Tags: president trump | unified fiduciary standards | ira | erisa

Will Trump Simplify Unified Fiduciary Standards?

Will Trump Simplify Unified Fiduciary Standards?

President-elect of The United States Donald J. Trump speaks to Republican leadership at Trump International Hotel the day before his swearing in January 19, 2017, in Washington, D.C. (Chris Kleponis-Pool/Getty Images)

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Thursday, 19 January 2017 03:41 PM Current | Bio | Archive

The Department of Labor’s Fiduciary Rule sponsored by Senator Elizabeth Warren and President Obama "effective April 10, 2017" essentially extends Employee Retirement Income Security Act (ERISA) requirements covering employer-sponsored retirement plans to Individual Retirement Accounts, thereby requiring financial advisors to put their clients’ interests first when offering IRA investment recommendations that result in compensation for the advisor. Currently, financial advisors are governed by regulatory requirements that differ based on licenses held and/or the regulatory body that has jurisdiction. It is the Department of Labor’s (DOL) view that these standards are insufficient and allow advisors to recommend products that are oftentimes more costly to clients than alternative solutions. In fact, the DOL commonly cites a highly controversial study that concludes IRA investors sacrifice returns due to recommendations from conflicted compensation arrangements.

The financial services industry has no objection with the core tenet of the rule. It is the complexity, cost, and ambiguity of the rule that is creating anguish for the industry. For example, a study performed by the Financial Services Institute (FSI) in conjunction with The Oxford Exchange has estimated that the total cost for the industry to comply with the rule will be $3.9 billion, which is nearly 20 times the DOL’s original estimate. While the final cost is debatable, what cannot be disputed is that firm after firm has indicated that they expect to spend $10-50 million in the first year alone to implement the rule. These estimates do not include the new and escalating compliance and legal costs that will result from this rule.

The DOL’s View of the World:

• Clients are often provided recommendations for expensive, complex products that offer more compensation to advisors than alternative solutions.
• In general, a level fee arrangement — absent of conflicts — is better for clients than paying commissions.
• While advisors offer valuable advice, most clients overpay for their investment recommendations.
• Low cost index and/or target date funds are often the right solution for most retirement savings. In fact, complex strategies are typically unnecessary to achieve retirement goals.
• It is more advantageous for clients to keep their money in existing 401(k) plans versus rolling their assets into an IRA.
• Robo-advisors will increasingly be able to fill any advice gap that may occur.

Financial Industry Concerns About the Rule:

• Financial advice for small investors will be more difficult to obtain (or more cost-prohibitive).
• Is it even possible to fully comply with the rule?
• Recommendations will be second guessed and subject to additional legal liability.
• The "neutral factor" requirement is virtually impossible to satisfy.
• The applicable date does not provide the industry with sufficient time to comply.
• Sales of annuities — the only product that can guarantee income for life, will be crushed.
• Small distributors and independent insurance agents will find it difficult to compete.
• Additional unintended consequences of the rule: higher advisory fees on certain assets and individual fixed income securities will be more expensive to purchase.

Our recommendation is to replace the rule with something much simpler that still reduces conflicts of interest. For years, we have been in favor of a unified fiduciary standard because the increased work and liability will convince many advisors that serving smaller clients is simply not worth the effort and the risk. Our objection to the DOL rule is the client’s potential for added expenses and their inability to receive investment advice.

Richard S. Bernstein, CEO of Richard S. Bernstein & Associates, Inc., West Palm Beach, is an insurance advisor for high net worth business leaders, families, businesses, municipalities, and charitable organizations. An insurance advisor to many of America’s wealthiest families, he is a writer, trusted local and national media resource and expert speaker on estate planning and health insurance. Visit his website at www.rbernstein.com. To read more of his reports — Click Here Now.

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The Department of Labor’s Fiduciary Rule sponsored by Senator Elizabeth Warren and President Obama "effective April 10, 2017" essentially extends Employee Retirement Income Security Act (ERISA) requirements covering employer-sponsored retirement plans to Individual Retirement Accounts.
president trump, unified fiduciary standards, ira, erisa
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Thursday, 19 January 2017 03:41 PM
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