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The Fiduciary Rule

I have written about the fiduciary rule so many times that I have given up citing the articles. If you are curious, there is a little search bar at the top of this website. Just type in “fiduciary rule.”

If you do not feel like doing that, here is a synopsis:

A few years ago, regulators started to push for a uniform fiduciary standard for advisors giving investment advice. The previous standard, a “suitability” standard, stipulated that brokers could charge high commissions as long as the product they sold was “suitable.” The Department of Labor did not care for that and developed a rule that would force brokers to act in their clients’ best interest. Meaning, if fund A was similar to fund B but had lower expenses, the broker would be obligated to recommend fund A. This is especially problematic because many financial services firms have revenue sharing agreements with fund companies: if Fund B charges higher fees, the broker as well as their firm can receive additional compensation. In lieu of direct commissions, many firms offer incentives like nice dinners, vacations, and gifts. Some firms have even required their employees to sell certain investment products to qualify for healthcare! The vacation and gift model works well for the firm because they can send the broker on a trip once but collect the recurring revenue stream as long as the client stays invested in the fund.

A fiduciary standard could potentially force brokerage companies to remove conflicts of interest from their advice. Conflicts like receiving large financial incentives from investment companies to sell their products. Suffice it to say, brokerage companies were not happy. The Department of Labor published their initial iteration of the rule and opened the proverbial floodgates. The financial services industry leveraged their considerable influence and the rule was revised. My opinion of the original rule and the changes can be found here.

The final rule was edited so much that it lost its teeth. Still, the die has been cast and the industry is changing. The brokerage industry continues to fight tooth and nail against the new rule and the president has vowed to reverse it.

So why are brokerage firms gleefully adopting some of its protocols? Especially given the rule has not taken effect and may never.

Fee based advice, like the advice we give at Gainplan, is meant to be free of conflicts of interest. We can stand behind that promise because we do not have revenue sharing agreements with mutual fund companies. Our clients sign contracts with us that state we will act in our clients’ best interest. The new fiduciary standard allows for best interest contract exemptions. A brokerage firm can enter into a contract with a client while still maintaining certain exemptions that allow for conflicts of interest. The Journal article above references Morningstar’s findings that “fee-based accounts can yield as much as 50% more revenue than commission accounts.” Brokerage companies are now using the potential fiduciary standard to tell clients they must move their assets to fee-based, managed accounts. These same firms are still accepting revenue from fund companies but they no longer need to rely on brokers to sell the funds. They just need to make sure the funds are included in the managed accounts. Large brokerage companies that adopted this model have already seen their bottom lines increasing. “Higher revenue tied to fee-based assets helped push Merrill’s revenue up 3% from last year to $3.8 billion in the first quarter and offset declines in traditional commission revenue.”

For a long time the biggest argument against the fiduciary rule was that retirement advice would become more expensive. While that seems correct, has the advice gotten any better? A fiduciary contract cannot truly exist as long as there are still best interest contract exemptions.


Free Financial Advice

All this talk about paying for money advice has driven me to seek a more affordable alternative. Or maybe, just something more entertaining. As always, financial advice from celebrities is a veritable cornucopia of silliness.

To truly appreciate it you should start with how Priyanka Chopra (I do not know who that is either) manages her money:

“I divide it between what I want to save, investments, what I want to spend, and philanthropy.”

That is not bad, right? I especially like that she is sort of counting savings twice.

Now, in contrast, read Lars Ulrich’s comments:

“We have two employees who take care of stretching us, massaging us. We have a chef. We stay in comfortable hotels. There’s private plane travel.”

I guess to each his own right?


Larry Fink

Larry Fink is the CEO of Blackrock and he recently gave an interview to Bloomberg. There is a lot of good information there but I was most surprised to learn that he invented Maroon 5.

“The first artist we signed was a band called Kara’s Flowers. We worked with them and changed their name to Maroon 5. We were the label Maroon 5 used for, I think, their first five albums. We made a lot of money on that record company—in a depression! Think about what happened to the record industry at that time.”

Also, there is this:

“One thing you have to understand related to the growth of ETFs is that a large component of the growth is not people seeking beta; its active managers navigating beta for alpha. They are doing asset allocation. It is cheaper; it is more efficient; you have less idiosyncratic risk than in any one stock. So I actually believe one of the unknown secrets about the growth of ETFs is that they are heavily used by active managers.”

Hey, we do that! I do feel a little guilty because we do not use a lot Blackrock ETFs but Larry really seems to get us!



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Categories: Industry Ideas, News, The Market

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