place that they think preys on the less well off. But, we have to be careful that in the process of trying to level the playing field and punish Wall Street’s stupidity, we don’t inadvertently make things worse, basically punishing the consumer instead of the bad actors. What we don’t need is another unintended “tax” on the consumer.
I don’t know if this will be the case, I certainly hope not. The post financial crisis should be a time to a push towards no B.S. and awesome investment solutions, not a push towards more watered down products for retirees or greater compliance and regulatory burdens — and fees for lawyers and government agencies as a result. Let’s hope the cynical side of me is proven dead wrong.
At Hedgeable, we will continue to push for democratization of the industry, by focusing on providing the largest breadth of high quality products that were oncereserved for the ultra-wealthy. Let’s take this next step in your journey together!
