Mullooly Asset Management

Fiduciary Fee-Only Financial Planner | Investment Advisor in Wall, NJ

fiduciary obligation

Fiduciary Rule reaches a potential dead end

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The Fiduciary Rule, proposed by the Department of Labor (DOL) several years ago, and signed into law in April 2016 may be meeting a dead-end.   And the Rule may be snuffed out before most individual investors even learned about it.  But individuals ought to get an education in what this rule is all about.

We believe in educating investors.  Educating our clients (and our prospective clients) makes them better advocates for how we can help individuals manage their investments — and better prepare them for their future.

For fifty years, if you needed to buy a suit in the NYC Metro area, Sy Syms was your man. Now, stay with me here.  Syms did his own commercials, always ending with their slogan, “An Educated Consumer is Our Best Customer.”  When it comes to investing, the same holds true.  And in the name of education, there is an important lesson taking place right now.

The Department of Labor proposed a “Fiduciary” rule, and this was put into law by the DOL in April 2016.  Implementation began just a few months ago, in mid-2017. The concept behind the fiduciary rule is straightforward: folks giving investment advice and guidance should be held to a fiduciary standard of care.

Meaning, investment advisers (who are regulated by the SEC or state securities regulators), are required to always put their client’s interests above their own.  But the standard for brokers is different: legally, brokers must recommend investments that are “suitable” for their clients. There is a distinct difference between “suitable” and “prudent” recommendations and advice.

Industry leader Michael Kitces writes:

“The Investment Advisers Act of 1940 came in the aftermath of the crash of 1929 and the Great Depression. It was essentially created to be a crackdown on much of the investment advising abuses that happened during the booming 1920s. The purpose of the rule was in large part to create a distinction between salespeople who were brokers, and those who really formally gave ongoing investment advice for compensation. They advised on investments, which meant they were advisers…”

Recently, a three-judge panel of the Fifth U.S. Circuit Court of Appeals ruled against the Labor Department. And according to attorney Daniel Viola of Sadis Goldberg wrote, “Opponents of the Rule raised concerns that the Rule would have unintended collateral effects that would render investment and retirement services more costly and potentially inaccessible for certain individuals.”

Is this the End for the Fiduciary Rule?Fiduciary Rule at Dead End?

When the news broke, Barbara Roper, the Director of Investor Protection, with the Consumer Federation of America (CFA) also added “…(t)he debate is not over how to pay for advice. The debate is over whether brokers’ sales recommendations constitute advice. Unless they are held to a fiduciary standard, they don’t, and regulators need to stop pretending otherwise.

Over the following days, the tweets from Kitces and Roper were clear in their opinion:

It’s important that investors understand how their adviser gets paid, we’ve discussed this before, here and here.  And it’s equally important to understand how compensation arrangements can make for “bad decision environments.”

We’re *not* saying working with a commission salesperson is wrong.  For some, this may work.  It’s important to KNOW upfront – no surprises.  When I began Mullooly Asset Management in 2002, it was my belief this could be a much longer path to profitability, but I also firmly grasped the understanding a fee-only fiduciary structure would be a much better environment for clients.

The Self-Fiduciary

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Clements

Why would anybody pay someone to evaluate their financial situation and not be truthful with that person? It seems like a waste of time, money and effort.

Yet, we’re all guilty of doing this exact thing!  We all go to various professionals for help several times a year and don’t do what they tell us to do. Financial planners develop strategies to help us reach our financial goals. Doctors provide care and prescriptions to treat our ailments. Dentists clean our teeth and tell us to brush/floss at least twice a day . Personal-trainers develop workout plans to help us achieve our fitness goals. Nutritionists develop diet plans to help us eat the right things. Not to mention, we can find the “right ways” to do just about anything on the internet. We have all the answers to our problems at our fingertips! So why do we still struggle with making these changes?

It’s easy to get distracted from what’s in OUR best interest because life seems to get increasingly more complicated with each day.

