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Debate Continues Over New Fiduciary Rule

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Debate Continues Over New Fiduciary Rule

Last week the U.S. Justice Department filed a court brief with the Court of Appeals arguing that the Department of Labor’s fiduciary rule, also called the conflict of interest rule, should be upheld, with the exception of allowing class-action lawsuits to be filed under the best-interest contract exemption.

The first phase of the rule, which requires that financial advisors act in the best interests of their clients, was rolled out last month. The rule also gives clients the right to file class-action lawsuits against firms that ignore the rule.

The hotly contested rule is far from final. The DOL is revising it and is asking for public feedback on what parts of the rule should be revised, if at all, and whether the January 1, 2018 applicability date should be delayed.

According to the Economic Policy Institute, every year, retirement savers lose $17 billion acting on advice from financial advisors who have conflicts of interest. Choosing a financial advisor is akin to selecting doctor, it’s not to be done casually.

According to the Economic Policy Institute, every year, retirement savers lose $17 billion acting on advice from financial advisors who have conflicts of interest.

Linda Sherry, director of national priorities for Consumer Action, weighs in on the issue, “The fiduciary rule is a win-win for consumers, as well as the banks and brokerages that serve retirement account customers. Consumer Action doesn’t see any downsides, and in fact, we are mystified as to why any firm would want to recommend retirement account investments that are not in the investor’s best interests.”

She points out why the rule is important, “Much of consumers hard-earned savings are wasted by unnecessary fees and commissions and predatory products. The higher the fees and commissions, the less of a person’s money is going to compounded investment earnings. This has a very negative effect on returns over time. It means that people who are doing their best to save for retirement might end up needing taxpayer support in their old age instead of having enough of their savings to see them through their lives.”

Furthermore, she says, “The rule was written with a big out to allow companies to continue in the same vein they always have if they wish to collect commissions, revenue sharing, or other types of compensation—by meeting specific requirements and entering into a contract with the client. (BIC exemption). Of course, even this is not acceptable to the industry, which complains that the best interest contract exemption is still too much of a burden. Boo-hoo!”

But there is another side to the story. “From the standpoint of small, community banks, we’re opposed the rule,” says Chris Cole, executive vice president and senior regulator counsel for the Independent Community Bankers Association.

He explains, “Many of our guys work in the wealth management division with commissioned-based accounts in the $100,000-$300,000 range,” and find the rule onerous. “Some of our guys have gotten out of the market of offering advisory services. Too much regulation means the end of services. Just like a lot banks got of mortgages because of Dodd-Frank.”

Bank board of directors, no doubt, are already grappling with what the rule could potentially mean in terms of compliance, employee and legal issues.

Comments
Martin
Martin   |     |   Comment #1
Investments other than savings are not FDIC insured. Anyone investing in such investment vehicles is exposed to losses.
Class action is not the solution because the investors agree to the losses prior to the investments, it is written everywhere, including the fine print. The investment firms do not have the money of the investors, they are spread around the globe for better returns. Suing the advisor is pointless, Madoff comes to mind where billions upon billions were lost and the investors recovered only a small portion of it. If class action can bring all of the money back, I'm for it, but once the money are lost, any kind of lawsuit is against the investor because now the big lawyers will take 50% of what ever is recovered and double rob the investors.
Lrdx
Lrdx   |     |   Comment #2
Losing money on investment is totally different to losing money on unnecessary fees and commissions.

If the you invest in S&P500 and it drops 30%, though luck, you lost 30%. You can't sue for this loss, sure. But when the index rebounds and grows back +50% you still end up at +5%.

If instead of investing in a 0.03% expense ratio index fund the advisor suggest you to invest in some closet indexer with 2% management fee, you will end up at ~+0.6% if the 50% rebound happens immediately next year. Even less if it happens later. *Best case* fees ate up all your gains. More realistically, you are still in negative. Oh **** right you want to sure for this.
Martin
Martin   |     |   Comment #4
Lrdx, the fees and commissions are disclosed upfront, having second thought after the investment is done, is not an excuse to sue the advisors for the fees and commissions and pretend to be victim. What if you double and triple your investment and paid the fees, would you complain then about the fees and return the profits back just to recoup the fees?
Lrdx
Lrdx   |     |   Comment #6
One goes to a financial advisor because they don't know how to invest, so having the fees disclosed up front means nothing in this context. And good luck understanding all the secret fees of a 40 page annuity contract.

