DOL Folly #474: A 9-Step Process to End Fiduciary Financial Advice

If you want to see the death of a profession in front of your eyes, head over to Ron Rhoades’ blog. His latest is titled, “IRA Rollovers: Does Your Due Diligence Meet Regulatory Requirements?”, though it is more opinion and scary opinion for the future of the financial advice profession if ideas like this win in the fiduciary conversation.

I’ll summarize the recommendation in a conversation, since the legalese of the blog I think is mostly just used to justify the supposed importance of his idea of what “meets regulatory requirements” (though, having read the DOL rule, I’ll share there’s very little that is obvious as to what “meets regulatory requirements” at all… it’s very vague, very difficult to find anything concrete to hang your hat on, hence the pontificating on what those things may mean I suppose).

If you make it to the end, you’ll find Mr. Rhoades’ IRA Rollover Due Diligence Checklist (readers of my blogs my have seen this referred to this as Ron’s 12 Step Program somewhat facetiously, but he only lists 9 sections of steps).

Alright, let’s walk through a conversation with a client and advisor in practice who implements 50% of one step of nine from Rhodes' checklist:

Jane Doe – “Hi Advisor, I would like to rollover my 401(k) plan to an IRA after I retire since I hate my 401(k), my ex-employer, and I know your approach. I would like to hire you to invest my account according to my financial plan.”

Advisor – “Well, wait just a moment Jane, I first need to go through Ron Rhoades’ 12… I mean 9... step checklist with you. OK, can you provide me a statement of your current holdings?”

Jane – “Here’s my statement from last September.”

Advisor – “Jane, it’s March. Do you have something recent?”

Jane – “I haven’t changed funds. Can I just tell you what they are worth? Why do you even need to know?”

Advisor – “OK. Let’s look what the checklist says, it says I need to pay for a very expensive program that invades

your privacy and puts your security at risk just to give me your current balances. So, you have three investments with money in them. Can you provide me a list of all of the options in your plan?”

Jane – “Why would I do that?”

Advisor – “My checklist is asking for it.”

Jane – “OK, this is a hassle. Let me go online to see if I can find it.”

Advisor – “While you’re doing that, do you know if your plan mandates that you must leave it? Or, can you stay in the plan?”

Jane – “What does that matter? I’m telling you I’m rolling over my plan to an IRA because I need your help managing it within my plan. Aren’t there benefits to actually having someone manage and monitor my plan? If not, why am I paying for it?”

Advisor – “Yes, of course there is, and they outweigh all of the opportunity cost of leaving the funds behind, but, this guy made this checklist, and now it’s kind of common practice I’m just going through it. Ok, what’s next – do you have the plan’s Summary Plan Description?”

Jane – “The what?”

Advisor – “It’s usually online with the plan options. I’ll need a few hours to read through that once you find it.”

Jane – “It’s not online.”

Advisor – “Oh, well, your HR department can make a copy.”

Jane – “My boss is my HR department and I still haven’t told him I’m retiring.”

Advisor – “OK, if you can find one laying around the office that’s important. It’s on my list, so it’s important. Now, how about the 404a-5 disclosures?”

Jane – “Does that help get the rollover process started?”

Advisor – “No, it’s just more information on your plan.”

Jane – “The one I’m leaving?”

Advisor – “I haven’t decided that yet, I think that's step 9, we're still on 1.”

Jane – “No, I did. It’s my money. Wait, I thought you were an investment professional?”

Advisor – “Yes, I’m a fiduciary, and this is what fiduciaries do.”

Jane – “Turn down clients?”

Advisor – “No, I’m not turning this down. I just don’t know if I can accept it yet. I mean, I can. And, I am. It’s just a part of the process.”

Jane – “So, you’re going to invest this, great. Can we get on with your thoughts on what to do with it?”

Advisor – “Yes, of course I’ll share that, but we’re still about halfway through Step 1, there’s some I skipped over we’ll have to come back to. On to Step 2 (of 9).”

Jane – “You’re fired.”

Could you imagine? This is the advice of a ‘fiduciary’ expert. This is what he believes 50% of 1/9th of a conversation should be to rollover a 401(k) plan.

Can you even swap out one other profession, one other type of professional, and put them into this scenario, and end with a situation that is a net positive for the client?

