Fiduciaries, Tree Trunks, and Twigs
It is July and Early Retiree's thoughts turn into his July trifecta - July 4th, Wimbledon, and the Tour de France. His attention turns from celebrating the U.S. Independence, to the all England Lawn Tennis and Croquet Club, to the world riding bicycle around France.
The Tour Intrigues Early. For 21 days, men with thighs the circumference of tree trunks and arms barely the circumstance of twigs (weight is the enemy of a bicyclist) ride 2,000 miles up and down the Alps and Pyrenees mountains and through breathtaking scenery and history. They suffer terrible pain so 1 of the 200 riders can wear a yellow cycling jersey.
How much pain? Until the 1960s, it was common for riders to drink alcohol during the race to numb the pain. Alcohol was banned, not because of concern for riders or spectators safely, but because alcohol was considered a stimulant.
Early’s sister, Hope Retiree, is not buying. “The tour lost its credibility with the drug scandals.” Indeed, in a list of winners of the Tour, no winner is listed for 1996, 1999-2006, and 2010 due to drug use.
Financial Advisors, like the Tour, have a credibility problem. In 2015, the White House Council of Economic Advisors concluded that in 401(k) and IRA accounts, advisors’ conflicts of interest resulted in annual losses of $17 billion for consumers.
On April 6, 2016, the Department of Labor (DOL) issued what has become known as the Conflict of Interest Rule. The rule is effective June 7, 2016 with a transition period through April 10, 2017. The ruling requires Financial Advisors managing retirement accounts (401(k), IRA, Qualified Annuities among others) to be Fiduciaries. Meaning, Financial Advisors must act in the best interest of their clients.
Advisors can be paid many ways. On one side of the spectrum are Fee-Only Advisors (FAI is a Fee-Only advisor) who are paid only by their clients. On the other side are brokers that can be paid by mutual fund companies, insurance companies, and clients.
Registered Investment Advisors (RIA – FAI is a RIA) and most employer retirement plans are fiduciaries. Brokers have a suitability requirement – meaning they must sell products that are suitable for their clients.
DOL and others have objected to the suitability standard because brokers are paid different commissions for different products. They feel this incentivizes financial advisors to sell the product with the highest commissions.
The new rule does not outlaw commissions but requires the financial institution to follow a series of guidelines including acknowledging their fiduciary status, and refraining from using incentives to act contrary to the clients best interest.
Frank Reish a renowned attorney on fiduciary issues has stated, “you can charge Walmart Prices for Walmart service or Tiffany’s prices for Tiffany’s services, but don’t provide Walmart services for Tiffany’s prices.”
The ruling is principles based and not rule based. This means it did not create a restricted assets list, meaning assets that cannot be sold because they violate the fiduciary standard. Instead the DOL implemented a prudent person principle.
“Prudent Advice is advice that is based on the investment objectives, risk tolerance, financial circumstances and needs of the Retirement Investor, without regard to the financial or other interest of the Adviser, Financial Institution, or their Affiliates, Related Entities, or other parties.”
Early, the retired engineer, looked at Hope and said, “I can live with that.”
Hope, the CPA, still is not buying, “Don’t get too excited, the DOL ruling is 1,023 pages and there will be ruling and interpretations over the next year and beyond. It is too soon to know what we will get.”
Time will tell, will the ruling have the strength of racer’s thighs or the weak grasp of their arms.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by FAI Wealth Management), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from FAI Wealth Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. FAI Wealth Management is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of FAI Wealth Management's current written disclosure statement discussing our advisory services and fees is available for review upon request.