Tuesday, April 14, 2015

DOL Fiduciary Rule Brings Tougher Times for Financial Advisers

The US Department of Labor's EBSA proposed a new fiduciary standard today for financial advisers giving advice on retirement plans.  Read the proposed rule on EBSA's site for the large amount of background material.  Prohibitions of conflicting interests will be tougher.  Disclosure will be more thorough.  The bottom line for advisers is a higher standard of care for the clients paying their fees.  Many advisers will not prove themselves up to the task despite the exemptions available.

Most wirehouse advisers push retirement plans populated with actively managed mutual funds.  These funds are more expensive than passive index funds and tend to underperform their benchmarks.  These same funds pay 12b-1 fees to advisers and their branch offices.  Fiduciaries have built-in conflicts tied to the financial products with the largest market share in retirement planning.  The SEC has recently placed 12b-1 fees under close scrutiny.  Any regulatory change that discourages 12b-1 fees will reduce product selection in retirement planning.  Less profitable products and tighter fiduciary standards will deter many advisers from offering retirement advice.

Clients seeking retirement solutions in this changing landscape have reason for optimism.  Robo-advisers are coming.  The AIs at automated brokerages work non-stop for zero pay.  Automated advisers can accommodate dirt-cheap, plain vanilla index funds in tax-advantaged retirement plans.  They also have negligible potential for fiduciary conflicts because they are programmed to do precisely what the client wants.  Coding DOL rule changes into an AI is much cheaper than retraining human advisers and funding a human compliance function.

Human beings always seek the path of least resistance.  Advisers are only human and plenty of them will get out of the retirement planning lane if reduced fees and more regulation make it unattractive.  Clients still need advice and they will not have the patience for human relationship managers who must explain conflicts before deciding what role they may play in a transaction.  Fiduciary rule changes are one more force pushing humans out of finance.  Automated advisory programs will fill the gap.