Sunday, July 16, 2017

Ideas for Engagement with WKU's Financial Planning Program

Ideas for Engagement with

Western Kentucky University's

Financial Planning Program

A. Ron's visits to firms, early August 2017.
B. Ideas for engaging with WKU's students.
C. Upcoming events Ron will be attending.
D. How to engage Ron for speaking/consulting.

A. Ron to Visit Firms/Practitioners in Kentucky, Tennessee, Southern Ohio, Indiana, Illinois and St. Louis, During the Week of August 7-11, 2017. 

As part of my ongoing outreach to firms and practitioners, I visit practitioners and firms each summer in order to share ideas and information. This assists me in delivering great and up-to-date content to students, and I'm pleased to share whatever insights I possess with practitioners and firms.

While each visit is unique, possible discussion topics for these short (typically 1-1.5 hour) visits this year include:
  • How is your firm adapting to the DOL's fiduciary standard?
  • What are your thoughts about the CFP Board's proposed revisions to its Standards of Professional Conduct?
  • Do you have questions for me about compliance with the fiduciary standards, either under ERISA, DOL prohibited transaction exemptions, as they relate to IRA rollovers, under the CFP Board's proposed rules, under the Investment Advisers Act of 1940 and/or similar state statutes, and/or under state common law?
  • What is your personal (or your firm's) business strategy for growth in the coming years?
  • How does your firm conduct investment strategy and investment product due diligence?
  • What software is your firm utilizing?
  • How do you typically engage with new clients, and/or present financial plans?
  • What financial planning issues are becoming more prevalent today?
  • What skills would you like to see graduates of undergraduate programs possess, or enhance?
  • Will you be looking for either interns or graduates in the coming years?
  • Would you be interested in having an undergraduate student "shadow" you for a day, or for longer?
  • Would you be interested in serving as a mentor for a student? (Mentoring often involves monthly phone calls or Skype calls with your mentee, offering them advice on professionalism, career choices, and generally making good decisions.)
  • If Western Kentucky University were to host a one-day Personal Financial Planning Conference in the Spring of 2018:
    • Would you be interested in attending?
    • What dates would be best?
    • What speakers would you like to see?
    • Would you consider sponsoring or co-sponsoring a speaker?
B. Assist Students To Engage with the Financial Planning Community: Would you be interested in:

B.1. Tours of Financial Services Firms with Students. During the Fall 2017 semester, and again during the Spring 2018 semester, I'll be undertaking "day trips" (typically on Fridays) with my students to visit financial services firms in Kentucky and in/around Nashville, Tennessee. Up to 12 students join me on these visits, which typically involve a 1-2 hour visit to a firm. We typically visit 3-5 firms per day, and often one firm hosts lunch for the students. Firm members often provide a tour of the firm's offices, discuss their business model, provide an overview of a "day in the life of" various positions in the firm, and/or "tips" for students and/or first-year financial advisers. Visits to practitioners provide huge benefits to students.
  • Student become much more deeply committed to becoming future personal financial advisers.
  • They get a real sense of the environment they will likely work within. (Some students have only infrequently visited professional offices.)
  • Students get exposure to different business models, which assists them to further define their own career paths.
  • And, students become more serious about their studies when they return.
B.2. Assisting Students Financially. In these times where there is a significant "gap" between grants/scholarships and the actual costs of attending college, nearly all students need help. In order that students can better engage with the financial planning community, please consider a contribution to WKU's Financial Planning Program, directed at one of the following purposes:
  • The Oct. 2-3, 2017 FPA BE Conference is Our Key Priority for This Fall ... The Location of a National Conference One Hour From WKU Presents a Unique Opportunity. 
    • Can you sponsor one or more students to attend the Financial Planning Association's BE National Conference, Nashville, FL, Oct. 2-3, 2017, by paying registration fees ($199 per student).
    • We desire to take up to 60 students to this conference, given its location one hour south of our campus. This means many more of our students can attend, instead of the only 6-8 we can afford to take to conferences that are further away.
      • Can you assist one or more students to attend this conference?
      • Only $199 per student - can have a TREMENDOUS IMPACT upon the student.
        • Students report that attending a major conference is often the highlight of their college career.
        • And we, as professors, see students become more engaged in their classes and serious about their studies, after they attend a conference!
  • Please Consider Sponsoring the Student Chapter of the Western Kentucky University Financial Planning Association:
    • Provide scholarships for student members' dues ($35 each); or
    • Provide $250, $500, $750, $1,000, $1,500 or $2,000 to reduce the annual dues for all students who desire to join the WKU Student Chapter;
  • Please Consider Sponsoring One or More Students to Attend the NAPFA South Region Symposium (Atlanta, GA) in the Spring of 2018 (typically $150 per student to handle travel via shared travel (via van) and shared hotel room fees, plus the pre-conference and conference registration fee of about $175)
B.3. Seeking a future hire - for either a permanent position or an internship?Speaking to the Financial Planning Association Student Chapter at Western Kentucky University (meetings are typically 5pm CT, on a weekday, in Grise Hall). Please suggest a topic - often centered around careers, career development, etc. Please note that the choice of speakers is determined by the students themselves. (Hint: Offering to sponsor pizza - available from Papa John's on-campus, and picked up by students - for the meeting is usually a good way to get to the top of the list!)

B.4. Become a guest speaker at one of Ron's classes: I usually have one guest speaker to each of my classes, each term. Speakers address the topic of the class.
  • Applied Investments (this introductory-level class teaches business students to better save and to better manage their 401k, and reviews asset classes, mutual fund selection, and multi-factor investment concepts) (Fall 2017 and Spring 2018);
  • Retirement Planning (a broad range of topics, from Social Security to Medicare to Medicaid to use of immediate annuities to use of MoneyGuidePro software, and employee benefits) (Fall 2017); 
  • Estate Planning (Spring 2018); or
  • Personal Financial Planning Practice Management (new course beginning Fall 2018, emphasizing counseling techniques, prospecting and networking, and the use of various types of software in financial planning firms). 
B.5. Sponsor and/or Assist WKU's Center for Financial Success. Our innovative Center for Financial Success hires students to provide presentations to, and one-on-one financial counseling to, WKU's students. This provides real counseling and presentation experience for our graduates.
  • In addition to cash contributions to assist us in hiring more students, we are in need of your expertise for training of the Center's staff on personal budgeting (from a university student's perspective), seeking out college scholarships and grants, and how to manage student loans - especially where multiple loans exist, of different types.
  • For more information about engaging with WKU's Center for Financial Success, please contact its Director, Prof. Andrew Head: Thank you!
B.6. Inviting/sponsoring one or more students to your FPA Chapter event (if within driving range of Bowling Green, KY) and/or NAPFA Study Group or other conference or event? Students receive as much a benefit from networking with practitioners, and hearing their insights and wisdom, as practitioners do themselves.

