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• FINANCE<br />
A new federal rule is about to shake up<br />
the business of retirement financial advice<br />
BY Steven Yoder ILLUSTRATION: Melissa Arendt<br />
70 comstocksmag.com | November 2016
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November 2016 | comstocksmag.com 71
• FINANCE<br />
For a sense of how fungible the label “financial<br />
adviser” has become, talk to Mike Chamberlain<br />
of Chamberlain Financial Planning & Wealth<br />
Management, which has an office in Sacramento.<br />
“'Financial services industry' is a very broad<br />
term,” he says, “and I don’t like being included in it.<br />
It’s embarrassing — if I tell someone I’m a financial<br />
adviser they immediately start to duck, thinking that<br />
I’m trying to sell them something.”<br />
Consider the alphabet soup of titles that adorn those<br />
counseling people on their financial futures. They include Accredited<br />
Financial Counselor (AFC), Accredited Investment<br />
Fiduciary (AIF), Asset Protection Planner (APP) and Accredited<br />
Asset Management Specialist (AAMS). Those are just the<br />
A’s — the Financial Industry Regulatory Authority counts 167<br />
such acronyms in all.<br />
And a title doesn’t necessarily connote expertise. Some<br />
designations have real teeth. Among other requirements, a<br />
Certified Financial Planner (CFP) has to have advanced education<br />
in finance (like a Ph.D. in business or economics) and do 30<br />
hours of continuing education every two years. Others, like Behavioral<br />
Financial adviser (BFA), just need to take two 2-month<br />
courses from a particular for-profit college and pass an exam.<br />
Soon all planners who give retirement investment advice<br />
will have to adopt an additional designation, one that won’t<br />
appear behind their name: fiduciary. That means they’ll be legally<br />
bound to act in their clients’ best interest, not their own.<br />
A U.S. Department of Labor rule set to kick in next April will<br />
require retirement advisers to meet the fiduciary standard.<br />
Chamberlain already operates as an accredited investment<br />
fiduciary — his fees don’t waver depending on which<br />
investment he recommends. That’s not true of many in the<br />
industry, who earn commissions based on selling specific<br />
products, some of them high-cost.<br />
For fee-only advisers like Chamberlain, the effects will be<br />
few. For other local financial planners who work on retirement<br />
accounts, the change may well mean retooling how they make<br />
money, and some may not survive. The rule applies only to retirement<br />
accounts because only these accounts, such as 401(k)s and<br />
IRAs, are under the DOL’s purview. The agency doesn’t regulate<br />
regular investment accounts. Those are the province of the U.S.<br />
Securities and Exchange Commission, which so far hasn’t required<br />
all who give financial advice to operate as fiduciaries.<br />
$17 BILLION IN HIDDEN FEES<br />
Financial advisers get compensated in a range of ways, but<br />
the two big ones are fee-only and commission. Typically,<br />
those who earn fees charge a flat retainer that doesn’t change<br />
with the advice they give, a fee that’s a percentage of their<br />
client’s assets under management or an hourly rate. Those<br />
72 comstocksmag.com | November 2016
"If I tell someone I’m a financial<br />
adviser, they immediately start<br />
to duck, thinking that I’m trying<br />
to sell them something.”<br />
— Mike Chamberlain, certified financial<br />
planner and accredited investment fiduciary,<br />
Chamberlain Financial Planning & Wealth Management<br />
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who earn commissions typically make<br />
money when they sell the customer a<br />
specific product. Those who advise<br />
retail investors say that generally,<br />
the interests of fee-only advisers are<br />
more likely to align with those of their<br />
clients because they don’t have the<br />
conflicts of interest that advisers on<br />
commission do.<br />
Conflicted financial advice costs<br />
retirement savers millions each year.<br />
A 2015 White House Council of Economic<br />
Advisers analysis estimates<br />
that hidden fees and commissions<br />
drain away about 1 percentage point<br />
of their investments annually. That<br />
doesn’t sound like much. But if true,<br />
because of the power of compounding,<br />
an investor’s nest egg expands 25 percent<br />
less than it otherwise would over<br />
the course of 35 years. That means a<br />
$10,000 investment would grow to just<br />
$27,500 instead of $38,000 over that<br />
