Monday, May 8, 2017

The DOL Fiduciary Rule: Simply Great for the U.S. Economy, American Corporations

Dear U.S. Dept. of Labor Secretary Acosta:

Two very important considerations relating to U.S. Business and the U.S. Economy are often overlooked in discussions about the DOL’s Conflict of Interest Rule:

FIRST - The Rule Benefits American Business, via Minimization of the Risks of Plan Sponsors.

Currently firms that sponsor ERISA-covered qualified retirement plans are at substantial litigation risk, due to lack of expertise in choosing the right lineup of investment options.

Interestingly, in most cases, the “retirement plan consultant” to the plan sponsor, who provided recommendations as to which funds to include in the plan, is “off the hook” (as they hide behind the suitability shield). Hence, broker-dealer firms are often dismissed (or granted summary judgment) in the initial phases of class action lawsuits brought by plan beneficiaries against the plan sponsors.

In essence, a delay and/or repeal of the DOL fiduciary rule will hurt American business owners (plan sponsors), large and small, by shifting risk from broker-dealer firms to most other American businesses.

With the DOL fiduciary rule in place, business owners will then be entitled to rely upon the advice they were provided. Since business owners large and small are not typically highly trained in the worlds of portfolio design and investment product selection, this only seems fair. Business owners concentrate on growing their business. And business owners higher trusted experts to assist them with navigating the complex world of investments.

SECOND - The Rule Benefits the U.S. Economy, as it Fosters Greater Accumulation of Capital. This in Turn Lowers the Cost of Capital for U.S. Firms and Spurs U.S. Economic Development.

The prospect of the DOL Rule has already resulted in substantial reductions in asset management fees at a number of mutual fund companies and other product providers.

The academic research is clear – lower fees and costs result in higher returns for individual investors, and greater accumulations in their retirement nest eggs. Currently the excessive extraction of rents by Wall Street firms and the insurance companies substantially impairs the growth of retirement nest eggs. This means that senior citizens will need greater services - from all levels of government - during their retirement years. This is a burden governments can ill-afford in the future, and will likely mean greater levels of taxation upon our citizens.

Just as importantly, lower investment product fees result in greater accumulation of capital in our economy. Over time, the impact is huge. Just as a rough estimate, we are talking about a likely 10% to 20% greater accumulation of capital over the next 20 years (and possibly much more). Even greater benefits result later, as the effect is cumulative.

The accumulation of capital, in turn, provides the fuel to turn the innovations from our researchers in American business and higher education into new products, bringing new benefits to Americans and to the world.

Such greater accumulations of capital can also lower the costs of capital to American business. This spurs on the undertaking of additional projects, which in turn results in both greater profits to American business and greater economic growth.

IN SUMMARY, when you expand the army of trusted, expert advisers to aid American business owners, qualified retirement plan participants, and IRA owners, GREAT THINGS HAPPEN.

Please consider the interests of all businesses, large and small. (Not just the handful of Wall Street firms and insurance companies that oppose the fiduciary rule.) And please consider how the DOL Fiduciary Rule will promote new business formation, job creation, and the expansion of the U.S. economy.

Thank you.

Saturday, May 6, 2017

Dear Thrift Savings Plan: Are You Shortchanging U.S. Government Workers?

An Open Message to the U.S. Government's Thrift Savings Plan:

There is a great deal to be admired about the U.S. Government's Thrift Savings Plan (TSP). Its low fees and costs (including low turnover, and hence low transaction costs, within the funds). It's L funds (Lifecycle Funds), that make investing easier for government employees. The stable value feature of the G fund and (in a fairly low interest rate environment) its attractive yield, given the lack of interest rate risk.

Yet, upon closer scrutiny, the TSP only has 5 investment options (plus the Lifestyle Funds):

  • G Fund: Government securities (specially issued to the TSP)
  • F Fund: Government, corporate, and mortgage-backed bonds
  • C Fund: Stocks of large and medium-sized U.S. companies
  • S Fund: Stocks of small to medium-sized U.S. companies (not included in the C Fund)
  • I Fund: International stocks of more than 20 developed countries
And, here's the rub. Over the past 25 years academic research has revealed "factors" that can be utilized to gain additional risk exposures, while also leading to high probabilities (over 10-20 year periods) of additional returns. While literally hundreds of factors have been discovered, only a handful have both withstood academic scrutiny and are "investable" at a fairly low cost. Examples of these factors include the value risk premium, the small cap risk premium (with newer research indicating its concentration among either micro cap stocks or small cap value stocks), and the profitability factor. (Others exist, as well.)

Yet, the Thrift Savings Plan has no funds that take advantage of these factors and this academic research. The result? Underperformance of a portfolio that uses only the TSP funds, relative to what could be achieved, is likely to occur by 1% to 2% a year (or greater) over most 10-20 year periods of time. Given the effects of compounding, this is likely to translate to 25% to 50% (or greater) lesser accumulations in their retirement accounts, at least for those government employees who invest fairly aggressive in equities (as they should) starting at age 25 and continuing to age 45. (Note that saving and investing wisely, early on in one's career, is key to building the foundations for a successful retirement and "financial freedom.")

Nor do the Lifestyle Funds stack factor exposures with the equity premium, while lowering allocations to fixed income - which portfolio construction has a high likelihood of achieving the desired levels of returns but with much less overall risk exposure.

So, I appeal to you, on behalf of my friends who work for the U.S. government and who participate in the TSP. Please add:

  • A multifactor total U.S. stock market fund with tilts toward value, small cap, and profitability.
  • A multifactor total foreign markets fund with the same tilt, and providing exposure to both foreign developed markets and foreign emerging markets.
  • The use of such multifactor funds within your LifeStyle Funds (or some new Lifestyle Funds).
  • For employees who desire to best integrate their TSP funds with their outside investments, additional individual funds should be offered in these research-favored asset classes:
    • U.S. large/mid cap value stocks;
    • U.S. small cap value stocks;
    • International developed markets large/mid cap value stocks;
    • International developed markets small cap value stocks; and
    • Emerging markets value stocks.
Our government workers endure many sacrifices to serve the public. Please, TSP, take your stewardship of these workers' hard-earned savings to the next level, to better serve them.

Friday, May 5, 2017

A Message to Morgan Stanley About Its (Lack of a Fiduciary) Culture

I'd like to step out of character and briefly comment on a story that's been circulating recently - Morgan Stanley's decisions to drop sales of Vanguard funds (as new holdings). The reason suggested by commentators? Because Vanguard does not make payments for shelf space (i.e., revenue sharing). In other words, Morgan Stanley will make more money selling funds that do make payments for shelf space. (Of course, Morgan Stanley is not alone - many broker-dealer firms engage in the same practices.)

In a related story, it was reported that Morgan Stanley would pay their financial advisors less if they recommend Vanguard funds.