If you are interested in one of the foregoing sponsorships, please contact me at

C. Join students from Western Kentucky University and/or me at the following events:

CFP Board of Standards, Inc.'s July 24th Tampa, FL Public Forum on its Proposed Code of Ethics and Standard of Conduct, Monday, July 24, 8:00 - 10:00 a.m., Renaissance Tampa International Plaza. I will be in attendance at the Public Forum and will then be part of a panel discussion, hosted by FPA of the Suncoast, following the Forum from 10:15am-Noon. Hope to see you there! (Note: CFP Board is hosting 10 public forums, around the country, the week of July 24-28.)

FPA of Southwestern Ohio Annual Symposium, Friday, Sept. 29, 2017, 8:00am – 5:00pm, at Miami University – West Chester, Voice of America Learning Center. I'll be presenting on "Due Diligence for IRA Rollovers Under the Leas of Regulators." (See description under FPA of Minnesota, below.) For more information about the Symposium, please visit

FPA BE National Conference, Nashville, TN, Oct. 2-4, 2017. Prof. Andrew Head and I will be bring many students from Western Kentucky University's B.S. Finance (Personal Financial Planning) Program to the national conference. Our campus, in Bowling Green, KY, is just an hour north of Nashville. We hope to see you at FPA BE! And - can you considering sponsoring one or more students to attend? (See above)

FPA of Minnesota 2017 Annual Symposium, Oct. 16-17, 2017. Visit for more details. My presentations include:
  • Exploring Fiduciary Issues: Fiduciary law is not uniform. Different legal standards may apply to fiduciary financial advisors as they engage in investment strategy selection, investment product selection, evaluating the benefits and costs of investment and insurance products, and in establishing their own fees. Integrating concepts from fiduciary common law, statutes and regulations, was well as from academic research into investment strategies and due diligence, Dr. Rhoades provides practical guidance on these issues for financial advisers.
  • Due Diligence for IRA Rollovers Under the Lens of Regulators: The SEC, state securities administrators, and other regulators have paid increased attention in the past few years at investment advisers’ determinations of whether a rollover of a client’s defined contribution plan account into an advised-upon IRA account is in the client’s best interests. Dr. Ron Rhoades provides practical considerations for advisors relating to data gathering, a checklist of financial planning and tax considerations that may be considered in connection with the rollover, and the methods to demonstrate the adviser’s value proposition.
D. Contact Ron for Future Speaking Engagements and/or Consulting Engagements.

I address topics on the application of fiduciary duties to investment advisers and financial planners.

   (A) I request payment for travel costs: (1) mileage to/from Bowling Green, KY to your location, and/or airfare from Nashville plus $69-$87 mileage to/from airport and airport parking; (2) hotel costs; and (3) conference registration fees.

   (B) I also request an honorarium as follows:
         (1) For-profit conferences, CE meetings, and consulting engagements at for-profit firms: $3,000 per presentation (or 6 hours consulting);
         (2) FPA Chapters, NAPFA Study Groups, and Webinars, and other Not-For-Profit Groups: $500 for one presentation; or $750 for two presentations at same conference.  [However, for FPA Chapters and groups within a four-hour drive of Bowling Green, KY, travel costs are requested but honorariums are waived, provided a "student rate" is available for undergraduate students to attend your event.]

Contact information:

Thank you!         

Saturday, July 8, 2017

CFPs to Become "F.A.A.T."? - "Fiduciaries At All Times"

(An earlier version of this blog post can be found at RIABiz.)

In a dramatic evolution that is certain to reverberate throughout the financial services industry, the Certified Financial Planner Board of Standards, Inc. released on June 20, 2017 its proposed revised “Code of Ethics and Standards of Conduct” that, essentially, would require all CFP® certificants to be “fiduciaries at all times.”

There is certain to be heavy pushback upon this proposal, especially by insurance companies. However, I believe it is likely that the CFP Board’s proposal is likely to proceed to implementation given recent developments.

Why? Momentum.

For example, on June 9th the U.S. Department of Labor in implemented its “best interest” standard for IRA accounts with a fairly strict duty of loyalty and the application of the prudent investor rule.

In addition, increased support for fiduciary standards at the state level exists (including their recent adoption in Nevada for all financial planners - except insurance agents who don't "hold out" as financial planners).

Also, the Financial Planning Coalition (which includes the CFP Board, the Financial Planning Association, and the National Association of Personal Financial Advisors) have long supported SEC adoption of fiduciary standards for all those providing personalized investment advice.

The June 20th proposal by the CFP Board is likely to be viewed as a significant step in the path toward a true profession for investment and financial advisers.

With the CFP Board engaging in the seventh year of its public awareness campaign, the recognition of the Certified Financial Planner™ certification by the public has grown tremendously and far outpaces the recognition of competing designations.

The vast majority of the over 77,000 professionals licensed to use the CFP Board’s marks in the United States will likely strongly support the adoption of the “fiduciary at all times” standards, given that their adoption will likely further the trust and confidence placed by consumers in Certified Financial Planners™. In turn, this will lead to even greater utilization of financial advisors, which numerous studies have shown is altogether necessary in order for individual Americans to navigate today’s increasingly complex financial world.