Emotions get the best of us and make us act out of line. Some of us can’t stand to see a disappointed face when we tell a loved one “no”. It’s difficult to reject social norms and break away from “the herd”. It’s hard work to determine what truly is in our best interest.

This brings me to a quote I read recently in “Ego is the Enemy” by Ryan Holiday.

IMG 1126 2I’ve been reading a lot from the Stoics recently via Ryan Holiday. The primary task in Stoicism is self-reflection. The caveat here is that we have to be 100% honest in these reflections. If we can’t be honest with ourselves, who can we be honest with?

Reflection creates awareness. It lets us identify areas of our lives that we would like to change. This is where the professionals mentioned above can help us. If we’d like to fix our finances, go see a financial planner. If we want to lose weight, go to a personal trainer and nutritionist. It’s that simple, right?! Not so fast.

While we can outsource “how to change”, we can’t outsource actually making the change. That still falls directly on us.

This is where we need to become a fiduciary to ourselves. A fiduciary is someone who is legally obligated to act in your best interest. The term fiduciary has been pushed to the forefront of the financial industry over the last few years. The investing public has started to realize that investment advisors should be held to this standard. While this is an important change in finance, it can and should be applied to our everyday relationship with ourselves.

It may seem selfish to be a self-fiduciary. A good analogy here is what they say before taking off on a flight; put your oxygen mask on first before trying to help others. Fix yourself before you try to fix the world.

Determine what is in your best interest through honest self-reflection. Figure out how to make the necessary changes. You’ll make the change if it truly is a priority to you. If you don’t, it never really was a priority in the first place. You stay focused throughout this process by acting in your own best interest, by being a self-fiduciary.

 

Credit Freeze: Worth it?

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In this post we discuss what is a credit freeze, is it worth getting one, and what happened with the Equifax breach and why it may impact you.

Part of our “job” so to speak is to manage your investments. But another part of what we do is help you plan safely for the future. So when a security breach (like what happened with Equifax) occurs, you need to know what took place, what to do next.

The Equifax Breach: What happened?

According to numerous reports on line, up to 143 million individuals may have had their credit information exposed to hackers over the recent months. That is a lot of data on nearly half of all Americans, out there for the taking. What’s worse: is it has been speculated a glaring software weakness was discovered in March, but not repaired for two months, in May.

On the surface, a two-month span for a patch may seem careless and sloppy. After all, if you turn on a Windows computer, it ALWAYS seems to be updating and patching. However (if done all at once on a large corporate-size scale), repairing a software issue on servers for a giant database like Equifax could knock them offline for several days. And for a stock market hanging on every penny per share of earnings, there are only ninety days until the next earnings release. Taking down your servers to repair a patch seems like a costly fix. To accurately test all facets across all tasks, a repair patch could take several weeks, even months. I think Equifax may deserve a pass on this point, nevertheless we all pay the price for identity theft.

Equifax claims it has no knowledge of the depth of the exposure, but states that credit reports for up to 143 million people could be exposed. What often happens with identity theft is a scammer will establish a new account in your name, but the bills/statements get delivered elsewhere. It’s very possible (and happens in real life!) that folks do not even KNOW their credit has been wrecked until they apply for credit elsewhere. Or when harassing phone calls begin coming from collectors. You could be a victim of identity theft for a period of time — and not know it.

The Equifax Breach: What to do

There are steps you can take now, ranging from “doing nothing” to being pro-active. Here’s what we recommend: freeze your credit files.

When freezing your credit file, you essentially block most companies from “pulling” your credit record.  If someone is attempting to borrow money or establish an account (or identity) under your name, a credit check will be run. This also happens when individuals open brokerage accounts. Freezing your file prevents future lenders from accessing your credit record. If they cannot see your file, you (or your identity thief) likely won’t be extended credit.  A credit freeze can be lifted, and that is important, especially when you know you will be having a credit check run on your credit in the coming days/weeks.

