Check the background of this financial professional on FINRA's BrokerCheck.

April Commentary: The New Landscape for Retirement Advice

Let me ask you a question. How many things do you know of that have not been updated since 1974?


Your grandmother's house? Sure. Your favorite song? OK. But would you be surprised to know that until yesterday, the major legislation regarding retirement plans and investment advice had not been changed? Given the speed at which the Federal Government operates, it is probably not much of a surprise, but that does not change the impact of the first major regulatory changes to our industry in more than four decades.


The issuing of this week's Notice of Proposed Rule Making (NPRM) by the Department of Labor (DOL) brought to fruition changes that were first proposed in 2010. The basic issue that the Obama Administration was trying to address was conflicts of interest in retirement advice that impact the middle class. These conflicts, which the DOL estimates cost middle class Americans approximately $17 billion per year, arise from a juxtaposition of advisor fees and commissions versus the best interest of the consumer. While I cannot, and will not, comment on whether the dollar value of the issue is accurate, I do want to take a few moments to address how it impacts you and your employees.


The major question at the heart of this ruling is are you, as an advisor, doing what is in the best interest of the client? Are you providing investment advice that meets the individual needs of the consumer on a fair and impartial basis without making your own compensation a mitigating factor? First, let's state the obvious. The answer should always be YES. Every advisor, regardless of how much money a client is investing should be able to tell their client why they recommend what they recommend. They should be able to easily articulate the benefits, weaknesses, risks, and other factors associated with any investment. If they cannot do that, then frankly, you are working with the wrong advisor.


The key points of the legislation are as follows:

  • Commits all firms and advisors who provide investment advice to live up to a fiduciary standard. This standard involves acting with care, skill prudence and diligence involving selection and communication of investment recommendations, and includes avoiding misleading statements about fees.


  • Firms must adopt policies and procedures designed to mitigate conflicts of interest, called the Best Interest Contract Exemption (BICE). This contract must identify conflicts of interest and compensation structure that would otherwise influence the advisor's recommendations and disclose them clearly and prominently. In addition, the contact must direct the consumer to a webpage that discloses the compensation arrangement between the firm and advisor.


  • The BICE must allow consumers to hold fiduciary advisors accountable for providing advice through a private right of action for breach of contract. Simply put, consumers will have the right to pursue legal action against the advisor or firm if they violate the contract, including class action, if the impact is felt by a group of consumers.


  • There are several carve-outs to the policy, aimed at clarifying specific areas of ambiguity. Retirement education, such as seminars provided by financial professionals to employer-based plan participants, are not subject to the fiduciary standard. Neither are transactions that are initiated by the consumer and unsolicited by the advisor. Similarly, employer plans that have a fiduciary working on the plan and really just utilize the advisor for the purchase of investments cannot hold the advisor as fiduciary.  

I wish that I could say that this conflict is being overblown, but sadly, I do not think it is. Companies with proprietary products, whether variable annuities, mutual funds, or something altogether different, often incentivize their agents and brokers to sell those products in return for increased commissions. I have witnessed it in my own career. It is not that these products are bad for the consumer, or do not do what the advisor says they will do; it is that there are often higher fees associated with those products, back-end or hidden fees that are not appropriately weighed by the advisor or client, costly features and limited investment options that can result in lower overall returns.

If I have one concern about the new reality, it is the misinterpretation of "best interest." As you know, cheapest does not always mean best. There are many reasons why a certain investment might be the best choice for a client. Sure, underlying fees are one of them, but they are far from the only one. Advisors should always be able to articulate why a particular investment is best, but it would not be in our clients' best interests to indiscriminately go with the cheapest option.

Additionally, there is the issue of investment performance. If a recommended investment underperforms, it does not mean that it wasn't in the best interest of the client at the time of selection. The market can be unpredictable, and no advisor can, with certainty, tell their clients how a particular investment should perform. Good advisors also provide much more for their clients than investment selection. Advice can run the gamut of virtually every major and minor financial decision. That advice has material value and should always remain part of the picture.

Despite some concerns, I firmly view this rule as a positive step for the industry. There has long been a dichotomy between investment advice and the middle class. Many people believe that you have to be a millionaire to have a financial advisor. The truth is that this has to change. We no longer live in a world of pensions and defined contribution plans. Social security is in flux. In today's world, the responsibility of retirement savings falls squarely on the shoulders of the consumer. So the industry had to change. Solid, affordable, and accessible advice needs to be available for all future retirees, whether they have $20,000 or $20,000,000.

Like every other piece of major legislation, though, we will not see the impact until the industry has time to react. My guess is that some products will cease to exist and new ones will pop up. Some mutual fund share classes will go away and others will appear. In total, we should all hope the result is not just more paperwork, but a world where people feel more empowered to retire on their terms with a broader understanding of how they got there.

Tell A Friend Tell A Friend
Connect with us on: Go to LinkedIn  Go to Facebook  Go to Twitter  

 Securities offered through American Portfolios Financial Services, Inc. Member FINRA/SIPC (FINRA/SIPC). American Portfolios Financial Services, Inc. and American Portfolios Advisors, Inc. are not affiliated with any other named business entities mentioned.

This communication is strictly intended for individuals residing in the state(s) of CA, CO, CT, FL, IL, KY, MA, MD, NJ, NY, PA and VA. No offers may be made or accepted from any resident outside the specific states referenced.

Check the background of this financial professional on FINRA's BrokerCheck.