While some insurance companies and a few broker-dealer firms may resist the new proposals, should such firms not permit the continued use of the marks by their advisers these firms possess huge risks. Given the substantial educational and experience qualifications required of certificants, together with passage of the difficult CFP® exam, insurance agents and registered representatives may choose to exit firms that do not follow the CFP Board’s lead. Moreover, advisers at such a firm would be at a significant marketing disadvantage.

The 60-day comment period on the CFP Board’s proposal begins today and ends of on Monday, August 21, 2017. Public forums will then be held in eight cities during late July. A final version of the revised Code of Ethics and Standards of Conduct is likely by year-end, with an implementation date sometime in 2018.

Understanding One's Fiduciary Obligations.

It is one thing to say "I am a fiduciary." It is altogether another to fully understand the obligations assumed as a result. The difficulty is even greater given the different fiduciary standards that exist - from ERISA's "sole interests" standard, to the DOL's B.I.C.E. and its "best interests" standard (and the impartial conduct standards found therein), to the Advisers Act fiduciary standard (as applied by the SEC), to state statutory and common law standards, and now the CFP Board's standards.

The challenge for us, as a profession, as we further study the language of the CFP Board's standards, is to more fully understand the implications of the fiduciary standard, come together on how to correctly apply the fiduciary standard of conduct to various common situations that financial and investment advisers face.

In so doing, we must endeavor to not create - as the late Justice Benjamin Cardoza so aptly stated some 89 years ago, "particular exceptions" that would result in a "disintegrating erosion" of the fiduciary principle.

Ron A. Rhoades, JD, CFP® serves as Program Director of the Financial Planning Program at Western Kentucky University. He is a frequent commentator and speaker on the application of fiduciary standards to investment and financial advice. This article represents his own views and are not necessarily those of any institution or organization with whom he may be affiliated.


The broad application of fiduciary duties can be found in Paragraph D.1. of the CFP Board’s proposed Standards of Conduct, which provides in pertinent part:

1. A CFP® professional shall at all times serve as a fiduciary when providing financial advice to a Client. As a fiduciary, a CFP® professional must always act in the best interest of the Client. In this regard:

     a. Duty of Care. A CFP® professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise based on the Client’s goals, risk tolerance, objectives, and financial and personal circumstances.

     b. Duty of Loyalty. A CFP® professional shall place the Client’s interest above the interest of the CFP® professional and the CFP® professional’s firm. A CFP® professional must seek to avoid conflicts of interest. Material conflicts of interest that are not avoided must be disclosed and managed. A CFP® professional must act without regard to the financial or other interests of the CFP® professional, the CFP® professional’s firm, or any individual or entity other than the Client, which means that a CFP® professional acting under a conflict of interest continues to have a duty to act in the best interest of the Client and place the Client’s interest above the CFP® professional’s.

In the Terminology section of the proposal, the CFP Board provides the following all-inclusive definition of “Financial Advice”:

   (a) A communication, based on the financial needs of a Client, that based on its content, context, and presentation, would reasonably be viewed as a suggestion that the Client engage in or refrain from taking a particular course of action with respect to:
       1. the development or implementation of a financial plan addressing retirement, insurance, taxes, education, employee benefits, estate planning, charitable giving, or other financial matters;
       2. the value of or the advisability of investing in, purchasing, holding, or selling Financial Assets;
       3. investment policies or strategies, portfolio composition, the management of Financial Assets, or other financial matters;

       4. the selection and retention of other persons to provide financial or professional services to the Client ….

Sunday, July 2, 2017

July 2017: Time to Take Action to Assist Your Profession

Momentum Exists for the Fiduciary Standard, But Much Work Remains to Be Done.

Despite the anti-regulatory environment, momentum has grown for the implementation of fiduciary standards of conduct upon financial and investment professionals. With the support of industry organizations (CFP Board, Financial Planning Association, NAPFA, IAA, CFA Institute, CPA PFP division, and many others), significant progress has been made.

  • The DOL "Conflicts of Interest Rule" and related prohibited transaction exemptions are partially implemented (as of June 9, 2017).
  • The CFP Board has proposed a "Fiduciary At All Times" ("F.A.A.T.") requirement for its Certificants.
  • The State of Nevada amended (effective July 1, 2017) its financial planner law so that both RIAs and BDs and their representatives will be subject to broad fiduciary duties. Other states are considering similar legislation.
  • The SEC, under its new Chair, is considering again whether to impose fiduciary duties upon broker-dealers (although whether a bona fide fiduciary duty would be imposed, as opposed to a version of suitability, remains a big "IF").
Much work remains to be done. There are many, many fiduciary "battlegrounds." As discussed below, there are many particular battles in which fiduciary advocates are engaged currently - and your valued input is also needed.

Yet, beyond public policy initiatives (i.e., expressing support for various laws, regulations, and/or association imposition of fiduciary standards), there also exists another need for the development of the financial planning / investment advisory profession. We need to raise the bar - both as to defining our standards and in educating the members of our profession.

We Need to Earn the Right to Possess Our Own Professional Regulatory Organization (PRO).

We need to take charge of our own professional standards of conduct. So that the fiduciary standard will not be lowered or "particular exceptions" created by varying winds of politics. And so that the definition of "what is right" and "what is wrong" is not established by non-practitioners, but rather in a highly contemplative manner by experienced professionals.

"Taking charge" will only happen via a true "professional regulatory organization" (such as that which exists for attorneys, or for accountants in a sense). Such a professional regulatory organization would be granted rights (subject to governmental oversight) to define the requirements for entry into the profession, the right to sanction or otherwise expel bad actors from the profession, and the ability to define educational and continuing educational standards.

Why do we need to take charge, ourselves, of our own professional standards of conduct, and how they are applied? For two primary reasons:
  1. To protect both the public interest (as any true profession will do). A professional regulatory organization serves the public interest - via a bona fide fiduciary standard that imposes restraints on the conduct of its members, and via other requirements imposed upon its members.
  2. To protect the profession itself. By ensuring that the profession's high standards remain high, this enhances trust from the consumer, and this in turn leads to greater use of the profession's valuable services.

But, a professional regulatory organization for financial and investment advisers will not come easily. We need to earn the right to become a true profession. How? In the balance of this post, I present two ways for you to get involved, and in so doing to advance our profession.

