New DOL Rules a Blessing for Investors

This past February, prompted by President Obama, the Department of Labor (DOL) established new rules for retirement advisors requiring they work under the fiduciary standard. In short, this closes the door on an industry-wide practice of abuse that needs to end.

Currently, there are two separate standards than an advisor or broker is required to meet depending on the type of license they obtain.  A broker under the suitability standard is required only to ensure that the advice is suitable for the client at that moment and no more.  Under the higher standard of fiduciary, the advisor is required to ensure that the investments meet the client’s risk profile and needs at the time of purchase and on an ongoing basis.  This standard demands more work from the advisor, as well as the disclosure of any conflicts of interest.

Brokers under the suitability standard maximize profits by increasing embedded fees on certain products and allowing for commissions on trading within the account.  As a result, a retirement account in a brokerage environment can often incur total fees of 5% per year or more, levels treated as excessive and subject to legal exposure in a fiduciary environment.

Unfortunately, many advisors carry either just the suitability license or both, using the weaker guidelines to increase their profits while eroding client assets over time.  I have seen on several occasions an advisor with both licenses pitch a client on their “safe” strategies, then immediately proceed to invest all their assets under the suitability standard.

In one such instance we saw recently, an investor nearing retirement handed over a large account to an advisor at a major retail bank.  As soon as the cash transferred, the broker used his suitability license to purchase a handful of high-fee investment products, pocketing $10,000 in commissions.  These products were mutual funds designed to provide “safe” returns, but in fact they lost 20% in just a few months when the market was down only a few percent.  Not only was the investor unaware of the commission structure, but there was also no obligation on the part of the advisor to monitor the investments.  The individual was left to watch their account go into free-fall while the advisor did nothing.

So the new rules make a ton a sense – retirement investors win and gain some protection from the damage done by unethical practices.  But the industry is fighting these rules in every way possible.  Just last week, I saw the headline, “DOL Rule May Force Advisors to Abandon Small Investors”, under the premise that as servicing small accounts becomes less profitable, the account holders will lose access to as broad a range of investment services.

Given the number of tools out there to serve small accounts at scale, this argument undoubtedly serves the interests of fear-mongering trade groups. Sound investment strategies for the long-term can be crafted from a range of low-cost, exchange-traded funds.  But unlike the example above, the advisor does have to monitor the markets and manage the account accordingly.  In other words, they would need to focus on managing the account instead of selling products.

 

Note:  Vodia Capital always has been and always will be registered under the fiduciary standard as a fee-only advisor.