As for if any 'interesting' investment could be any better then indexing, there is zero evidence of it in the long term. Sure, short term you can get lucky. But again, are you paying an advisor to select you an investment where you might get lucky, but worse off on average?
Anony
Anony   |     |   Comment #3
Annuity, my friends, annuity that's what you need. Shhhhh...I make a 6% commission upfront and you get stuck with 40 pages of contract language. Oh, and here's a mutual fund (yep, I get a commission here too) that you absolutely must have. But, and this is vital to your future, we need to meet for coffee twice a year to discuss your portfolio. My expert services (I look at your quarterly reports) are billed at a mere 1% of your balance. Churning doesn't pay with low commissions or we'd still be doing that.

I completely forgot. You NEED insurance. Here's my (what we sell and I earn commissions on) recommendation.
Martin
Martin   |     |   Comment #5
Anony, I think you are misleading the readers, the commission on the annuities is paid by the insurance company, every penny invested by the consumer is put to work, second, very few people fall for the mutual fund investments with high fees scheme these days, ETFs replaced most of the mutual fund indexes. It is no longer needed a financial advisor today if you know where to look for honest and free advice online. People are no longer stupid to pay for "expert" consultations.
Lrdx
Lrdx   |     |   Comment #7
Most people, maybe. But both stupid people and their predators still exist. Hence the rule.
Bogie
Bogie   |     |   Comment #8
Such a childish remark.

Naive and gullible people are not stupid people. Just easy targets to be taken advantage of by unscrupulous people.
Anony
Anony   |     |   Comment #9
Nonsense. Where on earth do you think the money for the commission comes from? It comes directly from the client's pocket. Read the surrender terms along with time limits and the "hidden" costs become quite clear.
Martin
Martin   |     |   Comment #11
Anony, comment #9, I used to sell annuities, there are no hidden costs, the early closing penalties are the same as early closing penalties of bank's CDs and the customer is aware of that. There are no hidden costs, period.
My commissions were paid from the insurance companies slash fund and I still receive some residual income from the companies, the customers are long gone or they have annuitized for life income and my customers never paid a penny of penalties or even part of my commission. I used to get them sign up bonuses of 8-10% of the principle every time they switch to another type of annuity or another company.
Lrdx
Lrdx   |     |   Comment #12
Maybe the annuities you sold don't. Unfortunately that's not even the norm.
asyoulikeit
asyoulikeit   |     |   Comment #10
Class-action is the most cost-efficient means to insure the financial industry tows the line. Removing that kind of litigation effectively results in a right without a remedy.
On a more positive note, today the CFPB banned compulsory arbitration clauses, often (always) used by banks and other financial institutions. (https://www.usnews.com/news/business/articles/2017-07-10/federal-regulator-moves-to-mostly-ban-arbitration-clauses). Gee, you think your local bank wants to face a jury? But, the administration is moving to get rid of the CFPB so who knows how long consumer friendly oversight will last.
SORRYABOUTTHAT
SORRYABOUTTHAT   |     |   Comment #13
ANYTHING THAT HURTS THE PARASITES, THE SCHLOCK MEISTERS THAT EXIST BECAUSE OF HISTORIC LOW BANK SIDE DEPOSIT RATES MAKES ME HAPPY,,,,,,taking food off the table of these leaches whether at a bank or a stand alone store IS GREAT NEWS......AND THEY BETTER HOPE LIZ" cfpb"WARREN DOESN'T BECOME POTUS,,,,,JACK BOGEL has ranted on the fees and FRONTLINE DID A GREAT DOC ON THIS A COUPLE OF YEARS AGO,,,PROBABLY NOW ON YOUTUBE..........LET'S HOPE THESE HUCKSTERS END UP DRIVING CABS.
HEIGHYOSILVER
HEIGHYOSILVER   |     |   Comment #14
Grampa,,,,who is that masked man that hides behind all those many forum handles,,,he's a straight shooter alright,,,,...Son, he's the Truth Ranger,,,,,and he's riding off in the sunset to another forum to fight for truth, justice and the mainstreet way!