(1) Promote the Adoption of Bona Fide Fiduciary Standards Via Your Own Participation in Public Advocacy.

Granted, our professional organizations have already made great strides in this area. The CFP Board has its new proposed Code of Ethics and Standards of Conduct, the Financial Planning Association has its ongoing support of the Certified Financial Planner(tm) certification), and NAPFA has its longstanding Fiduciary Oath and a strict adherence to fee-only practice.

But we must take great care to ensure that the fiduciary standard of conduct, and its requirements of due care, loyalty, and utmost good faith, remain principles-based and are not subsumed by - as the late Benjamin Cardozo warned against so long ago - "particular exceptions."

But, can we do more in this area? Yes. Primarily through education of policy makers and through advocacy.

So many opportunities exist at present for those who care about our emerging profession. These include:

  • Commenting upon, and generally supporting, the CFP Board's proposed revisions to its Code of Ethics and Standards of Professional Conduct.
  • Submitting comments to the U.S. Department of Labor on its recent Request for Information.
  • Submitting comments to the U.S. Securities and Exchange Commission on Chair Clayton's request for comments.
  • Participate in the public policy initiatives of the various professional organizations.
    • Seek to join the various public policy member committees of each organization, to have your voice heard.
    • Participate in state-level initiatives to influence state/local legislation and rule-making. This is highly important!
    • Participate in national-level initiatives, such as visits to your U.S. Senators and your U.S. Representative (either via meeting them in your home state, or on Capitol Hill during national advocacy days that various associations sponsor). [I participated for the first time in FPA's National Advocacy Days in June 2017, and it was a very rewarding experience. A real impact can be made. But instead of 77 participants (as the FPA had in 2017), we need 770 next year - 10x the number. Mark your calendars for a June 2018 visit to Capitol Hill. It will involve your own commitment of time (2-3 days) and money (small registration fee, plus travel costs). But, the result will impress you. For you can have a real impact!

(2) Contribute to the Discussion ... Should a Committee Be Formed to Help Define What Works, and What Does Not Work, To Comply With Fiduciary Standards of Conduct?

As I travel around my region, and around the country, I often hear from practitioners that they are uncertain on how to apply the fiduciary standard of conduct. There is a lot of uncertainty - and a certain amount of frustration, among many of our fellow colleagues.

And, as I meet with, and consult with, financial planning and/or investment firms, I find that many firms lack sufficient understanding of just what fiduciary duties apply to them, or how to apply (under DOL rules, and in certain other contexts) the prudent investor rule. When I point out my own views to these firms, the result is again - frustration in not knowing, and at times disillusionment.

The truth of the matter is that many, many in our emerging profession don't understand why it is important to avoid conflicts of interest, how to properly manage an unavoided conflict of interest, how to comply with the prudent investor rule's duties to minimize idiosyncratic risk and non-waste of client assets, and how to undertake proper due diligence on various types of investments. Nor do some of our colleagues know, more generally, what is required of them under the various fiduciary standards of conduct, nor what is prohibited.

How can we fix this? How can we eliminate - or at least alleviate - the frustrations many of our professional colleagues are feeling at present?

Do we turn to lawyers to help us? I hope not. While I am an attorney (and also a financial advisor practitioner, and an academic), and while attorneys have important contributions to make in providing guidance, few attorneys truly understand what financial planners do. Nor do they possess particular expertise in analyzing investment strategies or investment products or insurance products.

Do we permit "rule making via enforcement"? In which we define what is permitted, and what is not permitted, via the results of enforcement actions - whether they be by federal or state regulators, or by  the CFP Board? While enforcement actions have the benefit of judging real controversies - and this often leads to more careful consideration of the issues presented - the downside is that, alone, learning "how to stay out of trouble" by waiting on enforcement actions for guidance poses risks to each and every practitioner out there. None of us desires to be the "guinea pig" whose conduct is judged. In essence, waiting for a huge body of enforcement actions creates high personal costs for those whose conduct is first judged under fiduciary standards of conduct. And the lack of guidance creates risks for us all. (One might assume that decades of personal investment advice and financial planning would have generated a body of knowledge already. But mandatory arbitration with little in the way of reported decisions deters such a result. As do differences in fiduciary standards over time, and as does the changed nature of the capital markets, new insights from academic research, and the increased complexity of consumers' financial lives).

Is This A Better Solution: Proactive Guidance to All. The proper solution might be to at least partially seek to provide either hypotheticals, or advisory opinions, from a committee of experienced practitioners. Not to establish "rules." But rather to apply the fiduciary principle, and in so applying provide a greater level of guidance to us all.

This, in turn, would lead to better education of us all. Not just in the abstract (i.e., "here's the law or regulation, here's what it says, and here's when in applies). But, rather, education via more concrete case studies, that serve to illuminate the application of the fiduciary principles. So that our fellow colleagues can "up their game" - and their understanding of what is acceptable, and what is not.

How Should We Proceed, If At All, to Form a "Fiduciary Compliance Advisory Committee."

I seek your input and advice.

I submit that the task of serving on such a committee, if it were to be formed, is a daunting one.

Part of the problem is that we have many different fiduciary standards of conduct. ERISA's statutory "sole interests" standard (which incorporates the prudent investor rule). The DOL's "best interest" standard found in its new prohibited transaction class exemptions (B.I.C.E. and 84-24, in particular), which incorporate the tough "impartial conduct standards" and, within them, the prudent investor rule. State common law fiduciary standards of conduct. State legislative / rules applying fiduciary standards. The SEC's application of the "best interests" fiduciary standard found in the Investment Advisers Act. And the CFP Board's and other association standards (to the extent they apply a fiduciary standard of conduct). Hence, anyone serving on such a Committee has a lot of work to do, since any request or advice on a real situation that might arise, or any hypothetical situation, may result in varied conclusions depending upon which fiduciary standard of conduct is applied.

