Finance

• FINANCE
A new federal rule is about to shake up
the business of retirement financial advice
BY Steven Yoder ILLUSTRATION: Melissa Arendt
70 comstocksmag.com | November 2016

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• FINANCE
For a sense of how fungible the label “financial
adviser” has become, talk to Mike Chamberlain
of Chamberlain Financial Planning & Wealth
Management, which has an office in Sacramento.
“'Financial services industry' is a very broad
term,” he says, “and I don’t like being included in it.
It’s embarrassing — if I tell someone I’m a financial
adviser they immediately start to duck, thinking that
I’m trying to sell them something.”
Consider the alphabet soup of titles that adorn those
counseling people on their financial futures. They include Accredited
Financial Counselor (AFC), Accredited Investment
Fiduciary (AIF), Asset Protection Planner (APP) and Accredited
Asset Management Specialist (AAMS). Those are just the
A’s — the Financial Industry Regulatory Authority counts 167
such acronyms in all.
And a title doesn’t necessarily connote expertise. Some
designations have real teeth. Among other requirements, a
Certified Financial Planner (CFP) has to have advanced education
in finance (like a Ph.D. in business or economics) and do 30
hours of continuing education every two years. Others, like Behavioral
Financial adviser (BFA), just need to take two 2-month
courses from a particular for-profit college and pass an exam.
Soon all planners who give retirement investment advice
will have to adopt an additional designation, one that won’t
appear behind their name: fiduciary. That means they’ll be legally
bound to act in their clients’ best interest, not their own.
A U.S. Department of Labor rule set to kick in next April will
require retirement advisers to meet the fiduciary standard.
Chamberlain already operates as an accredited investment
fiduciary — his fees don’t waver depending on which
investment he recommends. That’s not true of many in the
industry, who earn commissions based on selling specific
products, some of them high-cost.
For fee-only advisers like Chamberlain, the effects will be
few. For other local financial planners who work on retirement
accounts, the change may well mean retooling how they make
money, and some may not survive. The rule applies only to retirement
accounts because only these accounts, such as 401(k)s and
IRAs, are under the DOL’s purview. The agency doesn’t regulate
regular investment accounts. Those are the province of the U.S.
Securities and Exchange Commission, which so far hasn’t required
all who give financial advice to operate as fiduciaries.
$17 BILLION IN HIDDEN FEES
Financial advisers get compensated in a range of ways, but
the two big ones are fee-only and commission. Typically,
those who earn fees charge a flat retainer that doesn’t change
with the advice they give, a fee that’s a percentage of their
client’s assets under management or an hourly rate. Those
72 comstocksmag.com | November 2016

"If I tell someone I’m a financial
adviser, they immediately start
to duck, thinking that I’m trying
to sell them something.”
— Mike Chamberlain, certified financial
planner and accredited investment fiduciary,
Chamberlain Financial Planning & Wealth Management
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who earn commissions typically make
money when they sell the customer a
specific product. Those who advise
retail investors say that generally,
the interests of fee-only advisers are
more likely to align with those of their
clients because they don’t have the
conflicts of interest that advisers on
commission do.
Conflicted financial advice costs
retirement savers millions each year.
A 2015 White House Council of Economic
Advisers analysis estimates
that hidden fees and commissions
drain away about 1 percentage point
of their investments annually. That
doesn’t sound like much. But if true,
because of the power of compounding,
an investor’s nest egg expands 25 percent
less than it otherwise would over
the course of 35 years. That means a
$10,000 investment would grow to just
$27,500 instead of $38,000 over that
time frame, according to the council.
All told, such losses cost U.S. savers
$17 billion a year, the study concludes.
“The fees and disclosures have
been awful in the IRA marketplace,”
says Mike Genovese, partner at
Genovese Burford & Brothers in Sacramento.
“It’s been a tough go for the
consumer in this country, because so
many [advisers] are incentivized to get
[clients] to roll over their money and
pay exorbitant fees,” he says.
The new regulation applies to any
advice on tax-advantaged retirement
plans given by independent securities
broker-dealers, insurance brokers, financial
planners and other financial pros. It
doesn’t ban commissions, but advisers
have to be able to show that they didn’t
benefit by recommending one product
over another. Advisers who still want to
earn commissions will have to present
their clients with a contract stipulating
that, among other things, the adviser will
act in the client’s best interest, receive
only reasonable compensation and disclose
how he or she gets paid.
But there’s one feature that makes
the best-interest contract important: It
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November 2016 | comstocksmag.com 73