A credit freeze does not impact your credit score

It also does not prevent you from getting your own credit report once per year. It will prevent you from opening a new account (we’re not fans of debt anyway!), but know that a credit freeze will also be a speed-bump when getting insurance, signing a lease and some other business transactions. A freeze also won’t be able to stop someone who already has access to your credit/charge accounts. Check your accounts often! Also, your current creditors can STILL access your credit report, but a freeze stops new credit requests.

To clarify, thecredit freezere is “new account fraud” and “existing account fraud.” A credit freeze will stop “new account” fraud in its’ tracks. But the only way to keep tabs on “existing account” fraud is to log in and look at the activity in your accounts, and check your statements. Report transactions you do not recognize. A simple phone call can go a long way toward resolving problems.

In several cases of existing account fraud, scammers will do nothing for months at a time, then try a few small transactions for a few cents or a few dollars, before moving onto bigger amounts. I know we should be doing this stuff already, but how many folks even LOOK at their statements each month? And of course, immediately report lost or stolen cards. Try to not let the cards out of your sight — think about the waiter who disappears with your credit card and waltzes back ten minutes later. Your vigilance will pay off.

Credit Thaw/Un-freezing your Credit

Most credit freezes last until you take it off. There are a few states (KY, PA, SD) where there is a limited time (seven years) where credit freezes need to be renewed. In most states, you can simply contact the credit agencies to place a freeze or (then) lift a freeze. In most states, the cost of placing a freeze is free, or a small amount (usually $5). Un-thawing (lifting) a credit freeze will likely cost a few bucks as well. For example, in New York and in New Jersey, it is free to initiate a freeze, and costs $5.00 to lift a credit freeze.  See the link, for the state-by-state list (below).  Seems worth it to us.

There is a TON of information available online, but yet, several companies seem ripe to sell you a “credit protection” kit. Don’t do it.

Instead, get some education (for free), from reputable sources:
Here is a source that lists the costs of freezing/thawing your credit files by state (scroll down about halfway):
http://consumersunion.org/research/consumers-unions-guide-to-security-freeze-protection-2/

Comparing credit freeze versus fraud alerts:
https://www.consumerreports.org/consumer-protection/security-freeze-vs-fraud-alert-deciding-the-best-option/

More questions/answers about credit freezes:
http://consumersunion.org/wp-content/uploads/2007/11/Things-to-Consider-When-Deciding-Whether-to-Place-a-Security-Freeze-2.pdf

Check out even more information about “credit freeze” — from the FTC:
https://www.consumer.ftc.gov/articles/0497-credit-freeze-faqs

And the most recent bad-boy (Equifax) said it would waive all fees until Nov. 21 for people who want to freeze their Equifax credit files (again, it is free to freeze your credit files if you reside in NY/NJ). It will also refund any fees that anyone has paid since the breach was announced, though the company would not say whether this would be automatic.

Contacting the Credit Agencies:
Equifax — 1-800-349-9960   (these folks may be a little busy currently!)
Experian — 1-888-397-3742
TransUnion — 1-888-909-8872
Innovis — 1-800-540-2505

What is a fraud alert?

A fraud alert allows creditors to pull your credit report, but they must verify your identity first.  Fraud alerts are automatic if you have been a victim of identity theft.  For example, if you provide a telephone number, the business must call you to verify whether you are the person making the credit request. Fraud alerts may stop identity thieves from establishing credit in your name. Keep in mind a fraud alert may not prevent the misuse of your existing accounts. Again, check your accounts often!

Is credit monitoring worth it?

We are not fans of credit monitoring. They are (often) more expensive than a credit freeze, and if you are being diligent, you can stay on top of items that appear in your credit history.  Now, if you don’t plan to open many new accounts in the coming years, the freeze may be the way to go.  We would pass on credit monitoring. 

This was a recent excellent article in the NY Times about the events at Equifax and steps to take now:
https://www.nytimes.com/2017/09/12/your-money/equifax-fee-waiver.html

Questions to Ask Before Working With a Financial Advisor

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There needs to be a discovery period between advisor and prospective client. It should be conducted almost as an interview. Both advisor and prospective client NEED to find out if the relationship will be a good match. Each situation will be different, but here are a few essential questions every prospective client should ask their potential financial advisor.