Assuming such reporting is true, then I would just like to opine ....
  • Payment for shelf space is an insidious practice. It creates a huge conflict of interest for the firm, and its advisors. Such arrangements should not be permitted to exist under a fiduciary standard, for no benefit accrues to the client. Payments for shelf space have to come from somewhere; they often result from management fees in the mutual funds (which management fees are kept higher than they need to be, by the presence of revenue sharing arrangements). And, the academic research is compelling ... higher-cost funds result in less returns to investors, all other things being equal.
    • (Other insidious practices that will become extinct someday: 12b-1 fees; soft dollar compensation.)
  • The conflicts of interest resulting from pursuit of higher fees to the firm from proprietary products or from products which pay revenue sharing cannot (the vast, vast majority of the time) be defended under the DOL's Impartial Conduct Standards. The 237 words of the Impartial Conduct Standards, elegantly written, should serve as a guide for true fiduciary conduct.
  • Under the DOL's Impartial Conduct Standards, the firm and its advisors must adhere to the prudent investor rule. One of the major aspects of that rule is to not waste client assets. This drives fiduciary advisers to seek out the lowest-cost fund or ETF in each asset class (all other things being equal). If a higher-cost fund is recommended, justification for the expenditure of the client's hard-earned wealth must exist. Not just mere justification - but justification that will stand up in court or in arbitration (with the burden of proof rightfully falling on the adviser and firm, when a conflict of interest exists).
  • Is dropping low-cost funds from a platform, in order to favor funds that pay a firm revenue sharing, a breach of the firm's fiduciary obligation under the Impartial Conduct Standards (and ERISA, generally)? That remains to be seen.
    • Probably not, at least under BICE. (And perhaps Morgan Stanley's actions are indicative of how BICE can be manipulated, through structuring what is available to clients. I have always expressed the view that BICE should be viewed as a transitional measure. If BICE indeeds becomes operational, it should be sunset after a few years, lest tomfoolery take place to use BICE to escape the application of the fiduciary principle.)
    • Suffice it to say, however, that it is clear that the spirit of the fiduciary principle is violated, in my view, at the minimum.
To operate as a fiduciary, your compensation arrangement with the client should be level, and agreed to in advance.

Then, as a fiduciary adviser, with your compensation set, you should search out the marketplace for the very best products available to the client. If those happen to be Vanguard funds, you should seek to have them available to your clients - if not directly on your firm's platform, then perhaps directly via Vanguard.

For a fiduciary is required to be an expert, and to exercise due diligence. And to use this high level of professional due care for the benefit of the client. And neither the firm nor the adviser should, under any circumstances, seek to take advantage of the client.

To Morgan Stanley, I convey these messages:
  • If these news reports are true, and if dropping Vanguard funds was the result of the motivations commentators have suggested - I suggest this. Reverse your decision.
  • Stop ... stop ... stop ... creating perverse incentives for your financial advisers to sell proprietary or other funds that pay the firm more, over lower-cost funds.
  • Otherwise, many of your good advisers, who want to do the best for their clients, and who want to be expert, diligent stewards of their client's hard-earned wealth, will eventually depart your firm.
  • Sure, many other advisers, who don't desire to work in a fiduciary culture, and who are willing to take on the added liability (and severe reputational risk) that results from working in a conflict-ridden environment, will likely stay with your firm.
  • Under a conflict-ridden culture, the legal claims will continue. And the litigation costs will continue. And ... oh yes, good new advisers won't be attracted to your firm. It's a dismal path your firm is on, over the long term. Short-term profits may abound, but long-term the firm has a poor future ahead of it.
  • If your advisers act as fiduciaries, don't compel them to also act as product-sellers. The two roles are simply incompatible. To paraphrase many a jurist, "a man cannot wear two hats at the same time."
To Morgan Stanley, I also state:
  • Change your decision-making. Or change your leadership.
  • For the instillation of a true fiduciary culture is driven from the top, always. And strong leadership embracing a bona fide fiduciary standard will be required to move your firm forward, not backwards.
  • If Morgan Stanley's current leadership can't embrace the changes in the industry, and if they fail to understand that the firm's market share will only shrink if its conflict-ridden business model continues to exist, then perhaps its Board of Directors should think about a change ... before Morgan Stanley's ship cannot be turned, and it either capsizes or diminishes in size to become a toy boat in a broad fiduciary sea.
To all dual registrant firms ... don't try to circumvent the fiduciary principle. In an era where greater transparency is required, and fiduciary practice models continue to win in the marketplace (either with or without the aid of regulatory initiatives), it is incumbent upon your firm to go "all in." Learn what is required under a bona fide fiduciary standard of conduct. Then structure your firm, and your services to clients, and the products offered on your platform, accordingly.

Thursday, April 13, 2017

June 9th: Strict Fiduciary Obligations to Arise?

April 13, 2017


It was a somewhat surprising, and yet brilliant, move, the U.S. Department of Labor ("DoL") last week announced its 60-day delay of the applicability date of its "Conflict of Interest Rule" and related prohibited transaction exemptions (PTEs). The DoL delayed until Jan. 1, 2018 the many specific disclosure and certain other requirements of the rule and PTEs. However, and most importantly, the DoL stated that the new "definition of fiduciary" rule would go into effect, along with the Impartial Conduct Standards, on June 9, 2017.

In other words, fiduciary duties will apply, starting June 9, 2017, to nearly all ERISA-covered qualified plan accounts [401(k) accounts, and others], as well as to IRAs (of all types) and HSAs.

Note that this is a fairly strict fiduciary standard. The Impartial Conduct Standards impose, through elegant language, a "best interests" fiduciary standard of conduct. And it's a bona fide standard. No waivers permitted of core fiduciary duties. Conflicts of interest (at the firm level, not the adviser level) might exist, but the client cannot be harmed by the presence of such a conflict.

Moreover, the Impartial Conduct Standards incorporate the prudent investor rule (PIR). And the PIR has two tough requirements (among others): (1) that fiduciaries avoid idiosyncratic risk (i.e., diversifiable risk); and (2) that fiduciaries not waste client assets (i.e., if a mutual fund or ETF has a higher fee than a similar fund or ETF, then you need to justify it. As I've explained previously, the Impartial Conduct Standards are so tough, you need to avoid gray areas. And that means avoiding the receipt of additional compensation received when recommending one product over another, unless fee offsets occur.

Lastly, despite the delay of the more specific rules requiring acknowledgment of fiduciary status in the contract, along with disclosure requirements and other provisions, as I've written previously the Impartial Contract Terms become implied terms of every contract between a fiduciary and a plan sponsor, plan participant or IRA owner, effective June 9, 2017. (That is, unless the account is, and remains, grandfathered.) In other words, the Impartial Conduct Standards are effective on June 9th, and they "mean business"! (Note, this is not an "implied contract"; rather, it is an implied term in an express contract. Just to be clear.)

There is an exception, however. For "level-fee fiduciaries" the Impartial Conduct Standards only appear to apply during the IRA rollover process, but not thereafter. When the IRA rollover process (which, logically, might include implementation of the new portfolio if the portfolio design (or allocation, or products) was discussed prior to the IRA rollover, as most likely occurs) ends, and when non-rollover activities begin, is uncertain at the present time. Still, due diligence is required (by everyone, regardless of whether they are a level-fee fiduciary) during the IRA rollover process, and the tough Impartial Conduct Standards apply.


First, firms may comply with them. For example, firms could choose to comply with BICE, or they may use 84-24 for fixed annuities (and, at least until Jan. 1, 2018) fixed indexed annuities.

Second, firms don't have to use these exemptions. They don't have to have all of the compliance procedures in place, the disclosures done in contracts and web sites and otherwise, and possess various express contract language.

But - here's the key - the imposition of fiduciary status, with the Impartial Conduct Standards, carries with it the duty to avoid conflicts of interest. And unavoided conflicts of interest must be properly managed. Not only must the conflict of interest be affirmatively disclosed, but the adviser bears the burden of ensuring client understanding of both the conflict of interest and its implications. Thereafter the informed consent of the client must be received by the adviser. (And, here's the rub - no client is ever likely to provide informed consent to be harmed. And since the academic research is compelling that higher product fees lead to lower returns, all other things being equal, avoiding higher cost products becomes paramount.) Even then, the transaction must be substantively fair to the client.

So, any conflict of interest will trigger the need to undertake disclosures and proper management of the conflict, anyway. In other words, if a firm chooses not to utilize BICE, a firm will find that it still has to come up with disclosures and processes to effectively manage conflicts of interest. So, in essence, not much has changed.


