DOL Fiduciary Rule Failure #781-Higher Costs Equal Lower Fees

February 5, 2017

Have you read how the DOL Fiduciary Rule is going to lower fees to the clients of financial advisors?

 

Someone forgot to tell Betterment, Schwab, all of the advisors raising their fees and minimums, and all of the firms outsourcing their clients to call centers.

 

The rule has lowered fees? This is just wrong. I’m looking at a 29-page article from an academicy, lawyerly type that outlines new steps for advisors who recommend rollovers.

 

Here’s how rollovers always happen... client calls seeking information on my services and value proposition. We meet and I give them as much free time as they need, in addition to a lot of valuable information. If they see value, they choose me.

 

Since I know the value of financial advice is more than anything in their 401(k), I throw out the 29-page, 12-step rollover paper because it has no purpose. The client – the party with the only judgement on value that matters – has determined that the cost of financial advice is worthwhile.

 

So too, by the way, have most non-lawerly, kinda academicy types who study the value of advice.

 

Here’s the truth of the matter though that no one is addressing… that consumer knows that they need help… and, it is in their interest to pay for that help. It’s in my interest to help.

 

However, more consumers will not seek help – at least not from a fiduciary – if they have to pay outrageous fees for an advisor to make a rollover recommendation.

 

Many studies suggest that this rule will cost advisors in the tens of thousands of dollars in annual income. Reducing an advisors take home pay by $30,000 doesn’t just reduce the number of new advisors, it also reduces the future value of an advisor’s business by a multiple. DALBAR is just one firm that has the cost at $600 - $1,000 per client per year. I estimate it is more for new clients and those that already know they want to hire me that I have to do a ridiculous inspection of prior to letting them know I agree that I can add value. 

 

This means that advisors will do what they, in fact, have been doing… raising fees, minimums, outsourcing clients to call centers, and otherwise putting them into a lesser service. They’ll compete more for higher-end clients, who will get more service, but will continue to charge more there.

 

Anyone who is suggesting this law is lower costs is ignoring economic reality. True fiduciary advisors will be paying more.

 

One group that so far no one seems concerned to comment on is Equity Indexed Annuity (EIA) salespersons, who the DOL has an open comment period at the moment on giving an exemption.

 

So, one group of advisors, most often the group that true fiduciaries complain the most about being conflicted and ripping off consumers, will get an exemption.

 

Because, of course as they say it, their product has “no fees” according to what my clients tell me their EIA salesperson tells them. 

 

Most will do better in bond funds or traditional annuities, and I’ve seen many get 50% more in income, but, I guess that 50% isn’t a fee. Just like the 10% commission paid to sell these products is just a gift… from investors to the agent. It’s not a fee!

 

Just to point out another obvious mistake with the argument that financial advisor fees are dropping… many firms are adding advice services. They are either reaching people who previously received free advice, or, who had a small account that they didn’t need ongoing advice (which, means that these clients are NOT being served by fiduciaries, because mutual fund companies should not be charging fees to recommend their own products if a client doesn’t need more services!) or they are reaching new markets. I think the later is commendable to try to serve, but Betterment just raised their fees.

 

So… explain that if you think fees are coming down please. And, explain to me why charging for unnecessary advice is not against the Fiduciary Rule. Despite not being a lawyer, I can read the law. Any firms adding advice and charging all of their clients for it can not be fiduciaries. They did not analyze each client for their need, and determine if they need advice or not. 

 

The new 'fiduciary' today is 'selling' an ongoing service instead of a 'product.' True fiduciaries are supposed to provide what's in a client's interest... am I wrong to be confused why these firms think their service is right for everyone? My service isn't right for everyone. 

 

Seems to me many are taking advantage of this rule, and no financial association that I can see is fighting back. 

 

And, I’m still waiting for someone to stick up for the client who goes to a mutual fund company for simple advice, and gets sold ongoing advice, which is in violation of the rule. All of those billions added to advice are an additional cost, not a reduced cost. My Ford dealer doesn’t charge me for advice on what car to buy because they are conflicted. Curious why mutual fund companies who previously gave free advice are getting credit for now charging for advice, and that’s a ‘lower’ cost?

 

And… why is it some mutual fund companies and brokers are allowed to charge different rates for different clients? Aren’t they fiduciaries now? Shouldn’t all of their clients get the same ‘best’ advice and ‘best’ cost? Why is it 1% for these mutual funds, and 0% for these ones? 

 

If I were a lawyer in the market... well... I'm not a lawyer (must explain why, just like my clients, I don't see the value in a $2,000 fee to follow a 29-page IRA, 12-step rollover)... but, it's just a thought for any one reading that is that maybe these firms are taking advantage of their clients paying 1-2% instead of 0%... 

 

And… while I’m at it… I’m not clear why as an independent advisor and true fiduciary that NAPFA is not leading to stand up for true, independent fiduciaries who are facing these firms that are taking advantage of what it means to be a fiduciary, but, more on that later.

 

Economic lesson of the article: Anyone suggesting that the government can lower fees with a rule is ignoring the fact that advisors and clients seek win-win relationships. All government does is impose cost. All cost does is remove transactions that would have otherwise happened. Since those transactions are no longer happening, it means that other services that offer less than a true fiduciary level of service will win, as will firms that receive exemptions. 

 

(Is it just strange to me that those who are supposed to be money experts don't know that higher costs on them to run a business equal lower benefits, lower transactions?)

 

 

 

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