How are you compensated?

This is THE MOST IMPORTANT question to ask before beginning a relationship. A financial professional can receive compensation in many different ways and it can often be confusing for clients.

  • Fee-Only –The fee paid is usually based on assets under management (AUM). The advisor will charge a percentage fee on the amount of assets under his/her control. These types of professionals do not get compensation from any product sales. The ONLY form of compensation they can receive is from the fee.
  • Hourly Financial Planning Fee – Some advisors charge hourly fees based on the amount of time spent working on a particular client’s financial plan. This will be on a case by case basis.
  • Fee-Based –Not to be confused with fee-only, they are NOT the same thing even though they sound very similar. A fee-based financial advisor has the ability to charge a fee based on assets under management AND collect sales charges and commissions on the products they sell. Fee based financial advisors are usually what are known as “hybrid advisors”. This type of compensation structure has serious flaws to it. If the advisor is compensated for selling products, wouldn’t he/she pitch the product that pays the most? This type of compensation structure often leads to conflicts of interest between client and advisor.
  • Commission-An advisor that gets paid on commission gets a percentage of every transaction they execute for a client. Some of the commission goes directly to the advisor with the rest of it going to the firm. This type of compensation structure is loaded with conflicts of interest. The advisor will want to perform as many transactions as possible so they receive more money. Also in some cases, firms place minimum transaction requirements on their advisors. The firm forces their advisors to execute transactions in client accounts even if it is not in the client’s best interest.
  • Wrap-Fee – A wrap fee account is an all-inclusive compensation method. The advisor charges an assets under management fee and a set fee for all of the trading commission. A wrap-fee would make sense for someone that wants to do a lot of trading in his or her account. Therefore, in a sense there is a limit on the amount of commission the advisor can collect. However, the conflict of interest from receiving commission still exists.

Are you a fiduciary?

There are many different titles financial professionals call themselves (wealth managers, wealth consultants, financial advisors, financial planners etc…). None of these matter as much as whether that person is a fiduciary.

A fiduciary is required to put the client’s interests ahead of their own. Investment advisors are legally bound by the fiduciary standard. Under the fiduciary standard advisors must try to avoid conflicts of interest and disclose any conflicts that do arise. Advisors must use best execution practices when transacting client accounts. Best execution involves performing the transaction at the lowest cost and by the most efficient means possible. Fiduciaries’ loyalty reside with the client only.

A financial professional with any other title beside investment advisor or certified financial planner may not be required to act as a fiduciary. All other financial professionals will be acting under the suitability standard of care. The financial professional has to believe that the investments are suitable for the client. They do not have to act in the best of interest of their clients. As long as the recommendations of the financial advisor meet the objectives of the client, the suitability standard has been met. The disclosure of conflicts of interest are also less strict under the suitability standard. The financial professional’s loyalty is split between what is best for his/her firm and what is best for the client.

What is your investment strategy?

An advisor’s investment strategy should be one that can adapt to meet your objectives, time horizon and risk tolerance. An advisor should be as transparent as possible when explaining the strategy to you. If an advisor cannot explain their investment strategy to you in a way that you can comprehend, you should probably not work with him/her. If the advisor seems to have a “black box” or says the strategy has “upside with no downside” run the other direction.

It is important to know what kind of investments the advisor will use as well. Most advisors use a combination of stocks, bonds, mutual funds and ETFs in their strategies. There is no need for a strategy to be more complex than that. Simple is better when it comes to investing, despite what some may say.

Clients of advisors should also be told where the investment accounts will be held. Most financial advisors use a discount broker as the custodian of client accounts. The advisor should let the client know which discount broker they work with. This way the client understands where they will be getting statements from and how to access their funds.

What services does your firm provide?

This might seem like a dumb question to ask, but many financial firms provide different services. Some firms are all inclusive meaning they do financial planning, investment management, tax preparation, estate planning, insurance planning etc. While other firms may just specialize in investment management or another area. It is important to define the scope of the engagement prior to entering into a relationship with a financial professional.