At its core, fiduciary duties are principles-based standards. And these principles are eloquently stated in the 237 words that comprise the Impartial Conduct Standards. And, these principles are imposed upon advisers effective June 9, 2017, as they become implied terms of existing contracts (except as grandfathered) and all new contracts between firms and the clients.

What about all of those other provisions - contract terms, disclosures, etc. I submit that most of these specific requirements found in BICE, PTE 84-24, or the other PTEs, don't really matter all that much. Any specific rules adopted just illuminate the fiduciary principles that already exist. Even in the absence of specific disclosure and contractual requirements, the fiduciary standard as applied by the principles-based approach (as set forth in the Impartial Conduct Standards) is extremely strong. In fact, it may even be stronger.

Quite frankly, I hope that BICE is not adopted, nor the new PTE 84-24. Instead, just adopt this principles-based approach, as exemplified in the Impartial Conduct Standards. (A few specific rules may need to be adopted, but nothing like the extensive requirements set forth in BICE.)


There are some eight weeks left, at the time of this writing, until June 9th.

It is possible that the DoL will gain new leadership, and under that leadership that the DoL will seek a new delay (for the definition of fiduciary, and the impartial conduct standards) past June 9th. However, to do so would violate the Administrative Procedures Act. It is just not possible to do a thorough economic analysis (which needs to counter the prior economic analysis undertaken) by June 9th. And, without such occurring, any attempt to substantially delay or to rescind the DOL fiduciary rule would likely be met by a challenge in court.

Also, as others have observed, judges don't like government agencies that do 180-degree turns in their rule-making, simply because a new Administration takes office. (Still, a delay past June 9th is possible, and no doubt broker-dealer and insurance company lobbyists are hard at work to make that happen.)

I've been saying, ever since Trump was elected President, that the DOL Rule was likely dead. Yet, here we are in mid-April, and its core provisions remain eight weeks away from becoming effective. I don't mind, as I would love it if my earlier prognostications are proved wrong.

Other challenges remain. New legislation is being introduced in Congress to stop the DoL. While certain to pass the U.S. House of Representatives, passage in the U.S. Senate is unlikely - provided the Democratic Senators continue to unite together. (Not always a certain thing, especially when Wall Street's money and influence are brought to bear.)


First, all firms (whether level-fee or not) should adopt policies and procedures regarding rollovers from ERISA-covered qualified retirement plans and IRAs. Again, please refer to my prior post for insights into what is required. Even if the DoL changes course, other regulators (SEC, states) are stepping up their scrutiny in this area.

Second, broker-dealer firms and insurance marketing organizations should go ahead and implement all of their compliance policies and procedures and plans. If you are going to utilize BICE, or PTE 84-24, or another PTE, by all means go ahead and implement, by June 9th. (You could design new policies and procedures to just apply the Impartial Conduct Standards, without complying with all of the specific, delayed-until-1/1/18 requirements of the PTEs. But then you would likely just be re-doing your procedures again, less than 7 months later.)

Of course, you could wait awhile. To see if the DoL under new leadership (likely to be confirmed by the Senate within the next few weeks) changes course prior to June 9th. Or you might wait to see if the U.S. Congress is able to pass legislation that stops "fiduciary" in its track. How long you can wait depends on how long it takes to implement policies and procedures, implement the systems you require, education your staff, etc. For most firms, they can't wait much longer.

Third, advisers whose firms choose to utilize BICE should be wary, and they may desire to consider a move to a firm that embraces a truer fiduciary environment. Advisers in firms that choose to use the PTEs will likely be placed in a situation where their economic interests are not aligned with those of their firm. Firms may see the additional revenue streams that come from conflicts of interest as too tempting; any claims brought (and they will be brought, at least by some fraction of clients) will just be subjected to negotiation, arbitration and some losses to the firms. But, absent the availability of class-action claims, compensation provided to those individual clients who actually pursue claims will just be a "cost of doing business." Any damage to a firm's reputation is easily fixed.

Because of this (and for other reasons), some large firms (e.g., Merrill Lynch) are choosing to not utilize BICE, and instead will move to adopt level-fee compensation for IRA accounts; this is not only good for consumers, but also good for the long-term health of the firm and of its advisers.

When combined with the use of low-cost mutual funds or ETFs, structured by experienced portfolio managers following evidence-based investing practices, it is likely that this approach will lead to far less claims by clients against their advisers and firms. In other words, much less liability, and much less reputational risk for the adviser. Advisers' reputations are not easily fixed, and marks on the advisers U-4 are likely to stay there for decades to come.

Quite frankly, if I were in a broker-dealer firm that wanted to use BICE, I would find another firm.

There is just too much risk to you (the individual adviser), and to your reputation, in using BICE. Proper adherence to BICE does not really provide any real benefit to you (compared to just providing level fee advice) - but it can cause you a lot of headaches.

I predict that a shakeout will occur. Advisers who don't desire to fully embrace the fiduciary standard will shift to firms that use BICE, and they will choose to assume the reputational and fiscal risks that accompany such a choice.

But the most excellent, ethical advisers will (more slowly) move away from firms that use BICE. For these advisers will realize that old writ, "A man cannot serve two masters," has a lot of truth to it.

When (such as under BICE) firms can receive greater compensation if their advisers recommend one product over another (even though the adviser receives no greater compensation as a result), over time such firms will ask their advisers to venture into the "gray." And, as a result, individual advisers will be brought into arbitrations, and have their U-4 dinged. Not fun. No conducive to having a long-term and successful career as a financial adviser.


Absent another change of direction by the DoL prior to June 9, 2017, a new era is upon us.

At least for IRA accounts, salespeople will become fiduciaries. Instead of pushing products, they will be required to step into the shoes of the client, with all the required expertise expected, and to select the best products in the marketplace for their clients.
  • Some will be able to make this transition. Others, stuck in a "sales mentality," will not. The latter will eventually leave firms that seek a proper transition away from the sell-side and to the buy-side.
Broker-dealer firms will continue to diverge in their approaches to the rule.
  • Some with weak leadership and poor foresight will chose to use the PTEs (including BICE), as they continue to seek revenue-sharing and other arrangements. But, the harsh reality is that additional third-party compensation, to recommend one product over another, will just result in liability.
  • Firms with strong leadership will realize that the fiduciary tide has turned, and they will choose to work to adopt level-fee compensation and a true fiduciary culture. It will take massive efforts to do this correctly.
Advisers will increasingly shift from one firm to another. Many of the older advisers, who want to try to remain as salespeople and who don't want to become true fiduciaries, will migrate to firms that will utilize BICE and the other PTEs. Those firms will welcome such advisers. But it's a devil's bargain - for both the firm and the adviser. It will trigger an inevitable decline in morale at the firms, as claims begin to be asserted for improper management of conflicts of interest. Even journalists in the consumer space will take note - and begin telling their readers to avoid firms that utilize BICE and the other PTEs.

Then, new advisers in firms that request the advisers to use BICE and the other PTEs, rather than level compensation, will eventually wise up and depart for a purer fiduciary pasture. They will move to broker-dealer firms (dual registrants, such as Merrill Lynch) that adopt level-fee compensation. Such firms are protecting their own good will, and the reputations of their advisers. In other instances, advisers will join RIA firms, eschewing the historical "sales culture" of wirehouses altogether in favor of a more client-centric, true fiduciary business model.
  • Independent B/Ds that don't adopt a true fiduciary culture will also see an exodus.
  • BDs affiliated with insurance companies will likely see the first major exodus. Fiduciaries don't want to be pressured to sell expensive products (including cash value life insurance that most consumers don't need).
Asset managers (i.e., product manufacturers) will undergo massive changes. Fees will fall (as indeed they already have, though more in coming). Advisers will scrutinize more intensely the apparent low-cost index funds and ETFs for "hidden fees" - such as diversion of securities lending revenue, higher-than-appropriate payments to affiliated service providers, and payment of soft dollars. This will lead to another shakeout among asset managers. Only those asset managers that quickly and truly lower their "total fees and costs" and, in the process, gain market share, will survive.