Part of the problem also rests with our own personal biases. Each of us have them. We are a product of our own education, training, and past associations. Setting to the side these personal biases can be difficult, and the best way to ensure this happens is by having at a minimum a committee of say, seven or more members, each with different perspectives and backgrounds, to debate the issues at hand. But all of such committee members must be committed to the profession and its development, committed to the public interest, and committed to and understanding of a bona fide fiduciary standard of conduct. And all of such committee members must possess the ability to be open-minded, and to seek to understand opposing points of view, prior to reaching any conclusions.

So, here are my questions to you:

  1. Would such a "Fiduciary Compliance Advisory Committee" be worthwhile?

  2. If so, should it be formed under the auspices of one or more of our existing professional organizations, and if so, which one? Or should this be an "independent" and "all-volunteer" committee - which by its nature would then possess more limited resources?

  3. What would you like to see the Committee do? Are there specific issues you would like to see addressed? Are there hypothetical situations you would like to submit for consideration? Should the Committee be accepting of requests for advisory opinions?

  4. How would this Committee's work (assuming it is formed) best be accumulated and disseminated? In other words, how would the lessons learned from this Committee's consideration of various issues best be communicated to practitioners, and/or utilized in more formal educational efforts?

  5. Do you have any other thoughts, relating to how to best provide guidance and education to our professional colleagues around the many issues presented by the fiduciary standard?

I look forward to hearing from you.

To submit comments for public viewing, please use the comment function on this blog. (I review all comments before publishing them, primarily as a means of deterring commercial postings.)

Or, please share your thoughts with me, privately, via email to:

Thank you.

Saturday, July 1, 2017

Issues of Public Policy I Often Wonder About ....

While I blog, otherwise write and speak about fiduciary issues, I have other thoughts about many of the public policy issues of today.

Lacking the depth of knowledge in any particular area, these are more like questions, rather than viewpoints I have adopted. On this July 4th weekend, I thought I might share a few of these questions with those who dare to read this post.

I Wonder About ... Dysfunction in the U.S. Congress.

  • There seem to be a lot of hard-working, dedicated U.S. Senators and U.S. Representatives. Why don't these individuals get more credit for at least trying?
  • There seems to be far too much allegiance to political parties, and too little allegiance to personal values and the pursuit of the "truth" and "better solutions."
    • Why should a Senator or Representative vote her or his conscience on every vote - not just when the "leadership" says it's "o.k. to vote your conscience on this one"?
  • I've always thought of the U.S. Congress as a weighing mechanism. The views of conservatives vs. liberals (and other contrasting points of view) are all taken into account, compromises are made, and a moderate, more middle-of-the road solution is achieved as a result. But this seems to have broken down in recent decades.
    • Was the past in Congress, decades ago, truly different, and more as I described?
    • And, if so, how do we get back to a Congress that works?
I Wonder About ... "It's Just Politics"
  • When did it become semi-acceptable to lie, then have the person who made the lie (or an observer) state "it's just politics"?
  • I was taught to never be critical of another person - by gossip, by calling names, or by otherwise being critical of the person or her/his motives. Saying something bad about a person just comes back to haunt you - whether in one's personal life, the world of business, or the world of public policy. I've not always been successful in my allegiance to this principle. But I try.
    • One can question a person's policy position, without questioning his or her integrity.
    • Why doesn't our press call those who unnecessarily call others names, or question their motives, to task?
  • Is it possible for any person to be - honest, well-reasoned, and hence not "newsworthy" - and still get elected nowadays? Or do only those who make headlines - through outrageous statements, falsehood after falsehood, or extreme positions - have a chance of getting elected to national office today?
  • Is it possible for any person to run for state or national office and refuse all contributions from organizations (be they corporations, unions, political parties, political action committees, etc.), and only accept contributions from individuals - and even then only up to a certain amount (such as $100 or less)? Would that person ever stand a chance?
  • Why do Presidential inaugurations cost so much (and lead to large corporate contributions, as a result)? Seems like those who want to party should pay for it - not by encouraging more money in politics.
  • For that matter, how can we get the "money" out of "politics"? Is a Constitutional amendment our only option at this point? And what would such an amendment state?
  • Why can't Congress be better stewards of our tax dollars?
    • The cost to produce the one-cent coin increased to 1.5 cents during 2016, for example. Time to eliminate the penny.
    • Small changes to save money, made repeatedly, add up. Especially over time.
I Wonder About ... The Size of Government.
  • Dear Republicans, government is not inherently "evil." Government does have a role to play in establishing standards (through law and regulation), and proper means for enforcement of standards (through private rights of action, primarily, and through government enforcement when private rights of action are wholly insufficient to deter improper conduct).
  • Dear Democrats, government should not be large. Government is not the proper solution to every problem. Nor do we, as a nation, possess unlimited resources.
  • Dear Members of Both Parties ... Look for ways to make government regulation simpler.
    • A prime example is our system of defined benefit and defined contribution plans. A huge number of different types of plans. A huge number of options, that just create costs for employers and employees who participate in the plans. As I've written about previously - simplify, simplify, simplify. It's possible!
  • Dear Republicans and Democrats ... Let's not "layer" government, by having different levels of government involved.
    • How can we remove federal "oversight" of states and municipalities, in their various government programs? Can we recognize that many times the costs of multiple layers of government outweigh the benefits?
    • How can we encourage states to consolidate various jurisdictions? For example, can we consolidate county and city/town governments, for greater efficiencies, in many areas? How about school districts, in other areas?
I Wonder About ... Technology and Jobs.
  • Technological innovation is likely to displace tens of millions of jobs in the next couple of decades. Will new jobs be sufficiently created?
  • We have a big educational gap, at present. We need many more skilled workers. Our colleges and universities are not providing sufficient number of graduates - especially those with technical skills (2-year degree, or certificate, holders). How can we address this better?
  • Apprenticeships do appear to be part of the solution. But are current proposals likely to end the needed greater support of technical skills training by other means?
  • Disintermediation is a powerful force. It is often resisted by enacting laws and regulations that, in effect, prevent change from occurring. Can we be more cautious about "protecting industries" from disintermediation and/or other changes?