It amazes me how little research and effort some people put into finding the right financial advisor. Just because your friend or relative refers you to their financial advisor does not mean they will also be a good fit for you. There is no right or wrong answer as to what type of advisor to work with. What is most important is to ask and UNDERSTAND at least these questions before agreeing to work with an advisor. When you sign up with a financial advisor you’re trusting that person with YOUR money, YOUR livelihood. Do the research, ask questions and don’t accept anything other than 100% transparency. It’s your future at stake after all.

Fiduciary Rule Has Led to an Awakening

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caseyThe fiduciary rule is partially in place as of June 9th. The most important thing this rule has done for the investing world is it has woken the public up to how important it is to work with a fiduciary adviser.

What does being a fiduciary even mean? Well it means that you have to act in the best interest of the client. But what does that even mean?

The difficult part is that it can mean very different things for everyone. This post will cover some key aspects that should be a part of every fiduciary relationship.

1. Honest communication between adviser and client about:

  • Goals
    The adviser needs to know what the money is for. It’s impossible for an adviser to act in the best interest of the client without this knowledge. The adviser may think they are acting in the best interest of the client but without the client communicating their goals the adviser will simply be guessing. This is a two-way street. It’s on the clients to tell their adviser what the goal is. It’s also on the adviser to ask and understand to the best of his/her ability what the client’s goals are. If the client doesn’t have any goals then the adviser should help the client set some reasonable short, intermediate and long term financial goals.
  • Compensation
    Understanding how your adviser gets paid is absolutely imperative. All fiduciary advisers should be up-front and open about their fees. If they’re not, that’s a serious red flag. An adviser that is unwilling or unable to explain his/her fee structure to their client’s is not an adviser that should be trusted.
  • Process
    A financial adviser should be able to explain their investment/financial planning process so all of their clients can easily understand it. If they can’t, their process is most likely too complicated. Keeping things simple and cheap works when it comes to investing.
  • Costs
    Every investment has some sort of cost associated with it.  Clients should know how much it’s costing them to own their investments. It’s on the advisers to let them know.

2.  Always doing the right thing for the client no matter what.

  • Sometimes fiduciary advisers are going to have to recommend a client do something that hurts their firm. This is the very essence of what being a fiduciary is all about. For example let’s say a client really needs to pay off a large debt he/she has. Their options are to either take out money from their investment account with their adviser  or open up a new credit card. Since taking on new debt just to pay off old debt is a not really getting rid of the problem, the adviser should recommend the client takes the money out of their investment account. This option would hurt the firm since the assets would no longer be under the adviser’s control. However, it would be beneficial to the client because they would be clearing some debt off their plate. A fiduciary should always put the client’s interests ahead of their own, plain and simple.

3. Limited conflicts of interest.

  • Advisers that charge an assets under management (AUM) fee or a retainer fee inherently have less conflicts than advisers paid on commission or by a wrap fee.  The real conflicts of interest are seen when “financial advisers” are incentivized to sell their firms investment products. These “advisers” get paid extra to put their clients into their firms products. Naturally these “advisers” will put their clients into the investments that pay them the most, not the investments that are in the client’s best interest.  It’s just like Warren Buffet said “never ask a barber if you need a haircut”. Never ask a “financial adviser” or stock broker (who gets paid to put you into products) for financial advice. Instead look for a fee-only adviser. There will never be a conflict free relationship, but minimizing conflicts of interest is a crucial aspect of being a fiduciary adviser.

Now that the Department of Labor’s fiduciary rule is partially in effect, I’m hopeful for the future of retirement savers. I’m slightly skeptical about how much the rule will actually be enforced. But like I said the most important thing this rule has done is it has woken investors up. It has woken them up to the fact that inexpensive, less-conflicted, honest financial advice is out there.  Now the investors just have to find it. When looking for an adviser make sure he/she covers the three aspects covered above as these should be a part of every adviser-client relationship. Especially if that adviser holds them-self out as a fiduciary.