Every broker-dealer firm and dual registrant that does not adopt a level-fee approach, eschewing the use of BICE and the other PTEs. Over time, since the economic interests of the fir and the adviser are not aligned, the good advisers will flee such firms.

Advisers who don't move to become true fiduciaries. Their days are numbered. Sure, they'll hang around for a dozen or so years. But eventually they will be out of the business.

Insurance companies. Most won't have the products that fiduciaries are able to recommend. (A few will thrive, but just a few low-cost providers.) Time to sell stock in many of these companies!

  • Want to sell high-cost variable annuities, whose 3% to 4% total annual fees and costs make the "guarantees" offered somewhat illusory? Fiduciaries know that the cost-benefit analysis leads, 99% of the time, to a "just say no" answer. High-cost VAs will disappear.
  • Want to sell fixed indexed annuities, and fixed annuities, from low-rated insurance companies (in terms of their financial strength)? Fiduciaries can't do this. Fixed annuities from low-rated insurance companies will see their sales decline. (See further discussion of EIAs, below.)
  • Want to recommend cash value life insurance as an "income tax free" vehicle for retirement savings? Fiduciaries can't do this (except when asset protection reasons exist, and there is no better alternative to meet the asset protection need). Cash value life insurance sales, which have already declined by 50% over the past decade, will continue to decline.
Higher-cost mutual fund complexes. When you create an army of expert fiduciary advisers to scrutinize products, only the best will survive.

Variable annuities? The high-cost ones, which often possess 3% to 4% (or more) annual fees, won't survive. Lower-cost ones will survive.

Equity-indexed annuities (EIAs)? Most won't survive. Anytime a fiduciary recommends the purchase of a fixed annuity from an insurance company with low financial strength, the fiduciary's judgment will be (rightfully) questioned. And, many claims will be brought against advisers recommending EIAs because the actual returns seen will often be far less than the returns that are illustrated (a fact a good fiduciary would know, and disclose, prior to recommending the product). Insurance company control over the level of profits it makes (via control over participation rates and caps, and by other means) will also be questioned.
  • [It is possible that good EIAs might appear in the marketplace - designed with transparency in mind and with low cost structures and from insurance companies with very high financial strength ratings. (If you know of any in the marketplace, drop me a line!)]
Revenue sharing, including 12b-1 fees? They will disappear, over time. Within a few years, the marketplace will be transformed into a "level compensation" environment. Rather than keep track of "fee offsets" (a difficult and expensive system to adopt and maintain), firms will become revenue-sharing-free and commission-free. The marketplace will put an end to 12b-1 fees, payment for shelf space, soft dollar compensation and other forms of revenue sharing - long before the SEC acts in this area.

Proprietary product recommendations? Eventually, they will largely disappear. You just can't represent the seller (your firm, or its affiliate, producing and selling an product) and the buyer (the client) at the same time. Eventually the investment community will come to realize this. Proprietary products will be shed by BD firms - a movement that began over a decade ago will accelerate.

Principal trading? Same result. It will be difficult in most instances for a fiduciary to justify a principal trade, unless they can prove that it is in the client's best interests. Let's be frank - principal trades make BD firms more money than agency trades. And it can lead to the dumping of securities. And other practices adverse to clients' interests. Except in a few cases (such as in a few states, where limited dealers of muni bonds exist), BD firms will migrate more to serving in an agency role, rather than as a principal. Perhaps the long-awaited split of brokerage away from dealers (that FINRA, f/k/a NASD, boasted that it was able to negate, in the 1940's) will finally occur. Again, from marketplace pressures, not due to explicit regulation. (This will take time.)

FINRA. It's opposition to the application of fiduciary duties to fee-based accounts in 2005, and its stated opposition to the DoL fiduciary rule (in favor of a new "best interests" standard that is anything but), will come back to haunt them. More and more Senators and Representatives in the U.S. Congress will question why FINRA even exists, given its opposition to raising standards of conduct, as evidenced by its actions over many decades. Increasing calls will occur for market conduct regulation to be stripped from FINRA, and given to a combination of the SEC and the states, or perhaps to a new professional regulatory organization (new formed, or adapted from an existing professional organization).


Large and small business owners (i.e., plan sponsors). They will be served by fiduciaries. In class-action litigation, they won't be left hanging out to dry, while their "retirement counselors" hide behind the shield of "suitability." Also, 401(k) product fees will continue to plummet, as fiduciary advisers rush to ensure participant funds are not "wasted."

401(k) plans. More small businesses will offer them, once their fears of liability are diminished, through the receipt of fiduciary advice from advisors that can be held accountable if things go wrong.

Plan participants and IRA account owners? Huge winners. Individual client portfolios will be (largely) managed under the dictates of the prudent investor rule. Lower fees and costs result. Less risk will be assumed by individual investors in many instances. And greater portfolio returns, especially over the long term, will flow to the individual investors. As a result, our fellow U.S. citizens will amass greater amounts for their retirement needs, and during retirement their nest eggs will be managed far better.

Lower-fee fiduciary advisers will gain market share. Including robo-advisers (although challenges exist for the "pure" robo in terms of providing the necessary advice without human intervention). Better yet will be the "hybrid" advisers - where personal contact is offered at the onset of the client relationship, and periodically thereafter. Individual advisers will team up with robo-advisor solutions, to more efficiently serve clients.

But, fears of the requirements of "reasonable compensation" are overblown. Generally, courts don't like to delve into this issue, and will permit the marketplace to set fees. We'll still see AUM fees of 1% and greater, especially when financial planning and life planning services are provided as part of such fee.

Lower-cost mutual fund and ETF providers will see large market share gains. But only the best will survive. Any attempts to "hide" fees (through excessive sharing of securities lending revenue, high payments to affiliate, payment of soft dollars) will eventually be unveiled by the army of expert fiduciaries.

Winners will likely be Dimensional Funds Advisors (DFA) and Vanguard. DFA offers compelling offerings with its core equity funds, providing high levels of exposure to several factors for relatively low cost. DFA also has excellent tax-efficient funds, and tax-efficient stock mutual funds will become necessary in taxable accounts as the fiduciary duties spread. But, over time, DFA will be challenged by the emergence of more multi-factor funds and ETFs; continued innovation by DFA may, however, keep them ahead of the rest of the pack.

Vanguard has a number of very-low-cost funds and ETFs, although it lacks offerings in some key asset classes. And it lacks broad market fund with multi-factor tilts, designed to minimize transaction costs and to promote tax efficiencies. If Vanguard can expand its offerings more intelligently than it has in the past, it could become even larger.

Some low-cost, but not always exceptionally low-cost, fund complexes will survive, at least for a while. TIAA-CREF and Fidelity come to mind. Over time, they will need to continue to lower their fees, to adequately compete. Otherwise their market share will slowly decline.

The possible elimination of 403(b) plans during tax reform [in favor of just having 401(k) plans] could also serve as an impediment to TIAA-CREF, to some degree. During any changeover many formerly 403(b) plans will likely re-examine their choice of investment adviser.

Some of the lower-cost ETF providers will survive, but others will fall by the wayside. It all depends on which ones become the low-cost leaders, achieve full transparency on fees and costs, and survive the waves of extensive due diligence that will be coming. Again, asset managers that aggressively cut fees and costs (not just the annual expense ratio, but also transaction and opportunity costs and diversion of revenue sharing dollars), and who go for market share, will likely be the survivors.