I Wonder About ... Some Tax Reform Issues.
  • Many, if not most, income tax deductions today favor those who are high-earners. Few deductions matter much to those who pay no income tax, due to low incomes, or who are in only 10% or 15% marginal federal income tax brackets. Fair?
  • We need to abolish double taxation of corporate profits - once at the corporate level, then at the personal level (when dividends are received in taxable accounts, or when stock buybacks are received in taxable accounts). What's the best way to do this?
  • Democrats ... eliminate most corporate tax deductions. Restore depreciation expenses to occur over the projected lives of property (with only some acceleration of deprecation, if only to reflect the time value of money). Eliminate most tax credits. And then reduce corporate income tax rates, to enable a lower cost of capital for U.S. corporate activities. This will likely bring more jobs back to the U.S., as well.
  • Should not everyone pay some federal income tax, even if only 1%? Paying tax is participating in the funding of our country's needs. This leads to persons having a feeling of contributing - i.e., greater dignity.
  • Abolish the AMT. Abolish deductions and special tax treatments, first, where possible. Then you won't need to have the AMT system. It's really, really complicated, and leads to some perverse tax-driven moves by individuals.
  • Should the federal government apply a 2% flat income tax rate, on top of existing federal income tax rates, which 2% collected would then go to the states from which the 2% would be collected? Would this deter states from seeking to compete with each other through tax policy?
    • States could lower other taxes, as this new federal revenue comes in.
    • Why do some states permit new corporate (and even individual) taxpayers to pay less (or no) state income taxes, for a period of time, to attract new jobs? Seems unfair to existing taxpayers.
    • Should a federal law prohibit states and localities from providing tax breaks (from state income taxes, sales taxes, property taxes, etc.) to corporations, as a way of preventing states from showering benefits on a few, at the expense of the many?
  • In some states, state income tax rates are actually regressive, not progressive. Why? The deduction (when itemizing) of state income taxes paid on the federal income tax return.
    • For example, a person paying a 39.6% marginal federal tax rate (and that's not even the highest marginal tax rate, due to the net investment income tax and the phase-out of certain deductions), paying Kentucky's 6% maximum personal individual state income tax rate, effectively only pays 3.624% marginal taxes after taking into account the itemized deduction (assuming fully deductible, due to other itemized deductions, such as real estate taxes, etc.). In contrast, a Kentucky resident with $15,000 of taxable income in Kentucky pays at a 5.8% tax rate; such a person (or couple) is likely to have higher actual income due to personal exemptions and the standard deduction; but the 5.8% income tax paid likely results in no deduction for federal income tax purposes (as the person does not itemize).
      • Even if the income is a bit higher, and there are other itemized deductions that add up to exceed the standard deduction, the Kentucky resident is likely in only a 10%, 15% or 25% marginal federal tax bracket - making the effective state income tax rate - based on 5.8%, less federal income tax deduction taken - either:
        • 5.22% (for 10% federal marginal tax bracket);
        • 4.93% (for 15% federal marginal tax bracket); or
        • 4.25% (for 25% federal marginal tax bracket).
      • In each example above, the lower income tax earner pays a significantly higher tax rate than the higher income tax earner - for purposes of state income tax. Does the fact that this state's income tax brackets are so regressive, after taking into account the deduction of state income taxes - bother anyone else other than me?
  • As a long-time estate tax planning attorney, I applaud some recent changes in estate tax law.
    • Spousal portability was long overdue. It really simplifies estate tax planning for most married couples. Should we keep it? (In my mind, absolutely.)
    • A $5.5 million (approximate) exemption this year, per person (effectively, close to $11 million for a married couple) on its face seems about right. Especially since the exemption now increases each year with inflation.
      • But, is this a sufficient exemption amount to protect most "small businesses" and "family farms"?
      • How do you define "small"? What does a "family farm" look like today?
    • The 40% federal estate tax rate imposed on assets exceeding the exemption seems like a quite high percentage. Is the rate too high? Should the rate be brought back down to 30% - especially if the exemption amount remains as it exists under current law?
    • Should we eliminate the use of family limited partnerships and similar strategies by bringing back family attribution rules.
    • Should we keep the federal estate tax, but with a lower rate applied lessen its burdens on the very few to whom it still applies?
      • We have great wealth disparity, and income disparity, in this country. We enacted the federal estate tax to minimize the risks of wealthy families owning most of America, through "dynasties."
      • Oh, by the way, should we eliminate the continuation of dynasties through generation-skipping trusts (which is a way around the federal estate tax)?
I Wonder About ... The Future of Democracy.
  • Democracy is a great experiment, that will continue to be tested. We have to always support it, and work to make it better.
  • Democracy is hard. In fact, it's very hard. I may spend decades of my life advocating for a certain position. Then, standing next to me tomorrow, or the next day, may be a person who publicly advocates for the exact opposite position, at the top of her or his lungs. This obviously would troubles me, as it would anyone. But, freedom of speech must be preserved.
    • I may fervently disagree with what you have to day, but I will always defend - to my utmost ability - your right to say it.
  • We have a republican form of government, not a pure democratic form of government. (I don't refer to our current political parties with this terminology. If you are unfamiliar with these terms as they are utilized, look them up.) Regardless, essential to our democracy is participation by as many as possible in the political process. Primarily this is done via voting.
    • Throughout our history we has disenfranchised persons from voting - those not owning property, those who were slaves, those who were women, those who were minorities, etc. In today's modern society, we continue to see efforts to reduce participation in the voting process. This seems troubling to me, and an abuse of the rights of each individual.
    • Why don't we hold elections over the weekend, when more persons can vote?
    • Why don't we make it easier to vote early, or via absentee ballots, than it is now?
    • Why don't we investigate why some voting precincts have long lines, time after time (which deters voting), while other precincts in the same county (or other jurisdiction) consistently have much smaller lines?
I Wonder About ... The Regulation of Financial Services.
  • How will we move, steadily forward, toward a profession for financial and investment advisers that:
    • Has, at its foundation, adherence to a bona fide fiduciary standard of conduct.
    • Has, at its foundation, the requirement for greater financial and investment education than required to obtain licensure today?
