Department Of Labor Rules That All Investment Brokers Must Be Held To A Fiduciary Standard

Character is defined as doing the right thing when nobody is looking.   The government has decided the brokerage industry could use a little help in that department.

New U.S. Department of Labor rules released April 6th require brokerage firms to operate under a fiduciary standard, which means they must always act solely in the best interest of their clients when recommending investments.  (No, that wasn’t always the case before.  Really.)  While the new regulations simply impose the same standards on brokers as applies to financial advisors, the brokerage industry is crying foul.  And its reaction could displace the retirement accounts of millions of middle-income Americans, which might be a good thing.   Here’s what you need to know.

The Suitability Scam

Until now, brokerage firms -- Fidelity, Vanguard, Merrill Lynch, Edward Jones, and countless smaller outfits – were held to a less stringent “suitability” standard, which meant they could recommend things that were technically beneficial to the client, but not necessarily in that client’s best interest.   This was important to brokerages because they derive significant income from sales commissions on various financial products.  Applying the suitability standard, a broker could pick up a sweet commission by selling a hefty life insurance policy to a 23-year-old guy with no dependents and no debt.  While the policy would certainly add value to the client’s portfolio – someone in that situation doesn’t need life insurance.  Under the fiduciary rules, the broker can’t run that hustle.  Similarly, a broker can no longer sell a client into a higher commission mutual fund or ETF when a cheaper alternative would accomplish the same goals.

Too Small to Keep

Brokers say the DOL’s fiduciary rule will increase their operating costs and make it less profitable to provide advice to smaller retirement account clients.  Roughly $19 billion in revenue from IRAs could be affected by the new regs, with brokerage margins on IRAs falling as much as 30%, according to Morningstar data reported in The Wall Street Journal.   In response to the new policy, the largest brokerages, whose clients tend to be affluent, are likely to move away from commissions to a system in which clients pay an annual fee for the broker’s service.  That will increase their operating costs as the firms will need to invest a lot more time and money in truly understanding and monitoring their clients’ financial circumstances and goals in order to meet their new fiduciary obligations.

As a result, some brokerage firms may drop their smaller clients. They just can’t make enough money by charging a 1% fee on $50,000 or $75,000 account instead of raking in all those commissions.   That’s one reason AIG recently announced plans to sell its brokerage operation, AIG Advisor Group.

The Silver  Gold Lining

If you have a modest account with a brokerage firm, don’t expect a cancellation letter this week.  It will take time for these companies to digest things and respond to the new rules.  But this is a good time to think about whether you are getting the most bang for your investment-advice buck.

The most widely cited alternative from small investors is a  robo-advisor.  These online firms use an automated algorithm to manage an investment portfolio based on parameters provided by the client.  Robo-advisors typically charge very low fees, largely because you will never talk to an advisor.  Nor will such firms help develop retirement, tax or estate planning strategies.

What if you, as a small investor, could hire your own personal financial advisor to oversee all aspects of your financial life?  This fee-based advisor would help you create investment strategies to achieve your goals, and provide tools and information for you to monitor your progress and make smart decisions about your money – making it, spending it, investing it.

That’s exactly what we offer at Wela.  Several years ago we saw how small investors were being marginalized by the large financial firms and began to to develop a unique alternative.  We leverage the latest portfolio management technology and our team’s knowledge and experience to give smaller investors access to quality, objective, personalized financial advice.  It’s a hybrid model that provides the low fees and convenience of the robo-advisors combined with all the benefits of having access to a human financial advisor.  Wela’s free online tracking system allows you to aggregate information from up to 19 sources – banks, credit cards, investments – and track your financial vitals on one dashboard.  You can check your net worth any time from any digital device.

And, yes, we are (always have been) fiduciaries.  Your best interest always comes first at Wela.  Even if no one is looking.