Obama directs Labor Department to move ahead on fiduciary rule

Earlier today, the white house put out a press release stating that the president plans to direct the Department of Labor to move ahead with a proposal that would raise investment-advice standards for brokers handling retirement accounts, arguing that conflicted advice is costing Americans billions.

It is the opinion of this author that the government doesn't understand that the cost of distribution is the main reason for the high costs of financial products in the retail channel, and that registered reps steer people into products whose expenses cover the cost of distribution--not necessarily because they want Americans to pay excessively for those products.




Professionally, in my experience, most of the financial service professionals (registered reps, financial advisers, financial consultants, RIAs, etc.) all genuinely try to give good advice or good counsel to their clients and prospects.  No one works for free, and thus when working with a client often times the mechanics of payment force this financial professional to choose between embedding their fees into the products (mutual fund 12b-1's for example) or working with clients on a fee-only arrangement where the client is invoiced.  


Strictly from the perspective of ease, it is often easier to have the investments foot the bill of the professional.  That is what the government is using as its primary factor in stating that the industry costs clients billions.  Not that the advice is bad, but rather that the investments are more expensive and thus intentionally harmful when really, they are more expensive due to the fees paid for the advice received.  


A good old American exchange of fees for services rendered.  


Don't get me wrong, I'm all for the idea that financial consultants must be required to always act in the client's sole interest when giving advice, however this rule will paint all financial professionals as fiduciary advice givers when many of them really aren't doing that or are even qualified to do so.  It's a poorly written rule from where I sit and think it needs to go back to the drawing board.

The link to the press release here: 
  
http://www.whitehouse.gov/sites/default/files/docs/cea_coi_report_final.pdf


**UPDATE**
http://www.sec.gov/news/speech/022015-spchcdmg.html#.VOtkXi65lz6


See the above link.  Apparently, SEC Commissioner Gallagher agrees with my opinion.  Within this speech is some pretty harsh criticism of the DOL's rule making calling it a "runaway train" and goes on to really pick apart the White House's internal memo.  Worth the read.



- Jason Grantz

Fiduciary, as easy as 1., 2., 3.,

A solid reminder piece was written and published today on NAPA-net.org.  The article was titled '3 Things Every Plan Committee Member should know'.  Here is the link.
 
3 Things Every Plan Committee Member Should Know

Here are the three things:
  

1. You are an ERISA fiduciary. Even as a small and relatively silent member of the committee, you’ll direct and influence retirement plan money — and it’s that influence over the plan’s assets that makes you an ERISA fiduciary. 

2. As an ERISA fiduciary, your liability is personal. How personal? Well, you may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. You can obtain insurance to protect against that personal liability — but that’s probably not the fiduciary liability insurance you may already have in place, or the fidelity bond that is often carried to protect the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond. If you’re not sure what you have, find out. Today. 

3. You are responsible for the actions of other plan fiduciaries. All fiduciaries have potential liability for the actions of their co-fiduciaries. For example, the Department of Labor notes that if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary is liable as well. So, it’s a good idea to know who your co-fiduciaries are—and to keep an eye on what they do, and are permitted to do.

Besides the three basic's, which essentially say, being a fiduciary is serious, potentially hazardous and requires responsible caution, the article also raises a few very good points, namely:

- Many plan committee members come from staff of the employer and are frequently put on the committee for no other reason than that someone has to do it.  Background may not be part of the decision and expertise may be absent altogether.


- Fiduciaries are required to act solely (re: exclusively, i.e. ONLY) in the best interests of the plan participants and beneficiaries, and that they MUST act prudently, usually means they have process' in place for making important decisions.  It goes on to iterate the importance of investment diversification and ensuring that the plan pays only reasonable expenses for services.


Finally, the best point that the article makes, in my opinion, is that it's hard  to be a plan fiduciary.  This is especially true if the committee hasn't read plan documents, doesn't have any policies or procedures to follow or doesn't understand how much they are being charged, and for what or how the fees are being charged. 

Unfortunately, in my professional experience, often it is the case that the expert standard of care fiduciaries are bound to under ERISA is not realistic to expect of the plan committee.  Most plan committees are well intentioned, but not experts.   A wise person once told me that in the absence of expertise when expertise is needed, a prudent person will hire it.  Good advice for the majority of well intentioned, inexpert fiduciaries.

- Jason Grantz