    • Provides effective rule making and oversight by the professionals themselves via one or more "professional regulatory organizations" - and which controls (subject to some government oversight, in order to avoid the formation of guilds) the regulation of those who are permitted to practice, and the right to sanction or expel those who do wrong - via a peer review process?
    • Undertakes a "light touch" to oversight, respecting of our status as professionals (and not treating us as criminals)?
      • But which undertakes frequent inspections on assets custodian, i.e., "asset verification" - in order to deter and detect actual fraud, and to prevent Ponzi schemes (which start small and usually due to financial pressures on advisors) from becoming larger?
    • Lessens regulatory burdens that currently exist, some of which just provide things for securities examiners to examine? Examiners tend to focus on documentation requirements, and disclosures, because they are usually not competent to address issues of due care; private rights of action, and peer review, are the answers in these areas.
    • Provides appropriate advice to members of the profession, so that we don't engage in the dreaded "regulation by enforcement." (See my recent post posing some questions about this.)
  • Can we recognize that pure capitalism is not appropriate - and that standards of conduct are properly applied (through principles-based regulation), in today's complex financial world where such a great disparity of knowledge and expertise exists as between investment and financial advisers and individual consumers? 
  • Why do we permit those who argue against the fiduciary standard to frame the debate as one in which "choice should not be restricted"? At its core, the fiduciary standard restrains conduct - it prohibits certain conduct, and it mandates certain responsibilities. These, in turn, restrict choice - by eliminating bad choices. It's disconcerting to hear from the new SEC Chair that a fiduciary standard should be adopted that "does not restrict consumer choice" (to paraphrase) - when that's exactly what the fiduciary standard is all about.
  • Why does the SEC permit mutual funds to report "portfolio turnover" as the lower of sales or purchases (divided by net assets), rather than the average of the two? Seems misleading, especially for funds that have a high percentage of inflows and/or outflows during a period. (I know why; I just don't think it's fair.)
  • Why was "suitability" - a concept that actually reduces the standard of "ordinary care" applicable to most service providers, and a standard that may have been correct when stockbrokers main functions was undertaking trades for clients - ever extended to the selection of mutual fund managers (i.e., investment managers)? The result seems to be lack of accountability of broker-dealer firms for giving investment advice.
  • Why are titles not appropriately regulated in financial services? If you call yourself a "financial / investment / wealth / estate" + "planner / advisor / consultant / manager" - should you not be held to account for holding yourself out in that manner. (Via the application of the fiduciary standard.)
  • Why did the SEC permit brokers to provide so much "advice" while not being held to the fiduciary standard? It really goes against the plain meaning of the requirements for the exclusion from investment adviser registration.
  • Why does the SEC permit dual registrants to disclaim away (or have clients waive) core fiduciary duties, especially given the anti-waiver provision contained in Section 215 of the Advisers Act?
  • Why don't we just do away with most of the disclosure requirements (in the new DOL rules) found in BICE, and 84-24? Let's just rely on the Impartial Conduct Standards.
    • Disclosures are largely ineffective, in the financial services world. That's why we go to the trouble of imposing fiduciary standards.
    • Disclosures never, alone and without much more, defeat the requirement to act in the client's best interests.
    • Informed consent is required, when a conflict of interest is present. And no client would ever consent to be harmed.
  • Why don't we just acknowledge that you cannot serve two masters at the same time?
    • Bona fide fiduciaries represent the client, and only the client.
    • Bona fide fiduciaries don't represent their firm (by selling proprietary products), nor do they represent other product manufacturers (by receiving product-based compensation).
  • Why do certain financial industry participants refuse to recognize this plain truth: fees and costs matter. The higher the product-based fees, however, paid, the lower the returns to investors, all other things being the same.
  • Why don't we realize that ... economic incentives matter?
  • Why do we ever allow the provision of tax-efficient investing advice, when constructing an investment portfolio for a client and choosing proper investments, to be disclaimed by any investment adviser, financial planner, broker-dealer, or others providing advice on such issues? Tax drag matters - a great deal.
  • How can we more effectively stop the revolving door between the SEC and Wall Street (and the law firms that serve Wall Street firms and insurance companies)?
  • Is the Volcker Rule too complex? Are the regulatory structures in place too costly? Would it be simpler, and better for our economy, to reinstate Glass-Steagull?
  • How can we better educate those who provide investment advice and portfolio management about ...
    • the requirements of the fiduciary standard of conduct?
    • the requirements of the prudent investor rule? (When it is applicable.)
    • what "works" in investing?
    • what does not "work" in investing?
    • why "investing" as a fiduciary advisor, on behalf of a client, should not involve "speculation" - except in those rare instances when the client desires speculative strategies be employed (and, assuming the prudent investor rule application is not mandated).
I Wonder About ... Health Care. (A lot of questions here. Do you dare to read?)
  • Is health care a "right"? Is food? Is housing?
    • We subsidize the provision of food a great deal, through government programs.
    • We subsidize the provision of low-income housing a great deal, through government programs.
    • But we don't "guarantee" either food or housing to all. Charitable organizations may be better suited to "fill in the gaps."
    • Yet, charitable organizations seem ill-equipped to provide substantial health care assistance to those who fall in the gaps. Hence, we indirectly provide for health care assistance through obligations imposed on hospitals to provide care to the indigent - at least some amount of care. Is this fair?
    • Am I comfortable with, according to some estimates, 20,000 more Americans dying each year if the current proposals pass, due to lack of access to health care?
      • Is such a statistic accurate? Does it overestimate or underestimate? Who knows. But, there would be more deaths.
      • Such a statistic seems abstract. Let me try to put it in terms that are more local to me. If there are 100,000 who live in my city of Bowling Green, that means (on average) there would be 6 more deaths in my city, each year, as a result of this legislation.
      • I regard myself as a moral person. I am greatly troubled by this statistic. Should I not be troubled by it?
  • There is no question that the Affordable Care Act created some perverse disincentives.
    • Small employers are disincentivized from crossing the "50 full time employee threshold."
      • Why are small employers treated so unequally from large employers? Is this fair?
    • All employers are disincentivized from hiring more full-time workers, in favor of hiring part-time workers (no more than a certain number of hours worked per week).
    • At least some of those on Medicaid, due to low incomes, may possess a disincentive to seek employment.
