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Banking & Finance

Advisers: New Federal Fiduciary Standard Adds Transparency But Could Price Out Small Investors

By Jenny Callison, posted Apr 11, 2016
Several days after the U.S. Department of Labor issued its new rule setting a fiduciary standard for financial advisers in their work with clients’ retirement accounts, firms large and small are still examining how the rule will affect the industry and retirement investors.

Scott Winslow, a principal of Wilmington-based, independent firm Nabell Winslow, supports the need for transparency for financial advisers and said Friday he does not regard the fiduciary rule – released April 6 – as government overreach. In fact, his firm found the rule “lighter” than expected, with more compromise measures. He pointed also to the fact that the rule will not take effect until January 2018 rather than the expected January 2017, giving financial advisers more time to prepare for compliance.

Those financial advisers who will feel the impact of the new rule are those who take commissions from investors for the products they sell, rather than charging an annual fee that is a percentage of the client’s assets. Winslow said that no more than 10 percent of his firm’s investments are commission-based.

Why the need for a fiduciary standard? In its summary of the rule, DOL stated that since 1974, when Congress enacted the Employee Retirement Income Security Act to protect tax-preferred retirement savings, the retirement savings landscape has shifted dramatically. Employer-sponsored defined benefit plans are disappearing, replaced by 401(k) plans, according to DOL, and Individual Retirement Accounts and annuities are growing as well. Many of these products did not exist in 1974.

In recent years, the summary continued, “Many investment professionals, consultants, brokers, insurance agents and other advisers operate within compensation structures that are misaligned with their customers' interests and often create strong incentives to steer customers into particular investment products.”

The new rule creates a fiduciary standard for retirement investments in which the advisors must make decisions in the best interests of their clients rather than adhere to  a “suitability” standard, according to Investment Insider, which explained that an investment that is profitable to the adviser may be suitable for a particular client but may not be in the client’s best interest.

When an adviser does recommend a client purchase a commission-based annuity or mutual fund product, that adviser must disclose his or her commission and file a Best Interest Contract Exemption form with the Securities and Exchange Commission, the rule states.

The national firm Edward Jones, whose advisers do sell many commission-based retirement investment products, is taking a close look at the rule and what it means for its clients, spokeswoman Regina DeLuca-Imral said Friday.

“While it is too early to determine [the rule’s] full impact, we have been working for some time to provide solutions for our clients that comply with the rule,” she said in a subsequent email. “We strive always to act in our clients' best interest and we support rules that further that standard. At the same time, we believe investors should have a choice in how they access and pay for investment advice. Until we've had the opportunity to study the rule in detail, we can't comment further.”
 
Investors’ access to advice and services concerns Vinton Fountain of Wilmington-based Fountain Financial Associates, whose firm, like Nabell Winslow, deals primarily with fee-based investments.

“There is a lot of change underway in our industry,” Fountain said Monday. “Most of it will be really good for consumers.

Some of the changes, however, will hurt smaller investors, because of the costs of compliance with the new fiduciary rule, Fountain said.

"When you have a regulatory impact like this, the cost to support certain clients will ... price them out,” he added. “Professionals in the industry will move away from providing advice for small retirement accounts.”

Winslow foresees a similar future for small investors, who need retirement investment advice but will find it hard to pay potentially steeper fees. He is also concerned that some financial advisers who are nearing retirement age may just close up shop, or that small firms will simply merge with larger ones.

"We’re going to see mergers and acquisitions from small to large conglomerate firms because of the cost of compliance," he said. "We'll see industry consolidation. A lot of big firms will spend a ton of money to make sure they comply."
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