time frame, according to the council.<br />
All told, such losses cost U.S. savers<br />
$17 billion a year, the study concludes.<br />
“The fees and disclosures have<br />
been awful in the IRA marketplace,”<br />
says Mike Genovese, partner at<br />
Genovese Burford & Brothers in Sacramento.<br />
“It’s been a tough go for the<br />
consumer in this country, because so<br />
many [advisers] are incentivized to get<br />
[clients] to roll over their money and<br />
pay exorbitant fees,” he says.<br />
The new regulation applies to any<br />
advice on tax-advantaged retirement<br />
plans given by independent securities<br />
broker-dealers, insurance brokers, financial<br />
planners and other financial pros. It<br />
doesn’t ban commissions, but advisers<br />
have to be able to show that they didn’t<br />
benefit by recommending one product<br />
over another. Advisers who still want to<br />
earn commissions will have to present<br />
their clients with a contract stipulating<br />
that, among other things, the adviser will<br />
act in the client’s best interest, receive<br />
only reasonable compensation and disclose<br />
how he or she gets paid.<br />
But there’s one feature that makes<br />
the best-interest contract important: It<br />
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November 2016 | comstocksmag.com 73
• FINANCE<br />
gives clients the right to sue their advisers<br />
if they breach the fiduciary standard.<br />
'A GAME-CHANGER'<br />
Major insurance industry players have<br />
made big moves to escape potential<br />
liability. In January, insurance giant<br />
AIG sold off its 5,000-person financial<br />
adviser group. A month later, MetLife<br />
did something similar, selling its entire<br />
retail sales force of 4,000 life-insurance<br />
agents who also act as financial advisers.<br />
“The rule change is huge. It’s a<br />
game-changer as far as the brokerage<br />
industry goes,” says Thomas Potter, an<br />
attorney who represents broker-dealers<br />
and investment banks in regulatory<br />
compliance issues at Burr & Forman, a<br />
firm that serves the Southeastern U.S.<br />
Locally, brokers and insurance<br />
agents who work on commission or<br />
receive other types of contingent incentives<br />
are still figuring out how<br />
they’ll adapt. “Some of them are hoping<br />
this will be repealed, and others<br />
are reading it and scratching their<br />
heads to figure out how they’re going<br />
to implement this,” says Sacramento<br />
benefits lawyer James Paul of Paul<br />
Benefits Law Corporation.<br />
Local brokers affiliated with a national<br />
broker-dealer like Merrill Lynch<br />
or LPL Financial likely will find that<br />
their main offices will handle the transition<br />
and give them marching orders,<br />
Paul says. But the brokers are going to<br />
see changes — if they’re not operating<br />
as fiduciaries, their national office<br />
may assign a fiduciary to oversee them<br />
when they’re dealing with a customer’s<br />
retirement account, he says. Not so for<br />
insurance agents, who typically have<br />
looser arrangements with the firms<br />
whose products they sell. They may be<br />
on their own to come up with a detailed,<br />
revised client agreement spelling out<br />
their fiduciary responsibilities, Paul says.<br />
Some may bail out of the retirement<br />
plan business altogether, or revise their<br />
business plan. Jan Pinney of Roseville-<br />
74 comstocksmag.com | November 2016
ased Pinney Insurance says the new<br />
rule won’t damage his own company to<br />
the same extent because 95 percent of<br />
the investments he sells aren’t retirement<br />
products and so aren’t affected.<br />
The other 5 percent, mostly retirement<br />
annuities, presumably will be subject<br />
to it, meaning Pinney Insurance will<br />
need to sign best-interest contracts with<br />
those clients. But he says it’s likely he’ll<br />
just quit selling those. Since best-interest<br />
contracts give clients the ability to<br />
sue, Pinney thinks the liability risks are<br />
just too high to keep selling annuities.<br />
As for purely fee-only advisers, even<br />
though they won’t face major changes,<br />
there’s one type of transaction they<br />
should pay close attention to under the<br />
rule: rollovers. When a customer seeks<br />
advice on rolling money out of a 401k<br />
to an IRA, the planner will need to be<br />
able to document that the advice given<br />
was in the customer’s best interest, says<br />
David O’Brien, board member at the<br />
fee-only National Association of Personal<br />
Financial advisers. They should<br />
