Market Pulse: Fiduciary rule brings about change
June 20, 2017
Back in April, the Department of Labor (DOL) issued a delay in the fiduciary rule making the effective date last Friday, June 9.
Despite considerable pressure from the brokerage industry, the rule took effect although it will be fully implemented on Jan. 1, 2018. The Trump administration may still change or delay the rule. As with any change there will be angst.
You'll recall that the rule requires brokers to put their clients' interests ahead of their own when it comes to managing retirement accounts.
In a nutshell, advisors need to document why it's best for a client to move from a 401k to a managed rollover IRA, and they must not make a misleading statement about fees and material conflicts of interest.
What's the case against the rule? For accounts that rarely make a transaction, paying commissions can be much cheaper than a fee that is a percentage of assets.
I predicted that the fiduciary rule would slow the sales of mutual funds with loads or 12-b1 fees, would increase the popularity of exchange-traded funds, and undermine annuity sales. Good.
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For the firms that continue to offer commission-based products, the fiduciary rule requires them to disclose fees in a best-interest contract exemption.
Some brokerage firms, like Merrill Lynch, prepared well for this rule. They no longer give new retirement savers the option of paying a commission for trades, opting instead to charge a fee based on a percentage of their managed assets.
Other brokerage firms expected the rule would be repealed under the Trump administration so they are temporarily paying their brokers a fee based on a percentage of assets, but could return to the commission model if the rule is repealed. My firm has always been a fee-only fiduciary advisor operating with full disclosure and transparency. No changes needed.
Whether or not the fiduciary rule is delayed or changed probably doesn't matter. Most investors are informed about fees and potential conflicts of interests of investment professionals.
The days of high commissions and mutual funds with load-fees are over. Costs are down; way down (see last week's article). That's good for everyone. Well, almost everyone.
David Vomund is an Incline Village-based fee-only money manager. Information is found ator by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.