MAM 184: Tim & Tom Talk DOL Fiduciary Rule

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MAM 184: Tim & Tom Talk DOL Fiduciary Rule Transcript

Tom:    Welcome to the Mullooly Asset Management podcast. This is Tom Mullooly, and I’m joined by Tim Mullooly.

Tim:     Hey everybody.

Tom:    This is episode 184.

Tim:     184.

Tom:    I almost said 185.

Tim:     Yeah.

Tom:    We’re going to talk about a topic that we covered a few episodes back in December, but apparently …

Tim:     It’s back.

Tom:    It’s back. We need to revisit the Department of Labor changes that are coming now on June 9th.

Tim:     That’s right. Yeah. Does everyone remember that DOL rule that people were talking about a lot last year? Well, like Tom said, it’s coming back, June 9th, so next week, it’ll go into partial effect, not full effect.

It was scheduled originally to go into this partial effect back in March or April, I think, but it got delayed, but it’s finally going into somewhat of effect, so we figured we would give everybody a refresher as to what this rule is, who it affects, and the ins and outs.

Tom:    A couple of things that, I think, are important. Tim’s right in the sense that this was originally supposed to be in place April 10th and with the full effect of January 1st of next year, 2018, and that full implementation date …

Tim:     That’s still the case. That’s still set. Yup.

Tom:    Yeah. The major change … I sat on a panel at NASDAQ at the end of November discussing the Department of Labor changes. At that time, we didn’t know it was going to get pushed back like it has, but I remember speaking with a reporter afterwards and I said, “For one of the few times in my career, I can remember being the after picture, not the before picture,” because it sounds like, on the surface, that they would prefer to see advisors gravitate more towards the business model that we’ve got here at Mullooly Asset Management.

Tim:     Right. Yeah. For us here, as a firm, not going to have too many big changes to put into effect with this rule. It’s more going to affect people in the broker/dealer side of things, but it’s just going into partial effect on June 9th, so what exactly does that mean?

Tom:    June 9th happens to be a Friday, so I think everyone’s going to be good over the weekend.

Tim:     Right.

Tom:    They’re not going to really enforce any of the rules on the very first day that this is in place, and it’s kind of … What was the analogy that you saw in a magazine?

Tim:     I think one article in Forbes said there is a “no bite” during this partial effect period, meaning, the rules are there and they want you to abide by them, but there’s not going to be any real enforcement of them until the January 1st full effect.

Tom:    They’re kind of making a trial run.

Tim:     Right. Just a dry run to … You could call it a “soft open”, when you open a restaurant, I think, was the quote from the Forbes article. Even though you know you have to act in the best interest of your investors, there’s no one really enforcing it.

Tom:    It’s pretty amazing to think that between basically now and January 1st, we’re going to force people in the industry to act in the best interest of investors. Are you kidding me?

Tim:     Shouldn’t that have always been the case?

Tom:    Right. I just want to read some things that were in the Department of Labor frequently asked questions. If you want to read the entire rules that they put out, go right ahead, but they put out a couple of these frequently asked question guides and they’re excellent.

Tim:     They’re much easier to read for everyday people.

Tom:    What they talked about was during this transition period, which we’re going to be entering now, advisors in financial institutions must give advice in the client’s best interest.

Tim:     Duh.

Tom:    Yeah, I’m shocked. They said that the client’s best interest has to have two components. It has to involve prudence and loyalty. Very hard to prove in the court of law, but I still can’t believe that everyone is not subject to that level.

Just spending a moment talking about fiduciary obligation, we’re investment advisors. We have a fee-only practice. We assume the mantle of a full fiduciary obligation when we’re managing our clients’ investments, but even a broker has to have some modicum of fiduciary obligation. They can’t be reckless.

Tim:     Right.

Tom:    First of all, they’re not going to be in business very long and secondly, they’re just going to get one complaint after the other until they’re out of business, so there always is some measure of fiduciary obligation, but now, what they’re trying to do is drive home the point that if you’re going to be giving advice, you are going to have a fiduciary obligation for your clients, and that has never been the case for brokers.

