June 2, 2017
The concept of a rule which protects investors from unscrupulous advisers is a sound one. However, in creating the rule I believe the Department of Labor (DOL) went beyond the scope of protecting investors from the minority of "bad" financial advisers by over-burdening "good" financial advisers.
Advisers are small business people for the most part and already run fearful on a daily basis of inadvertently violating one of many securities related rules.
The DOL set to go into effect on June 9th is difficult to understand and presents very costly challenges to comply.
There must be a more efficient way to protect investors and improve investor outcomes.
The genesis of the rule is that DC (401(k), IRA etc.) investors had significantly poorer results than DB investors. (True) In trying to isolate a correlated factor, the DOL came up with fees as the main driver of the results differential. It is true that (all else being equal) fees impact returns.
The fee issue would be solved with greater disclosure requirements. The DOL with the assistance of the Commission and the industry could develop a simple, 1/2 page fee and liquidity disclosure form that would be required with subscription to any investment. This would have an immediate impact on adviser behavior. (And move mutual fund trading costs from the Statement of Additional Information into the Prospectus)
As the rule now stands it won't be understood at the investor level generally.
One area of confusion relates to rollovers from employees leaving a company sponsored plan. If an investor is leaving a 401(k) plan (where she self-selected her investments) to roll-over her 401(k) to an investment adviser, how is the RIA to compare the company plan to the Adviser's offering to determine best interest when cost seems to the the rule's driving factor? The RIA can't know the fees of the plan she is leaving, whether the plan sponsor or participant paid those fees or if the investor was getting fiduciary advice. (vs. a list of funds to choose from). And, which fees are included? Management, custody, record-keeping, 12b1, "other", trading fees in a mutual fund not listed in a prospectus?
Also, investor's in a company plan are usually self-directing their investments (i.e. do-it-yourself). When someone retires, they hire an RIA or Registered Investment Advisor they are presumed to receive benefit from that advice. Of course, advice has a cost associated with it. It seems the rule wants a full-service advice driven model to be cost competitive with a highly scalable large company self-directed company 401(k) plan.
This renders the rule too complex.
A more effective solution might be a simpler one. Increase the penalties and enforcement for bad behavior by investment advisers and registered representatives and require full fee disclosure on a simple standard form for every investment.
Put together a working group of people in the industry who can act as volunteers in helping you craft a solution.
Thanks for your work on behalf of American Investors.
Herb W. Morgan
Sr. Managing Director
Efficient Market Advisors
A Division of Cantor Fitzgerald Investment Advisors