There must be some legal theory that has stopped things as dumb as this from entering the world of ideas!

It’s easy when you don’t work for people – real people – to claim moral authority, to ‘virtue signal’, and claim to spend your time on righting their wrongs.

Every single Jane Doe in the real world, however, is going to lose fiduciary advice. Advice that only in the last several years has the market been able to make work for such a client. When I started it was million dollar minimum accounts, $20,000 minimum fees, and while that is the case at many fiduciary firms, it isn’t quite the norm for everyone.

It’s also a conflict that when academics claim to represent these people, but benefit from consulting fees for implementing unnecessarily complex information (wait, I though the DOL Rule was meant to end conflicted advice… we need a ‘conflicted advice’ rule for those giving advice on the ‘conflicted advice’ rule!.... regulation begets regulation!).

According to Rhoades, “the analysis of an IRA rollover is not an easy process.”

But, it is. The client chooses. It’s their money.

Harold Evansky, another supporter of the fiduciary rule, recently stated he did not understand why the fiduciary rule “would be a huge expense to small firms, I don’t know.”

It’s funny to me today to see how vastly different some see things in the world, or politics, etc., because as a small firm that works with every day people, I see nothing but costs (no benefits to the client).

Here are just a few recommended by my Rhoades in Step 1 of his checklist:

  • Asset aggregation programs – Not cheap!, not universally accepted by clients, a liability, and not necessary to recommend a rollover.

  • Time. $250+ per hour for advisors to make the same recommendation after several hours that they would have in just a few minutes.

  • Staff. Rhoades states that “firms will need to hire additional staff to undertake IRA rollover analyses. Such work might be suitable for new graduates.”

I find it contradictory and questionable to suggest that after all of the importance put on this idea that an advisor who is a fiduciary must perform these steps… that the task can simply be turned over to a recent graduate with no experience in a fiduciary capacity whatsoever.

Many have come up with hundreds, if not thousands of dollars, per client, for no observable benefit to the client. No changes will be made by the advisor, except that the chance of the client not hiring them increases exponentially.

This topic and Rollover checklist is merely a tool being suggested for people like Mr. Rhoades to recommend future lawsuits against advisor products and practices they personally dislike.

We once again see the fallacy that those in favor of this transformation of the definition of the idea of a fiduciary can’t, though it’s right in their face.

This isn’t about being a fiduciary. If it were, it wouldn’t both be so unnecessarily complex, and so simpleminded, all at once.

It’s about control. As is the end goal of all regulation. It is not to right a wrong, or improve the access of fiduciary planning, because the costs of this bad idea and the future ones that are coming won’t do that. It is to control markets, because Mr. Rhoades believes he has that ability, though history has a 100% failure rate at those who don’t go with the market.

And, it is because individuals like Mr. Rhoades are benefiting from the control. Hourly consulting fees on financial advisor compliance wouldn’t be quite as much if we didn’t have checklists like this!

(If I feel sadistic or need to laugh as I witness the death of personal financial planning, I may look at and do a few follow-ups the other parts of the 401(k) checklist.)

(I haven’t in the past used individuals names when questioning their ideas, but, these ideas are becoming a serious threat to the ability of individuals to receive the advice of a true fiduciary and since ideas run the world, I think I may continue to address those promoting bad ideas a little more directly.)

(Here’s another reason I see the world differently than Mr. Rhoades and others who support this rule. They believe that the client is the one with imperfect information on advisor and therefore must be protected. Nonsense. A client knows far more about what they will get out of a relationships than I do as an advisor! As an advisor, I have imperfect information on my client, though I am willing to work with them, to get to know them, to help them adapt good behaviors, to help them reach goals… if they choose to pay for my expertise. Again, it’s their choice! Just as the rollover is always the client’s choice! No one regrets making a rollover. And, if Mr. Rhoades felt that inappropriate rollovers were an issue one would think he would spend his time making recommendations for expanding access for fiduciaries to 401(k) accounts, rather than promoting a system that discourages rollovers.)

(Note: I request to review Summary Plan Descriptions as a matter of policy for all clients. To not do so and to make advice on a 401(k) at any point is malpractice. That should have been done well in advance of a rollover.)


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