Tim:     Surprisingly. Yeah.

Tom:    It’s amazing. TD Ameritrade puts out surveys and year after year after year, they would publish data where they would pull clients, investors and they had no idea that brokers did not have a fiduciary obligation to their clients.

Tim:     I feel like it’s a question that would never get asked because it’s something that you just assume people are always going to act and just have a good nature about them and do the right thing for people, but obviously, not the case.

Tom:    Yeah. Going back to those frequently asked questions, one of the other things that they said during the transition period is that advisors in financial institutions, in addition to giving investors advice in their best interest, they can’t charge no more than reasonable compensation. This one gets me all the time. They can’t make misleading statements about transactions or about compensation or about any potential conflicts of interest.

Again, you can’t see me because it’s a podcast, but I’m shaking my head, like, “Really?” That’s amazing, but yet before we turned the microphone on, Tim and I were talking about specific instances where a new client would come in to our office, they would show us the statements, and what would they tell us?

Tim:     They would say their old broker advisor would say, “Oh, well, there was no commission in there.”

Tom:    Right. Yeah, no commission, but …

Tim:     There might not be any commission, but they got paid on some sort of fee that was baked into the product that was sold.

Tom:    Baked into the cake.

Tim:     Technically, commission, there was none, but they still get paid.

Tom:    Yeah. One of the things that never really gets discussed very much is where this whole idea about the fiduciary obligation and this whole Department of Labor change came from, and it really sprouted from story after story, where investors had a 401k account at work and then they were talked into rolling their account over, once they leave the company, into an IRA. What are some of the potential problems in that scenario?

Tim:     There are a number of problems that could arise from that. First off, no one is forcing you to roll your money out of your 401k, and a lot of the funds, most of the time, in a 401k have greatly discounted fees.

Tom:    Hey Tim, I want to just hit the pause button for a second because I think that’s a misunderstanding that a lot of people have. I think many people have been conditioned to the idea that “Okay, I had this 401k at work and now I’m retiring, so I have to do something with it,” right?

Tim:     No.

Tom:    They don’t.

Tim:     People might think that, but that’s not the case. You can leave that money in your 401k even if you’re not working at that company for as long as you want.

Tom:    Right. Even when you get to the point where you’re, say, 70 years of age or beyond and you need to begin taking required minimum distributions, the 401k plan administrators will calculate that for you and work with you to take that distribution. You’re under no obligation to roll that money from a 401k plan into an IRA, but then what happens, when they go from a 401k plan into an IRA?Tim:     Well, it opens up the door for them to be sold a number of different products that potentially have much higher fees than what they were paying inside the 401k plan, so it, most of the time, ends up costing these people more money and fees and they most likely don’t realize that that’s happening.

Tom:    Right. There is all kinds of different plans out there. Now if you work in a small business and you’ve got a 401k plan that’s being administered by the owner’s financial advisor down the street, it’s probably not going to be a very cheap plan, but suppose you worked for a big Fortune 500 company, I’ve got to believe that they’ve negotiated some pretty cheap fees for the investments in their plan.

Tim:     Right.

Tom:    It may wind up costing you money to go into some of these products, then the whole other question becomes “Am I doing the right thing with these investments?” We’ve all read horror stories about clients retiring and they’re putting all their money into the .com mutual funds in the late ’90s, and it was great for a few months until it wasn’t great for a few months.

Tim:     Yeah.

Tom:    You can run into all kinds of problems. I think that’s really a big issue is that this whole Department of Labor business really kind of emanated from these horror stories that we’ve heard from people who rolled their money out of their 401k plan, when they didn’t need to do that, and then went into an IRA, were sold a lot of crappy products, great fees for the broker or advisor, and these investments, they started circling the drain, which is really bad, and this is money that people have to live on for the rest of their lives.

Tim:     Yeah.

Tom:    That whole 401k transition business really became the starting point for these Department of Labor changes, but they’re still under review.

Tim:     Yeah. Under the new administration, there’s been a mandate for the Department of Labor to conduct a review of the rule.