Many Discount Brokers/Custodians. TD Ameritrade, Schwab, Fidelity, and others will continue to grow as more and more independent RIAs and independent BDs require custodial services. Some challenges exist, but as RIA firms and independent BDs continue to gain market share, then these custodians will continue to benefit. Especially if they, themselves, eschew conflicts of interest in their practices.

Under the Impartial Conduct Standards, some practices of mutual fund complexes and custodians - such as providing "free" educational conferences (even if the participants pay their own travel costs) - will need to be altered. Don't be surprised to see all custodians start charging fixed fees for conference attendance, and even annual fees for access to trading software, rebalancing software, and research. Small RIAs will bear the brunt of such fees, and it will increase the cost of entry into this investment advisory profession.

The U.S. Economy and U.S. Corporate Profits. A huge win. Greater accumulation of capital results, accelerating over time. This lowers the cost of capital for U.S. companies, and provides the fuel for U.S. economic growth.

Professional Associations, Generally? Too soon to tell. But, generally, as the members of FPA, AICPA/PFP division, NAPFA, CFA Institute, and CFP Board converge around common standards (such as the fiduciary standard), these organizations begin to look more and more the same. And, as conference sponsorship revenues fall (especially as high-cost product providers evaporate), financial pressures may be brought upon them to merge, or at least become more closely aligned. Some organizations may share common technology (web-based software) platforms, for example, to save fees, costs and staffing expenses.

Certified Financial Planner(tm) Certification? A clear winner. The way you distinguish yourself, in a fiduciary era where everyone is using low-cost products, is to offer financial planning. And providing financial planning in different ways, to fit the desires of different clients, will become necessary.

An embrace of life planning with further add to the CFP(r)'s value proposition, and will stem the rise of "artificial intelligence" to provide financial planning advice.

Also, the Certified Financial Planner(tm) certification has become the most recognized among consumers (although much work remains in that area); I don't see any other designation being close to challenging the CFP mark, in terms of consumer awareness.

Newly Minted CFPs. Firms' demand for newly minted CFPs will soar. College undergraduate programs may well see the number of graduates rise, especially as a larger number of "good jobs" and internships become available as firms shift toward fiduciary business models. Problems continue in attracting minorities and women to the field, but efforts will continue to be made.

There are significant differences in the level of education provided in some college programs, versus many of the certificate programs that "teach to the CFP exam." These distinctions will become more widely known, and firms may begin to recruit more heavily from top-tier university programs that teach all aspects of financial planning and investments, including client relationship management skills and foundational knowledge as to the use of various software.

For example, the depth of the corporate finance / investments background that Financial Planning Track graduates of Western Kentucky University receive, along with training in networking and ongoing enhancement of interpersonal skills, will set these graduates apart. If demand increases for our graduates from firms practicing under the fiduciary standard, then WKU will be willing to expand its programs to increase its number of graduates.

Other institutions will become known for producing graduates with an emphasis on financial counseling, or who also possess strong business education, or for more in-depth practice management knowledge. The CFP Board will continue to evolve its student learning objectives, however, thereby providing a core common course of study that binds all of the university programs together.

Chartered Financial Analyst designation? The CFA is most respected designation, within the larger financial services industry. But will it further shed its security analysis roots, and embrace more comprehensive education and testing around "wealth management" (i.e., financial planning plus investment portfolio management)? Will it survive the passive investment research onslaught? Don't get me wrong - we'll always have securities analysts (for without them, the market would not be as efficient as it is now). And we'll need investment bankers (although I predict investment banking fees will diminish over time, especially for equities). The question is how many securities analysts will be hired, in the future, as technology continues to displace workers in this area and as the number of actively managed portfolios decline.

CPA/PFS designation? Likely a boost, over time. Simply because, as trust in financial advisors becomes more widespread among consumers, the demand for all financial planning services will rise. The question is whether the CPA/PFS becomes aligned with the CFP(r) designation, in some fashion. The CFP has greater brand recognition (as a financial planning designation). But the CPA designation is perhaps the most highly trusted by consumers, and the required tax and financial planning knowledge to become a CPA/PFS continues to make it one of the few premier designations available today. A closer alignment between CFP and CPA/PFS could be undertaken, if visionaries exist along with those who can make it happen.


That's what the June 9th date promises.

But only if the DoL's Definition of Fiduciary and Impartial Conduct Standards are actually implemented on that date. Eight weeks is a short time, but it is also a long time - in terms of what could happen in Washington to derail the new June 9th applicability date for the core, important parts of the DoL rules.

Let's hope that June 9th arrives with the application of the broader definition of fiduciary and with the application of the Impartial Conduct Standards. For on that day, the financial planning and investment advisory emerging profession(s) will take a huge step forward toward laying further foundations for a true profession someday.

Ron A. Rhoades, JD, CFP(r) serves as Director of Western Kentucky University's Financial Planning Program. He is also a tax and estate planning adviser, a Certified Financial Planner, and a registered investment adviser. He frequently consults to firms on the application of the fiduciary standard of conduct, and he is a frequent speaker on fiduciary standards generally as well as investment due diligence.

This blog is written on his own behalf, and does not represent the views of any institution, firm or organization with whom he may be associated.

For questions, comments, suggestions, and inquiries, Please contact Ron via e-mail:

Sunday, April 9, 2017

June 9, 2017: Many IRA Account Contracts Include Impartial Contract Standards as an "Implied Term"

The U.S. Department of Labor's extended of the "applicability date" to June 9, 2017 for the imposition of the Impartial Conduct Standards to ERISA-covered retirement plans and to IRA accounts, and the DOL's application of the expanded definition of "fiduciary" effective on June 9, 2017.

Yet, many other provisions of the rules were delayed until Jan. 1, 2018. These include the written statement of fiduciary status, as well as a written commitment to adhere to the Impartial Conduct Standards.

However, as I discuss in this post, the absence of a express term in the contract that the Impartial Conduct Standards are to be adhered to does not means that the parties to the contract cannot enforce the Impartial Conduct Standards. Rather, the Impartial Conduct Standards become implied terms of every new IRA account agreement (or IRA annuity contract) entered into on or after June 9, 2017, and become applicable to existing IRA account agreements when transactions are undertaken that remove the arrangement from grandfathered status.

In other words, the Impartial Conduct Standards are likely enforceable by the customer for new IRA transactions (to the extent not grandfathered), through a breach of contract action, as if the financial services provider had expressly placed in writing its commitment to adhere to the Impartial Conduct Standards.

Permit me to summarize the law in this area, and then to apply it to the DOL's Conflict of Interest and other rules, as they now stand to be implemented on June 9, 2017. (For purposes of brevity and clarity, I omit the numerous court citations that would typically be found in a law review article that might address these issues.)

American courts have traditionally taken the view that competent parties may make contracts on their own terms, provided such contracts are neither illegal nor contrary to public policy, and in the absence of fraud, mistake, or duress a party who has entered into such a contract is bound thereby. The paramount public policy is that freedom to contract is not to be interfered with lightly.

Yet, under principles of contract construction, implied terms are very often held to exist within an express contract. While most often seen in Uniform Commercial Code Article 2 ("sale of goods") cases, the principle is derived from common law. In fact, under common law the general principle exists that a contract is the sum of its express terms and its implied terms.

The great majority of state and federal courts (but not all courts, at least not in all instances) accept the common law rule that courts in construing contracts may incorporate relevant, unmentioned laws as implied contract terms. Hence, it is a general principle that statutes in existence at the time a contract is executed are deemed, in the absence of contractual language to the contrary, part of the contract as though they were expressly incorporated therein. In other words, statutes become implied terms in an express contract. The parties to a contract are presumed to know the law applicable to their relationship.