• FINANCE
gives clients the right to sue their advisers
if they breach the fiduciary standard.
'A GAME-CHANGER'
Major insurance industry players have
made big moves to escape potential
liability. In January, insurance giant
AIG sold off its 5,000-person financial
adviser group. A month later, MetLife
did something similar, selling its entire
retail sales force of 4,000 life-insurance
agents who also act as financial advisers.
“The rule change is huge. It’s a
game-changer as far as the brokerage
industry goes,” says Thomas Potter, an
attorney who represents broker-dealers
and investment banks in regulatory
compliance issues at Burr & Forman, a
firm that serves the Southeastern U.S.
Locally, brokers and insurance
agents who work on commission or
receive other types of contingent incentives
are still figuring out how
they’ll adapt. “Some of them are hoping
this will be repealed, and others
are reading it and scratching their
heads to figure out how they’re going
to implement this,” says Sacramento
benefits lawyer James Paul of Paul
Benefits Law Corporation.
Local brokers affiliated with a national
broker-dealer like Merrill Lynch
or LPL Financial likely will find that
their main offices will handle the transition
and give them marching orders,
Paul says. But the brokers are going to
see changes — if they’re not operating
as fiduciaries, their national office
may assign a fiduciary to oversee them
when they’re dealing with a customer’s
retirement account, he says. Not so for
insurance agents, who typically have
looser arrangements with the firms
whose products they sell. They may be
on their own to come up with a detailed,
revised client agreement spelling out
their fiduciary responsibilities, Paul says.
Some may bail out of the retirement
plan business altogether, or revise their
business plan. Jan Pinney of Roseville-
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ased Pinney Insurance says the new
rule won’t damage his own company to
the same extent because 95 percent of
the investments he sells aren’t retirement
products and so aren’t affected.
The other 5 percent, mostly retirement
annuities, presumably will be subject
to it, meaning Pinney Insurance will
need to sign best-interest contracts with
those clients. But he says it’s likely he’ll
just quit selling those. Since best-interest
contracts give clients the ability to
sue, Pinney thinks the liability risks are
just too high to keep selling annuities.
As for purely fee-only advisers, even
though they won’t face major changes,
there’s one type of transaction they
should pay close attention to under the
rule: rollovers. When a customer seeks
advice on rolling money out of a 401k
to an IRA, the planner will need to be
able to document that the advice given
was in the customer’s best interest, says
David O’Brien, board member at the
fee-only National Association of Personal
Financial advisers. They should
also check that their client agreements
comply with the language called for in
the rule, he says.
As for businesses that offer retirement
plans, Paul says they should pay close attention
since they could be on the hook
too in a lawsuit or a DOL compliance
check. The rule change means it’s more
important than ever that they’re transparent
with employees — showing fees as
a line item on retirement plan statements
and ensuring that the company’s retirement
plan adviser is a fiduciary. “The
DOL does investigate retirement plans,”
he says. “You have to be able to demonstrate
that you made a prudent decision
and have that documented.” And if your
adviser hasn’t at least had a conversation
with you about the DOL rule change, you
should be concerned, he adds.
A few sectors can expect the new
regulation to bring in new clients. For
attorneys specializing in benefits law,
business is going to be very good, Potter
says. And one local firm, Auburn-based
Riskalyze, is promoting tools that it says
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November 2016 | comstocksmag.com 75

• FINANCE
are tailored to help advisers adapt. Among other products,
the company has developed software that allows advisers
to set a risk number for each client based on their goals, automates
the development of a portfolio that aligns with that
risk number and creates documentation showing how each
investment decision was aligned with that customer’s best interest
— which will be critical in reducing advisers’ liability,
says Riskalyze Co-Founder Michael McDaniel.
(The Financial Planning Association of Northern California
had no members willing to comment on the new rule.
And several local advisers representing the country’s largest
independent broker-dealers either didn’t respond or referred
inquiries to their central offices, which didn’t respond.)
THE FIRST DOMINO
There’s an outside chance the new regulation won’t survive.
Three federal lawsuits have been filed against the Department
of Labor by national investment adviser groups and business
advocates. On the other side, a coalition representing
large financial planner associations has filed supporting
documentation and arguments defending the DOL.
Similarly, the rule has cleaved opinion among some
Sacramento retirement professionals. Pinney believes
inserting a cumbersome new rule into the marketplace
will result in brokers dropping small investors; if so, those
customers won’t have access to retirement advice, goes the
argument. If a customer has even $500,000 to invest and the
broker is charging a ½-point fee, that account will generate
$2,500 a year — not enough to justify the legal risks, he says.
On the other side, Chamberlain doesn’t think it goes
far enough. Customers won’t bother to read the new bestinterest
contract that the adviser asks them to sign, he
says. And he points out that the rule covers only retirement
accounts. That means customers won’t necessarily know
that when their adviser switches to discussing their nonretirement
accounts, that advice doesn’t have to meet a
fiduciary standard.
That separation of the financial-advice world into
retirement and non-retirement territories could end soon.
In May, Securities and Exchange Commission Chair Mary Jo
White said her agency would propose a more sweeping rule next
spring that will require all financial advice — whether related
to retirement plans or not — to be subject to the fiduciary
standard. O’Brien thinks the DOL rule has opened the door to
that more dramatic change: “It’s the first domino,” he says. •
Steven Yoder writes about business, real estate and criminal
justice. His work has appeared in The Fiscal Times, Salon, The
American Prospect and elsewhere. On Twitter @syodertweets,
and online at stevenyoder.net.
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