also check that their client agreements<br />
comply with the language called for in<br />
the rule, he says.<br />
As for businesses that offer retirement<br />
plans, Paul says they should pay close attention<br />
since they could be on the hook<br />
too in a lawsuit or a DOL compliance<br />
check. The rule change means it’s more<br />
important than ever that they’re transparent<br />
with employees — showing fees as<br />
a line item on retirement plan statements<br />
and ensuring that the company’s retirement<br />
plan adviser is a fiduciary. “The<br />
DOL does investigate retirement plans,”<br />
he says. “You have to be able to demonstrate<br />
that you made a prudent decision<br />
and have that documented.” And if your<br />
adviser hasn’t at least had a conversation<br />
with you about the DOL rule change, you<br />
should be concerned, he adds.<br />
A few sectors can expect the new<br />
regulation to bring in new clients. For<br />
attorneys specializing in benefits law,<br />
business is going to be very good, Potter<br />
says. And one local firm, Auburn-based<br />
Riskalyze, is promoting tools that it says<br />
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November 2016 | comstocksmag.com 75
• FINANCE<br />
are tailored to help advisers adapt. Among other products,<br />
the company has developed software that allows advisers<br />
to set a risk number for each client based on their goals, automates<br />
the development of a portfolio that aligns with that<br />
risk number and creates documentation showing how each<br />
investment decision was aligned with that customer’s best interest<br />
— which will be critical in reducing advisers’ liability,<br />
says Riskalyze Co-Founder Michael McDaniel.<br />
(The Financial Planning Association of Northern California<br />
had no members willing to comment on the new rule.<br />
And several local advisers representing the country’s largest<br />
independent broker-dealers either didn’t respond or referred<br />
inquiries to their central offices, which didn’t respond.)<br />
THE FIRST DOMINO<br />
There’s an outside chance the new regulation won’t survive.<br />
Three federal lawsuits have been filed against the Department<br />
of Labor by national investment adviser groups and business<br />
advocates. On the other side, a coalition representing<br />
large financial planner associations has filed supporting<br />
documentation and arguments defending the DOL.<br />
Similarly, the rule has cleaved opinion among some<br />
Sacramento retirement professionals. Pinney believes<br />
inserting a cumbersome new rule into the marketplace<br />
will result in brokers dropping small investors; if so, those<br />
customers won’t have access to retirement advice, goes the<br />
argument. If a customer has even $500,000 to invest and the<br />
broker is charging a ½-point fee, that account will generate<br />
$2,500 a year — not enough to justify the legal risks, he says.<br />
On the other side, Chamberlain doesn’t think it goes<br />
far enough. Customers won’t bother to read the new bestinterest<br />
contract that the adviser asks them to sign, he<br />
says. And he points out that the rule covers only retirement<br />
accounts. That means customers won’t necessarily know<br />
that when their adviser switches to discussing their nonretirement<br />
accounts, that advice doesn’t have to meet a<br />
fiduciary standard.<br />
That separation of the financial-advice world into<br />
retirement and non-retirement territories could end soon.<br />
In May, Securities and Exchange Commission Chair Mary Jo<br />
White said her agency would propose a more sweeping rule next<br />
spring that will require all financial advice — whether related<br />
to retirement plans or not — to be subject to the fiduciary<br />
standard. O’Brien thinks the DOL rule has opened the door to<br />
that more dramatic change: “It’s the first domino,” he says. •<br />
Steven Yoder writes about business, real estate and criminal<br />
justice. His work has appeared in The Fiscal Times, Salon, The<br />
American Prospect and elsewhere. On Twitter @syodertweets,<br />
and online at stevenyoder.net.<br />
Providing trusted<br />
retirement advice<br />
for over 23 years.<br />
Hanson McClain Advisors is an Investment Advisor registered with the Securities and Exchange Commission (08/16). Published in August, 2011, 2012, 2013, 2014, 2015, 2016: Barron’s Top 100 Independent Wealth Advisors. Rankings<br />
reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms and the quality of the advisors’ practices. Barron’s© magazine is a trademark of Dow Jones L.P.<br />
76 comstocksmag.com | November 2016