Tom:    In essence, it could still change or there’s still the possibility that before January, this thing could be scrapped.

Tim:     Right.

Tom:    Which is …

Tim:     It’s definitely not a finished deal that it’s going to 100% go into full effect on January 1st. It’s still up in the air, depending on this review. There had been talks about a delay or pushing it back even further than just the June 9th, but the DOL released their official 60-day delay to the rule, so here we are ready for it to go into this transition period on June 9th.

Tom:    Yeah. I don’t know how many people are actually really ready for this.

Tim:     Right.

Tom:    We’ll see what’s going on. I know that in March, right before the initial implementation date, Vanguard and BlackRock, two of the biggest asset managers out there, called for a much more significant delay, considering all the confusion that the rules have caused, so they did open a period of time about two weeks for a public comment, which is really not a long time, but they got-

Tim:     Right. It says, according to an Investopedia article, they got 193,000 comment letters, yeah, which is a lot.

Tom:    I think almost all of them were opposing a delay.

Tim:     Right.

Tom:    I thought that was pretty amazing to see those kind of numbers. The legislation itself is over a thousand pages in length and I’m sure, like all legislation coming out of Washington these days, it’s going to increase exponentially before it’s a final deal.

If it’s not stopped, it’s going to automatically elevate all professionals in the investment business who work with retirement plans or provide retirement planning advice to the level of becoming a fiduciary. If you’re an advisor who has retirement accounts, you’re going to be bound ethically and legally to meet the standards of the fiduciary practice.

Tim:     That means all advisors or professionals in the business would have to act in their clients’ best interest above his or her own interest.

Tom:    Right.

Tim:     You can’t put yourself first in front of your clients. It’s got to be the other way around.

Tom:    Right. That’s really the whole idea behind being a fiduciary is you got to treat your clients’ money better than you would take of your own.

Tim:     Right.

Tom:    It’s more than just being suitable. The recommendations to clients now have to be suitable and they have to be prudent. They have to be in the client’s best interest. If you want to buy a stock, XYZ, if you’re a client, and it’s doubled in the last couple of months and it’s really speculative, it might be better to wait for this thing to pull back or look for another opportunity. I think the thing that really kind of surprised me with all of these exemptions that came out is that advisors can still work on a commission basis with the clients.

Tim:     Right. Surprising enough, there are a number of different exemptions out there, one called the Best Interest Contract Exemption.

Tom:    The BIC.

Tim:     The BIC, B-I-C, people have been shortening it to. It allows advisors to continue to work on a commission, but they must provide clients with a lot of disclosures beforehand. Just reading the frequently asked questions, it seems like it’s a lot of hoops to jump through if you want to continue to work under the commission-based world.

Tom:    Yeah. I think if you’re a brokerage client, you should prepare to buy a bigger mailbox or just prepare to get flooded with a lot more paperwork because as they begin this transition period now, June 9th, and through the start of this actual implementation on January 1st of next year, financial institutions have to notify their clients of their fiduciary status and any material conflicts of interest.

We provide all of that when we get started with a client, but suppose you’re a big brokerage firm, you got retail clients, you do investment banking for other clients, that their stock or their bonds are going to show up in the mutual funds and the ETFs and all the different products that they own, they’re going to have to send out phonebook-sized updates to clients. The printers are going to make a lot of money.

Tim:     Yeah.

Tom:    I don’t know who else is.

Tim:     Yeah.

Tom:    It’s a good thing, this Department of Labor fiduciary rule. It really is a good thing because it’s going to help level the playing field in terms of hopefully beginning to take away the conflict of interest that brokers have in working with individual investors.

Tim:     Yeah, and then hopefully, we’ll give investors who may be skittish about working with people in the industry, because they think, “They’re just trying to scam me out of money,” hopefully, we’ll give people peace of mind to know that the person they’re working with is putting their best interest in mind when they’re getting recommendations.

Tom:    That’s a good point to end on. Thanks for tuning in to episode 184 of the Mullooly Asset Management podcast and look for us again on the next one, 185. Thanks again.

 

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