And an action brought to enforce an implied term is an action that arises under the contract. The fact that the source of the implied term is a statute rather than an inference from what the parties said or from the circumstances of the contract makes no difference.

Naturally, not only the requirements of statutes themselves find their way into contracts as implied terms, but also requirements imposed by regulations enacted under the authority of a statute. In either instance - actual statute or regulation - the legal requirements imposed are implied into the contract. In essence, contracts incorporate the relevant legal requirements, whether or not they are referred to in the contract itself.

Hence, it appears that the terms of the DOL's Conflict of Interest Rule and related exemptions, and in particular the Impartial Conduct Standards with an applicability date of June 9, 2017, will likely find themselves to be implied terms in a contract. In other words, for any IRA account agreement entered into on or after June 9, 2017 - whether it be in the form of a brokerage account application, insurance or annuity contract, or investment adviser-client agreement - it appears that the Impartial Conduct Standards are likely an implied term of that contract, and enforceable by the customer in a breach of contract action. The Implied Contract Standards, despite the DOL dropping the requirement that they be explicitly referred to in the contract, are nevertheless "read into" such IRA account agreements.

While courts have been at times reluctant to imply into contracts the terms of any statute or regulation, in the current instance it is clear, from the language of the DOL's recent pronouncement (the "Delay Rule") that the DOL clearly intends that the Impartial Conduct Standards apply to all new IRA accounts. It appears more than equitable that courts will imply the Impartial Conduct Standards, not only because the DOL clearly intends that they apply, but also given the overwhelming knowledge within the financial services industry of the current DOL rule-making process and its impact.

Can financial services firm disavow the application of the Impartial Conduct Standards, as an implied term of the contract? It is true that the express terms of a contract generally overrule the implied terms. However, it is a general legal principle that contracts must be subject to existing, relevant laws, and that private parties may not abrogate or override laws enacted from public concern. The general rule is that one whose rights are subject to state restriction cannot remove them from the power of the government by making a contract about them. This would seem to be especially true since the DOL's 2016 regulations contain a provision that effectively prohibits the parties from disclaiming away their core duties arising under the Impartial Conduct Standards, and prohibits seeking client waivers of those duties.

It should be noted that the inclusion of the Impartial Conduct Standards as an implied term of the parties' contract is not about the creation of a new cause of action. The courts that have considered the DOL's Conflict of Interest Rule and the Best Interests Contract Exemption have all, to date, rejected the argument that a new cause of action is created by the DOL rules, when they expressly require incorporation of the Impartial Conduct Standards into the contract. Rather, the Impartial Conduct Standards are just that - they establish terms of the contract that constrain the actions of a party. In other words, they establish standards for performance of the contract. A claim brought by a party is still a contractual claim, whether the Impartial Conduct Standards are expressly a part of the contractual terms or an implied term of the parties' agreement.

Of course, as with nearly any application of common law principles, the conclusions stated above are subject to challenge. But I believe that the probability of success, in the event of a judicial challenge, clearly favors the conclusion that the Impartial Conduct Standards are implied terms of nearly all new IRA account agreements, effective June 9, 2017.

Accordingly, I urge all insurance companies, insurance marketing organizations, broker-dealers, and registered investment advisers to continue their implementation of their compliance policies and procedures, for adherence to the Impartial Conduct Standards.

Saturday, April 1, 2017

I Am Absolutely Stunned by Trump Tweets This A.M. Regarding SEC Nominees, Fiduciary, DOL

Dear Reader:
Please be aware - this post was done on APRIL 1ST, and it was an April Fool's Joke.
Thank you.

April 1, 2017

In his classic early morning Tweet style, President Trump surprised the financial services community with these tweets this morning:

    Withdrawing nomination of SEC Chair. GREAT GUY but ties too close to HUGE Wall Street firms. Will nominate SEC Commissioners that represent THE PEOPLE! 
    04:39 AM - 01 Apr 2017

    Dodd Frank to be repealed. But will require financial advisors to act in BEST INTERESTS of their customers. 
    04:52 AM - 01 Apr 2017

Then, a few hours later, Trump surprised again:

    DOL best interest rule to be studied. My SUPPORTERS want it. Will find way to MAKE IT WORK for THE PEOPLE.
    07:46 AM - 01 Apr 2017

Needless to say, this writer is just absolutely STUNNED by these developments. I profess that I don't know what may come from this possible change of direction.

Will the President lead, instead of just blindly following the Wall Street insiders he surrounded himself with?

Will President Trump actually fulfill his campaign promises to look after the interests of, as he states, "the people" -  and not the monied interests in Washington, D.C.?

Will the President instruct the DOL to go ahead and implement its "Conflict of Interest" (Fiduciary) Rules?

Alas, then I awoke from my morning slumber, and realized that my dream was amiss. Such a wild fantasy could only happen on April Fools Day.

All my best. - Ron

Sunday, March 5, 2017

"Government Should Not Regulate FA's Conduct by Imposing Fiduciary Duties"

I'm a lawyer, and I'm upset. Because the government has these rules in place. I can't, for example, represent the buyer of a business when the seller of the business interest gives me a commission to assist with its sale. How awful! Why shouldn't I be permitted to profit from such an endeavor?

I'm also the trustee of a private trust, and I'm saddened. Because, again, the government has these darn laws and regulations in place. For example, I can't sell my stamp collection to the trust, for a tidy profit for myself, even though it would be a "good" investment (at least, so I say).

I also provide investment advice. Imagine, again, my total dismay when I was informed by securities regulators that I was a fiduciary. I cannot accept commissions from selling hedge funds, non-publicly traded REITs, oil and gas limited partnerships, and all manner of other kinds of illiquid investments. I can't receive expensive trips and other awards for meeting sales quotas. I can't receive additional compensation through casually disclosed payments for shelf space and other revenue-sharing arrangements. Even though I would receive much more personal compensation as a result.

Imagine, those government regulators even want me to exercise "due care" when providing investment advice! Oh, my, the plaintiff's attorneys are clamoring ... they are parked outside my door, even!

Oh, woe to me. The federal government is so intrusive! In fact, it must be a communist conspiracy, hatched by some liberal academics in some ivory tower in cohorts with evil government bureaucrats.

Of course, I jest.

Yet, over the past few weeks, I have received many communications - from "financial advisers" I have never met - telling me in no uncertain terms that the government has no right to interfere in their business as a financial advisor. They should be free of all government restraint.


As James Madison so famously wrote, "If men were angels, no government would be necessary."

The fact of the matter is ... fiduciary duties are not imposed lightly, but are imposed when other legal constraints are ineffective - such as disclosures (not read, if read not understood, by consumers, in the complex and ever-changing world of investments).

The fact of the matter is ... fiduciary duties serve to restrain greed.

The fact of the matter is ... some government regulation of business conduct is justified. And the U.S. Department of Labor's Fiduciary ("Conflict of Interest") Rule is perhaps the most necessary, thoughtful, and elegant regulation to emerge in the last few years.

The fact of the matter is ... I truly am an attorney. I do serve as the trustee of a private trust. And I am a registered investment adviser. As such, I accept the restraints on my conduct that come with my fiduciary status. I accept the responsibility to avoid conflicts of interest and to act with a high degree of expertise and care.

