The so-called “fiduciary rule” could curb expenses for retirement savers by $17 billion each year, but end up unfairly squeezing smaller players in the wealth-management community and hurt some investors.
The U.S. Department of Labor rule started to roll out in June and is designed to mandate financial advisers be fiduciaries and provide financial advice that puts their clients’ interests above their own.
In other words, “Don’t do something with a customer’s money that you wouldn’t do with your own money,” explained Michael D. Ice, finance professor at the University of Rhode Island.
The rule is supposed to eliminate any conflict of interest related to retirement accounts such as 401(k)s and investment retirement accounts, or IRAs, which is potentially good news for consumers. Indeed, a 2015 report by the White House Council of Economic Advisers estimated IRAs alone were shortchanged by hidden fees and commissions to the tune of $17 billion a year.
AARP, a retirement-advocacy group, wrote a letter to the DOL earlier this year expressing the need for such a rule.
“There have been too many horror stories about individuals being placed into suitable investments that are both not in their best interests and unsuitable,” AARP said. “The time is now to protect hard-earned retirement savings.”
But the new rule is raising concerns among wealth managers, who are scrambling to comply with a rule they say is unclear and hurts law-abiding firms.
“The rule is meant to provide customers some protection against people who would take advantage of their lack of sophistication or ignorance of the marketplace,” said Malcolm A. Makin, president of Professional Planning Group. Makin heads the Westerly-based, independent registered investment adviser, which is a member of Raymond James Financial Services Inc.
“If you look at all the little things and ingredients that comprise the rule … it’s not always in the best interest of the clients,” he added.
Makin, who has repeatedly been named one of the nation’s top financial advisers by Barron’s, says his firm has worked hard to ensure increased costs don’t trickle down to their investors.
But he points specifically to issues related to costs for new software and investment platforms, onerous compliance requirements and ignorance surrounding fee schedules.
A portfolio, he explained as an example, could contain unmanaged assets the client wants to hold onto. Makin’s firm would not bill for those assets, but may have to under the new rule.
“Clients are all different. Goals and objectives are different. There are some similarities, but one portfolio does not fit everybody and one method of distribution doesn’t fit everybody,” he said. “The fee issue under the rule is huge.”
Another major issue, Makin points out, is the ambiguous language surrounding commissions and the impact it will have on less-established wealth-management firms, along with the next generation of savers.
“The rule doesn’t come out and say, ‘Thou shall not have commissionable retirement products,’ but the way the language is presented, and the tone of the rule, has caused a number of firms to simply say, ‘We will not sell commissionable products,’ ” Makin explained.
This part of the rule could have one of the biggest long-term impacts on the industry.
Commissions are largely a mechanism for young wealth managers to make a name for themselves. At the same time, it’s how young investors can get someone to manage their retirement money without having to pay high fees.
“For the 22-year-old, it’s hard,” Ice explained. “There’s no one you can [make commission from]. And there’s no chance to make much money on fees because who’s going to give a 22-year-old kid out of college $22 million? You’re going to struggle until you are 30-40 years old.”
Makin sees it from the perspective of the investor.
“Say there’s a young construction guy who wants to put some money into an IRA. He might have $1,500 to put into his first IRA account, but it could be very difficult to find someone to work with him because they can’t get paid,” Makin said. “The losers in this are going to be the folks who are just starting out.”
The rule, he said, isn’t going to hurt a well-established firm like his own. But it does tip the scales in favor of larger investment firms with big, brand names. Makin also sees the blanketed approach removing a humanistic element from wealth management that he worries could hurt the industry in the long-term.
Ice is more reserved, saying the fiduciary rule enhances transparency, which is where the wealth-management industry should be heading. And while he believes building a wealth-management career will take longer than it did a decade ago, he doesn’t see the profession disappearing because the investor-wealth manager relationship has become too important.
“My financial adviser knows me better than my wife,” he quipped. “A true, proper financial adviser, the kind of person you share your hopes and dreams with, is a relationship well beyond something you could legislate in a fiduciary law.”
