Subject: IA-BD-Conduct-Standards
From: Gary Braden

June 3, 2017

As someone that submitted comments from the beginning of the DOL Fiduciary Rule process it was almost like they had selective hearing infection as they disregarded comments that did not fit their goals/agenda.  Of course the fee management side originally supported the concept totally until they read between the lines that just because they use fee management doesn’t mean they would not incur “unquantifiable” liability under the class action and civil law suit processes of the Fiduciary Rule.

For registered persons the BIC or the BIC waiver offers little “protection” from the lawyers looking to litigate anything for a quick settlement regardless of how much they put their clients’ interests above everything else.  The rule was written by lawyers for lawyers.  I have had many of my clients for over 20 years and having looked at all the angles can’t see how I will be able to serve them once the DOL fiduciary Rule is fully implemented and it makes me ill to basically tell them I will no longer be able to serve them and the problem is that I can’t recommend a replacement for me as we are all in the same boat.  My having this opinion concerning the DOL rule has prevented me from taking any new clients in the last 18 months as I have told perspective clients that it would not be right for me to take them as clients and then have to tell them I can no longer serve them because of the DOL rule.  I am not worried about a client complaint about my long standing service to them but how do you protect yourself from frivol ace law suits and the legal fees that you will incur.  Even if you win the legal fees will consume your business.   

Rather than a lengthy email let me see if I can discuss in brief bullets:

• Simple math points out that the break even between the client paying a onetime 5% commission on mutual fund purchase (normal or IRA accounts) versus paying a 1% fee (or higher) on all assets under management breaks even in less than 5 years but the 1% fee never goes away.
• Commissionable mutual funds have break points where typically a customer pays a 2% commission on $500,000 and no commission on investments over 1 million dollars.  Most fee managers won’t even take a client will less than a million dollars in investable assets.  A customer buying a million dollars of mutual fund shares from one fund company does not pay any sales charge in most cases.  The representative may  get paid 1% out of mutual fund company assets on a million dollar sale and then a portion of the .25% 12B1 fee to provide future service to the client.
• If you wanted to make the broker/dealer side of the equation similar to the fee side simply restrict retirement accounts sales to Class C shares.  No front end sales charge and unless the client liquidates shares in less than 12 months there is no charge.  Less than 12 months and the fund company charges a 1% fee typically.  DO THIS AND ALL THE REGULATORS WILL FEEL FINE BUT THE CLIENT LOSES since around the 5th year or less the 1% 12B1 fee results in the costs starting to exceed the sales charge to the client over the long term holding period the total costs to the client are significantly higher as LIKE FEE MANAGEMENT the 1% 12B1 fee never stops versus a onetime commission paid up front.  In fact, my brokerage firm has policies in place not allowing representatives to use class C shares for larger invested amounts that qualify for break points on the sale without the client signing a statement acknowledging the additional costs they could incur.
• The fee management side will gladly take the larger clients with sufficient assets but smaller clients will no longer be supported by a human advisor.  Look at what the larger brokerages are doing.  Either they are cutting the smaller clients loose or developing some sort of computer ROBO system and having smaller clients sign some sort of waiver to not hold the brokerage liable for future investments and no longer provide any sort of personal advice to those clients.  Since retirement accounts represent less than 5% of the business at some large brokerages they have simply cut that part of their business.
• I have over 20 years in the business and have never had a client disappointed with my service let alone some sort of complaint and would not be worried about one of my clients initiating a legal action but the Fiduciary Rule moves the process from Arbitration to Civil and Class action law suits.  Ask the people that provide E&O insurance if they have figured out what that liability is for a registered person and how much it is going to cost.
• DOL is not responsible for IRAs.  The Internal Revenue Service is.  The SEC and FINRA and all the state insurance regulators are responsible for regulating the various products in question so where does the DOL get off regulating beyond their prevue??   I have to ask.  How is DOL going to regulate the Rule they have made???  Let the lawyers do it!
• We have all read President Trump’s memorandum concerning the DOL Fiduciary Rule and it states that if the rule affects a short list of issues then it needs to either be modified or eliminated and as it now stands it violates every issue raised by the president.

Obviously the list could be much longer but these points should be enough to stop moving down this path resulting in many Americans losing any source of advice other than a book or computer program.

Gary Braden
Registered Principal