Yet, even though I am "burdened" with such fiduciary obligations:
  • I earn reasonable, professional-level compensation for my expertise.
  • I serve clients both large and small.
  • I provide holistic advice to my clients, often changing their lives dramatically for the better.
  • I look forward to going to work each and every day.
  • I look forward to serving my clients as a trusted professional.
  • I know I add value, through my expertise and through my stewardship of my client's hopes and reams.
  • Lastly, I don't ever think about potential liability as a fiduciary. Because by avoiding conflicts of interest, and by maintaining and applying my expertise, I have nothing to fear.
I have been for 30 years an attorney, and I have served for over 15 as an investment adviser, and for nearly a decade as a private trustee. In these roles, I have operated as a fiduciary willingly, and happily.

The fact of the matter, as I've illustrated before here and here, I've seen the harm done to my fellow Americans by non-fiduciaries providing financial and investment advice. Hundreds of times. Perhaps thousands of time. I've lost count.

I've seen Americans' retirement hopes and dreams crushed through investment advice that hides behind the low standard of "suitability." I've seen the huge extraction of rents by Wall Street and the insurance companies from the investment portfolios of my fellow citizens.

I've seen the failures by FINRA to raise the standards of conduct for brokers, as it opposed (and continues to oppose) a bona fide fiduciary standard of conduct.

I have a saying about those who continue to impose harm on investment consumers: "Either they don't know, or they don't care."

And I have a saying about those who continue to oppose the imposition of fiduciary status. They just don't understand the substantial public policy rationale behind the imposition of fiduciary status - whether it be on a trusted attorney, a trustee, or when providing advice about investments.

So, to all those who oppose a "government mandate" that you act as a trusted, expert adviser when providing financial and investment advice, and in the best interests of your clients ... you may prevail in the short term, for now. But political winds change, and the fiduciary movement has its legs.

Every year that goes by bona fide fiduciaries continue to gain market share.

Every year that goes by more and more consumers will ask the right questions to ensure that they are receiving advice only from bona fide fiduciaries.

Every year that goes by the business model of selling expensive, often risky and inappropriate investment and insurance products, will be in ever-greater jeopardy. It's not what Americans want. It's not good for American business. It's not good for capital formation. Your business model is a dinosaur, and only through the money-fueled intensive lobbying by FINRA, SIFMA, FSI has the extinction event, so long overdue, been temporarily delayed.

Join me now, or be forced to join me later. It's your call. But, it's inevitable.

And, just as an aside. Being a fiduciary to your clients just happens to be ... the right thing to do.

Friday, March 3, 2017

Mrs. Baxter's 'Financial Advisor' - A Sad Tale of Deceit and Betrayal

March 3, 2017:

Against the backdrop of the Trump Administration's initiative to delay, and then repeal, the DOL fiduciary rule (designed to eliminate, or at least minimize, conflicts of interest between financial advisors and their clients), we often forget the real harm caused to our fellow Americans under the current regulatory regime. Each and every day individual investors are scammed. They believe they receive trusted advice from expert professionals, when in most cases that is just not so.

The sad reality is that the person sitting across the table from the individual investor is more likely than not just pushing products - expensive mutual funds destined to underperform, even more expensive hedge funds and floating rate securities, fixed (equity) indexed annuities with often-excessive commissions issued by insurance companies with inadequate financial stability, high-cost variable annuities with illusory "guarantees," and much more.

Most individual investors think they are doing fine with their current "advisor" - when in reality they are subjected to what I call "financial rape." It's a continuous battle to open up the eyes of individual Americans, and then to guide them on how to choose a trusted, bona fide fiduciary.

In this post, I relate the story of "Mrs. Baxter." Not her real name, of course, nor even representative of a single client. But, this tale is, rather, a compilation of hundreds of individual investors I have counseled over the years. Indeed, there are millions of "Mr. Baxters" and "Mrs. Baxters" out there  who are unaware of the harm which is imposed upon them. And, as seen in this post, they need help - from true professionals who operate at all times as "bona fide fiduciaries."

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"Mrs. Baxter, the total fees and costs charged in connection with your investment portfolio are well over 2% a year, and approaching 3% a year," I opined.

The 63-year old Mrs. Baxter, a recent widow, seemed un-phased. "They must be great investments, then," she replied.

"No, ma'am," I replied, "the extra fees and costs you are being charged are reducing the returns of your portfolio, over time. In fact, even though you are withdrawing only three and a half percent of your portfolio, each year, with the excessive fees and costs you are paying your portfolio is unlikely to grow further. And, most importantly, you'll likely run out of money during your lifetime."

Mrs. Baxter sat up in her chair. "But my financial advisor said I would be fine."

"Do you know how much his firm is paid, from your investment portfolio," I inquired.

Mrs. Baxter appeared puzzled. "I'm not paying my financial advisor anything. He's never charged me a dime."

"Sadly, ma'am, that's not the case. Between the sales loads, or commissions, you've incurred, as well as the 12b-1 fees charged by many of the mutual funds you own and paid to your brokerage firm, the  extra payments made by your mutual funds and variable annuities to your brokerage firm called "payment for shelf space" and "marketing support dollars," soft dollars, and more, your brokerage firm is receiving about 2% a year in fees."

Mrs. Baxter replied, "That can't be."

I took several minutes to review the printout of my spreadsheet with her. Like about one-third of individual investors, Mrs. Baxter thought her broker didn't charge any fees at all. And, like about 80% to 90% of individual investors, Mrs. Baxter had no clue about her total fees and costs.

It was surprising that Mrs. Baxter was in my office now. If her daughter had not insisted that she get a second opinion on her portfolio, she likely would have never learned what she is learning now.

I continued. "Mrs. Baxter, on your $1,000,000 portfolio, the total fees and costs you are paying are about $26,000 a year. You are paying more than twice in fees and costs that you should. And, your investment portfolio is also not designed or managed in a way to minimize the tax drag on your investment returns. In essence, you are paying several thousand dollars a year, each year, in taxes you should not have to pay."

"In sum," I continued, given the seven years you've been with your financial advisor, the value of your portfolio is far less than it should be. It should be worth at least 10% more, and quite probably an even higher amount. The academic evidence is compelling: high fees and costs, and excessive taxes, drag down your investment returns substantially, and the effects of compounding increases the severity of the harm to you over time."

I had yet to deliver all of the bad news. "Mrs. Baxter, also, your portfolio is exposed to too much risk. There are ways to design portfolios that minimize different types of risk. But this portfolio does none of that. To put it bluntly, this portfolio is not designed by an expert, and it puts your financial future in serious jeopardy."

Mrs. Baxter, her eyes now wide open, had a good question for me: "The sign in my financial advisor's conference room said, 'The Best Interests of Our Customers Should Come First.' Did my financial advisor break his vow to me - to act in my best interests?"

"Unfortunately, Mrs. Baxter, that sign did not clearly state that your financial advisor, and his firm, are required to act in your best interests. It is marketing hype, and it is, unfortunately, quite deceiving. The firm is not a fiduciary to you. Your financial advisor is a product salesperson, not a trusted advisor."

Mrs. Baxter appear confused, as I continued. "I've checked on your 'financial advisor.' He's just a stockbroker, who has been in the business for several years. He also sells expensive insurance and annuities. Yet there is no evidence that he possesses any substantial training in planning to address retirement needs, in taxation, or in portfolio theory and management. While he has a few designations after his name, most are meaningless. In fact, there is no evidence that he possesses the substantial knowledge and expertise that a true professional should possess to advise you on your investment portfolio and retirement planning."

"But he calls himself a 'financial advisor'!" Mrs. Baxter said now. It was clear that she was getting emotional. Her anger was apparent. And her expression changed from time to time to one of concern - as she should be concerned about the real threat to her own financial future. She asked, "Can I sue him?"

