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Annapolis, MD (PRWEB) October 26, 2016
Much has been written about the new Department of Labor (DOL) ruling that takes effect in April of 2017. In a nutshell, it simply states that advisors when advising on retirement accounts such as IRAs and the various types of Pension Plans, must act in the best interest of the client. Up until this ruling, an advisor could act in their own self-interest. This meant specifically that they did not have to treat a client's retirement money as though they were a fiduciary. They did not have to treat retirement money as though it were their own. I know it is hard to believe, but that was the law of the land.
What does the new ruling mean in practice? It may or may mean nothing to certain investors. It means a lot to advisors however and why fiduciary firms such as ours have had a recent and steady inquiry from advisors to see if they can affiliate to our business model.
Let’s look at the prime example of an individual leaving their company. Before the ruling, firms could “rollover” retirement assets into an IRA and along the way recommend an investment that was not in the client’s best interest. By not in the client’s best interest, the DOL means an investment that charges high commissions where there could be a cheaper substitute. It is estimated that this one ruling alone will save investors $17 billion per year in unnecessary fees starting in April.
There are two questions to ask if to fully understand the ramifications of this ruling. The first is what are firms doing to comply with the new rules? The second is, what does it mean to the relationship clients have with advisors?
So, what are firms doing?
1) Merrill Lynch/Bank of America has informed all of their advisors that they will no longer be able to receive commissions in retirement accounts they manage. It means every IRA account for example, will
A) Convert to a self-directed account where the client buys and sells on their own accord and the advisor receives zero compensation or
B) An automated solution, meaning, no access to the advisor or
C) The client will be converted to a fee-only arrangement. The conclusion is clear---Merrill Lynch/Bank of America---one of the firms that were most vigorously opposed to this ruling will lose revenue.
“Trust me, their brokers will only deal with you if they get paid so the real choice they are giving you is “our way or the highway.” I suspect many of their clients will switch to a fee arrangement. But I also suspect their will be an echo-boom to the ruling at these firms. When clients see what they are paying in fees that they could not see before, they will seek other types of cheaper, more transparent relationships and this will hurt firms such as Merrill Lynch/Bank of America. It will also hurt any other firm that derives the bulk of their revenue from commissions,” - Carlos Sera
2) LPL is another firm and their case is different. They are an independent network of brokers and based on the latest reports, they receive almost 40% of their revenue from the sale of high commission variable annuities. It is possible that LPL will be bought out by someone and many of their brokers will be scrambling to adjust to the new reality.
3) State Farm has simply said that their agents can no longer sell anything other than insurance.
In terms of the relationship clients will have with advisors, it will be less conflicted but advisors must find a way to make back the lost $17 billion. Count on much of this coming back to clients in the form of higher fees.
What does it mean to those clients that don’t convert or are ineligible for a fee arrangement? They are on their own.