My Thoughts on Department of Labor Laws
Many of you are relied on as part of the financial teams of your clients and as such I wanted to give you this quick note. In my industry “Wealth Management” there has been a lot made of the Department of Labor’s law on “Conflict of Interest”. It’s becoming a big deal for a lot of the major firms who have for years relied on third parties for a part of the compensation namely through 12B1 fees offered by mutual fund companies, and insurance companies.
Now firstly let me point out that this rule is only covering retirement accounts (which now includes IRAS) presently. From what I read, I don’t see that there is anything showing that they are looking to cover standard brokerage accounts (except for IRAs).
The stem of this rule I attached from the DOL website is:
Under our current system, your advisor can accept a back-door payment or hidden fees for directing you toward investment products that may not be in your financial best interest. And it's completely legal, provided that all parties sign and adhere to a Best Interest Contract.
Many firms have decided not to offer commission based IRA accounts for their clients. These advisors are being told by their firms to move to a fee based account or send the account elsewhere.
So, my thoughts…. ABOUT TIME….
I’ve been dealing for years with clients who, at the suggestion of someone else, have rolled their 401k into IRAs and had those funds subsequently put into mutual funds or annuities. I get involved usually when the client is not happy with the results or they subsequently learn something about the product they were sold that doesn’t equate to what they thought at the time of sale.
I’ve continually said that most investors have no idea what they pay in fees. Several surveys have highlighted this and if this rule can play some part in addressing this then I’m all for it.
From where I sit it appears that the major issues relate to whether you are acting as a fiduciary. The meaning of which is that you act in the client’s best interest and disclose any conflicts.
WOW…. Is this not something that a reasonable person would think that their Advisor is already doing? Secondly, there seems to be a push towards having an investment policy statement for the recommendations you give. Additionally, you may need to justify these recommendations. It sounds bad when it’s said out loud, but yes, I guess this is something that has been lacking.
In my practice we have managed our own in-house portfolios for many years. I invest my client’s funds in direct stock, and individual bonds. Unless there are specific reasons such as I cannot get diversification, I very rarely recommend mutual funds, as in my opinion it can be costlier to a client.
Summing up, I’m encouraged by what the new rule can bring to the industry, namely more transparency and fair treatment for investors.
Should you have any questions or concerns, please don’t hesitate to give us a call.
Any opinions are those of Mick Graham and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