"Sadly, I don't see how a lawsuit would be successful," I replied. "All of your account documents stated that the advisor was not a fiduciary to you. Your broker appeared to recommend 'suitable' investments, but he had no duty to recommend the best investments to you. In fact, many of the recommendations made appear to have been done because they paid your broker, or his firm, more money."

Mrs. Baxter just sat there. Stunned. I knew she never read the mountains of disclosure documents she was presented. Even if she did read them, like so many Americans she does not possess the high degree of financial knowledge necessary to discern what was important, and what was not.

"Mrs. Baxter, here's what I want you to do. Take my written analysis home. Look over it. If you desire, seek out another second opinion."

Mrs. Baxter said, "I've already decided. I'm going to make a change. I want you to take over my portfolio."

I knew it was not time for her to make any important decisions, especially regarding her own future retirement security. Certainly no one should make decisions about money in such an emotional state. So I replied, "Mrs. Baxter, let's meet again in a week. And we will go over the analysis, make certain you understand it, go over my own portfolio recommendations for you. Write down your questions over the course of the net week, and I'll answer all them when we meet."

"But I don't have any questions."

"Mrs. Baxter, I can assure you that a week from now you will have questions. Good ones, too. But for right now, and for several days, it is in your best interests to let what I've told you sink in. You should review this analysis. Then we'll review it again, together. And then, and only then, will we proceed together to fix your portfolio and make it work a lot better for you - with far less fees and costs, substantially reduced taxes imposed on you, and with far less risk that you will outlive your money."

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If you are an individual investor, and you've read this, what can you do?

  • First, ask your current "financial advisor" (or whatever title he or she uses) these questions. Get the answers to these questions, in writing. Be aware that many investment or financial advisors say that they are "fiduciaries" or that they act "in your best interests," when in fact they do not. This questionnaire should result in "yes" answers to each and every question; otherwise, your advisor may not be a bona fide fiduciary (in the author's view).
  • Second, get a second opinion about the management of your investment portfolio. Ask the same questions, first, of those you approach for a second opinion. And get the answers in writing. If all of the answers are not "yes" - keep looking. Find a true expert, trusted advisor. Find what I call a "bona fide fiduciary." They are out there, and when you find them your own financial future will become much more secure as a result. 
  • Third, and in addition to the answers to the questions referred to above, have your advisor provide you with a certification of his or her (or the firm's) allegiance to bona fide fiduciary practices. The three documents currently available that meet this requirement are:
    1. The Fiduciary Oath from The Committee for the Fiduciary Standard (any advisor can sign this oath; no cost involved, nor membership required);
    2. The Fiduciary Oath from the National Association of Personal Financial Advisors (NAPFA) (members of NAPFA, who are fee-only and who meet certain educational and testing and review requirements, sign this oath); or
    3. The Best Practices Fiduciary Advisor Affirmation from the Institute for the Fiduciary Standard (the Advisor Affirmation Program requires firms to pay an annual fee, have their Form ADV reviewed, and require language inserted into their Form ADV).
Realize that your financial goals, hopes and dreams are too important to risk to chance. Seek out the best. There are bona fide fiduciaries out there - expert, trusted professionals. But they remain outnumbered by non-professionals in this business by about 10-to-1. So be prepared to search diligently, and don't ever accept anything less than a true, bona fide fiduciary.

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If you are an existing financial advisor who is not currently acting as a trusted professional, you are likely tired of pushing proprietary products, or products that pay your firm "payment for shelf space" or other forms of revenue sharing. You likely want to act in your client's best interests, at all times and without exception; but your firm just is not structured to permit you to do this. You want to deserve the trust that your clients place in you. What should you do?

  • First, realize that for several decades now a growing body of independent, fee-only advisors has existed. These fee-only advisors avoid nearly all conflicts of interest. They don't accept material third-party compensation (commissions, 12b-1 fees, payment for shelf space, revenue sharing, sponsorship of client seminars, prizes, awards, etc.). And - they make an excellent living. More importantly, they love what they do - they look forward to going to work each and every morning, for they know that each and every day they transform the lives of their clients for the better.
  • Second, attend a conference of fee-only financial advisors. There are many worthwhile fee-only organizations out there, but the largest and most established is the National Association of Personal Financial Advisors (NAPFA). At their Fall or Spring conference you'll find sessions on practice management, portfolio design and management, how to identify and use the best technology, and much more. More importantly, you will meet other advisors who previously fled the world of product sales for the world of trusted advisors. They and everyone else at the conference will greet you warmly. You'll receive advice from everyone who has gone before you, and you'll be invited to join this collegial community of professionals. You'll go away from the conference knowing that a pathway to excellence exists, and you will more firmly visualize the route you must take toward a more personally rewarding career.
  • Third, if you are considering joining another firm, there are many opportunities out there. If you possess established client relationships (please, don't call it a "book" any more!), there may be firms - both large and small - that you can join. These firms already operate as bona fide fiduciaries. Many of these firms have assisted "breakaways" before. So, explore your options, quietly and discretely. You'll be glad you did!
  • Fourth, if you are already with a broker-dealer firm and/or insurance company, then before you begin the actual planning for any transition to "go independent"- get legal advice. You have rights, and so do your clients. To avoid missteps, and to better the odds that your clients will follow you, seek out legal advice from securities law and/or compliance attorneys who have previously advised on many advisor transitions. Don't skimp on good legal advice as you plan to make the transition. 
  • Fifth, realize that once you make the decision to transition to an independent firm (existing, or your own firm), and to practice as a bona fide fiduciary, you'll never want to go back! In fact, very, very few of those who leave the "sell side" of this industry for the "buy side" ("purchaser's representative" or "fiduciary") ever return. (In fact, in all my years, I've never, ever, met even one who left the sell-side and then returned to it later!) So, be confident that you've made the right decision!
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If you are an existing financial professional who already operates as a bona fide fiduciarycongratulations! Like me, you likely love your profession, and your career path.

And, you are likely upset about the developments in Washington, D.C. While you see that the Trump Administration's decision to kill off the DOL fiduciary rule favors your own practice (as you will retain a marketing advantage as a true fiduciary), you also recognize the harm that is done to your fellow Americans, each and every day. You know that fiduciaries will prevail in the marketplace over time, but you are saddened that it will take longer for financial planning and investment advice to shed the "product sales culture."

  • First, don't give up. Although there is only a small chance to get the Trump Administration to reverse its course, this is a fight that continues to be worth fighting! Submit a comment letter on the DOL's proposals to delay the fiduciary rule. (Do so today!) Ask your colleagues to submit comment letters. And ask your clients, as well. Share, to the extent you can, stories of the "Mrs. Baxters" of this world - with the DOL, with your U.S. Senators and members of the U.S. Congress, and with your local media.
  • Second, realize that even if the DOL fiduciary rule is delayed and then either rescinded or replaced (with a weak rule), much progress has been made in recent years. Several courts have already upheld the DOL fiduciary rule on its merits. Hence, all it takes is a future change of the Administration, and before long a new version of the DOL fiduciary rule - likely even improved and stronger - will emerge again and be adopted and finalized. It's inevitable. So, have hope that a better day will come - for all Americans, not just the ones lucky enough to have you as their investment and financial advisor.
Ron A. Rhoades, JD, CFP(r) is the Director of the Financial Planning Program at Western Kentucky University's Gordon Ford College of Business, Bowling Green, Kentucky. Dr. Rhoades teaches courses in investments, retirement planning, estate planning, and managerial finance.

Ron is an avid researcher into fiduciary law as applied to financial services, and has written and spoken extensively about the fiduciary duties of financial advisors, the status of laws and regulations, investment due diligence, and the paths toward a true profession.

This post reflects his views only, and are not those of any institution, organization or group with whom he may be associated. To reach Ron, please e-mail: Thank you.