Firms Attempt To Change As Someone Starts Watching

14745674 - isolated business man with binocular at desk Every once in a while my wife, Jill, “trusts” me with the food shopping—under one condition. I bring my daughter Sophie. Which is fine with me, since I really do not like doing it. Sophie does. She can maneuver through a grocery store like no other kid.
Last Saturday, I “got the call” from Jill to take on Stop & Shop. I grabbed Sophie and we were on our way. As I was driving, Sophie grabbed the list from me. I could see her strategizing. We entered the store and she was off, masterfully maneuvering aisle to aisle. Swiftly and efficiently slipping around other shoppers, starting with produce, moving to the deli, fish counter, paper goods, meats, chicken, dairy, threw some Cheez-Its in there, and finishing at the checkout.
Sophie is a self-checkout gal. I’m an old-school guy, always have been. I still prefer to actually face another human being when I’m checking out, but I let Sophie take the lead, so we went with the self-checkout.
As she reached the produce in our cart, Sophie started searching for the code for Honeycrisp apples (those things are expensive!). Suddenly, Sophie stopped searching and looked at me. “Dad, can’t people just put in the code for some really cheap fruit and pay by the pound for that? None of the workers even really pay attention to these checkout things.” I looked at her as she typed in the code for the expensive Honeycrisp apples and said, “Sure, but that’s basically stealing, and that’s never right no matter who does or does not see.”
As I was driving home that day, I thought about how that checkout experience kind of relates to this new Department of Labor ruling. I know, it seems like ages ago that you and I first started discussing the Department of Labor ruling that would finally enforce a fiduciary standard across the whole financial industry. That rule, which still faces a rocky road of appeals and discussion before being implemented, imposes a fiduciary standard on all advisors who are getting paid to provide investment guidance on retirement accounts 401(k)s, IRAs, Roth IRAs, Simple IRAs, SEP IRAs, et cetera).
Previously, that fiduciary standard was imposed only on financial advisors licensed as Investment Advisor Representatives and advisors who deal with employer-sponsored plans covered under the federal statute ERISA. Unfortunately, brokers and their brokerage houses, have not had to play by those same rules.
But that is changing.
Movement toward implementation of the rule has been slow thus far, and as Susan Roman and I are Investment Advisor Representatives who are already held to the fiduciary standard, legally bound to act in our clients’ best interests, we think the movement toward this rule has already taken long enough. But this is not an easy transition for many big financial firms.
I recently read an article concerning a big-name firm that is making changes to their practices, in order to comply with the DOL ruling. Bank of America Merrill Lynch (Merrill Lynch) has announced that starting in April of 2017, their brokers will no longer offer new, advised commission-based IRAs. Those accounts will be moved to either their fee-based, investment advisor program, or transitioned into their self-managed retail style offerings.
Hmm, why would they do this?
They are doing this because the standard brokerage, commission-based system cannot comply with the necessary “best-interest” guidelines that the fiduciary standard will impose.
Frank McDonnell, head of Merrill Lynch’s Global Mutual Funds, was quoted as saying, “The decisions we’ve made regarding the Department of Labor’s fiduciary rule are grounded in our strategy to provide best-interest, goals-based advice to our clients regarding their retirement accounts while preserving client choice.” He added, “They also reflect our goal of ensuring that our advisers and our firm are best positioned to comply with the rule.”
Merrill Lynch is not alone. In September, State Farm announced that their brokers are no longer permitted to sell mutual funds or variable annuities. Janney Montgomery’s online letter to its families regarding the implementation of the rule says “… your Janney Financial Adviser will contact you to determine how we can best continue working together to meet your goals under the new DOL rule.”
So, let me go back to the grocery store story I started with, and highlight one of my favorite quotes from a man named C.S. Lewis. You might have heard it before, “Integrity is doing the right thing, even when no one is watching.”
This is a quote I try to live by, and a quote that Jill and I have worked hard to teach our kids. It’s a quote that I repeated to Sophie in the store that day.
You see, until recently, people weren’t really “watching” these commission-based brokerage accounts. Brokers were not required to work in their clients’ best interests. This is not to say that they weren’t; however, it’s a little telling now, that when they are legally obligated to do so and about to be regulated by the government, that they are starting to do the right thing.
Folks, I want to be clear about something: the rule does not prohibit the use of commission-based investments. A provision built into the rule called the Best-Interest Contract Exemption (BICE), basically still allows financial professionals to still use commission-based investments, but now advisors are required to sign a contract saying that the recommendation for such an investment is in the client’s best interest. And the brokerage house must sign off on that contract. I also think it’s telling that instead of continuing their current practice, and guaranteeing that their brokers’ advice is what is best for their clients (under the punishment of a class action lawsuit if wrong), they are choosing to not offer such products anymore.
If the advice offered and the products used were not in their clients’ best interest, why were they even offering them?
You got it—because they could, because no one was watching.
Now is an important time to be even more vigilant, and even more alert, because you deserve more, even when no one is watching.
1. http://tinyurl.com/jgkw6q4; 2. http://tinyurl.com/j7yh2ev; 3. http://tinyurl.com/jv4v3ob