  • The Affordable Care Act had some very positive reforms to insurance regulation.
    • The new legislation would appear to permit states to opt out of covering preexisting conditions - for some plans.
    • If you know anything about insurance, this violates the principles of insurance. Set up different rules for coverage, for different types of plans, and the healthy will migrate to the cheaper, less costly plan (or opt out of coverage altogether). This leads the unhealthy stuck in the more expensive plan - which then gets more and more expensive, leading to more persons dropping out. Yes, this is an insurance policy death spiral.
      • I have taught a course in principles of risk management and insurance. The proposed legislation would permit states to essentially violate the principle of insurance, if they so choose. Those with pre-existing conditions would, in the end, lose coverage as their insurance policies collapsed.
  • The Affordable Care Act was never titled "Obamacare" by the way. Nor is the new legislation titled "Trumpcare." Why does the press use what are clearly political terms for these bills / laws, thereby exacerbating the feelings of those who participate in debating these issues? Can't we hold the press to a higher standard?
  • Yes, health care legislation is complicated. But why are we not addressing efficiency in the delivery of health care coverage, as a means of bringing costs down?
    • The major problem with health care remains its costs and how to fund its costs.
    • Should we not endorse the greater use of community health care clinics?
    • The Affordable Care Act increased the availability of patient's electronic records, leading to certain efficiencies in coordination of care (and, hence, better patient outcomes). Let's preserve this initiative.
    • I'm not a fan of "big government." But, is health care appropriate for for-profit businesses? Or should we turn to another solution?
      • Depending upon how you define them, non-profit businesses are a significant portion of the U.S. economy.
      • Should only "mutual insurance companies" (essentially, not-for-profit companies, owned by policy holders) be permitted to be the "payers" in health care systems in the United States?
      • Can we fashion not a "single-payer system," but markets (perhaps by state) in which mutual insurance companies or other types of not-for-profits compete to provide comprehensive health care coverage? And, in so doing, can we eliminate much of the billing and associated paperwork, and hence make health care more efficient?
  • As the richest nation in the world, why are we the only (or one of the few, depending on who you listen to) nation(s) who don't provide comprehensive health care coverage for all of its citizens?
  • Why should U.S. corporations shoulder the burden of group health care insurance premiums. Corporations in other countries generally don't. Does this make U.S. corporations less competitive?
    • If we remove the huge burden of health care costs from American business, would it make U.S. corporations more competitive, and/or bring more jobs back to the U.S.?
    • Why does the focus on the low wage growth of the past 4 decades not include, as part of the statistics often utilized, the "total compensation" (including the employer portion of health care insurance premiums paid, etc.) provided to employees. If this were done, would the statistics look substantially different?
    • If we remove the requirement that large corporations provide health care coverage, and move to a system in which health care coverage for all is provided via some other means, would not wages go up substantially?
    • Again, I don't like the disparity in government regulation, as between large employers and small employers. Why should small employers not bear the burdens of health care costs, when large employers are required to bear such costs, under the Affordable Care Act? And, as stated above, these regulations create some interesting distortions in our employment markets.
  • Why not adopt a new funding means for health care costs?
    • Tied to a combination of the annual income and net worth of each individual (or family).
    • Net worth seems to be necessary to include. As the current tax law permits a lot of "income" to not be reported (through tax-deferred or tax-free accumulations, such as 401k, traditional IRAs, Roth IRAs, non-qualified annuities, life insurance cash values, non-realization of capital gains and losses, etc.).
      • A certain amount of net worth would be excluded, from computations done each year. For example, at age 20 a person might be able to exclude $100,000 of net worth, by age 30 this would have risen to $200,000 of net worth, etc., etc.
      • Values for real estate would be "market values" as undertaken by property appraisers.
      • Most assets would be valued as of December 31st, for purposes of the next year's computation.
      • Tax returns would include a page for calculation of net worth.
      • Perhaps a small percentage of net worth, above and above the excluded amounts, would be required to be devoted to health insurance premiums - as part of the total contribution an individual makes to premium contributions.
    • Annual income would be based upon an estimate provided by each person. This estimate could be changed, online, each month - as a person's employment and income changes.
      • As a person's income increases, so does their contribution to health care insurance premiums.
      • If the amount of income, upon filing of a person's federal income tax return for that year, is lower, a "refund" of insurance premiums paid would occur for that year.
      • If the amount is higher, an extra payment would be paid (with a person's tax return) for that year, plus a fixed rate of interest.
    • Each person's contribution to premiums would go up with each $1,000 increase in either net worth (above excluded amounts) or income. No huge increases once certain thresholds are crossed, as often occurs under current tax laws. In this way, there is no huge disincentive to accumulate more assets, nor to have more income.
    • The government steps in to subsidize premiums for those who are the poorest - in terms of a combination of net worth and income.
I Wonder About ... Religion. (Now, this is a touchy subject.)
  • Can we recognize that while religion is a very powerful and mostly positive contributor to our society, at times religion has been used incorrectly?
  • Should we never say we are doing an action because "God has said it is right." How do we know this? Isn't it better to say that our values and our view of what is right, and wrong, are provided to us in large measure by our religious beliefs. But our actions are determined by what we view as right. (We should not presume to speak for God.)
  • Can we recognize that humans have certain inalienable rights ... rights that cannot be defeated even by religious beliefs? Religion should not be used to oppress, such as by defining that women must be subordinate to men (in some religions).
  • How strongly can we advocate against religious oppression, without questioning ...
    • Why women can't be priests in certain religions?
    • Why a woman cannot become Pope?
  • Can we question, without being disrespectful, those who advocate for "tradition" even though their arguments have some type of discriminatory effect?
  • Can we recognize that change in our society at times occurs gradually, and at other times occurs more rapidly. Can we at times we respect gradualness, while at other times - such as when core fundamental rights are at issue - respect that we must act to embrace more rapid change, even though disruption occurs?

Tuesday, June 27, 2017

Most Nevada Financial Planners Become Fiduciaries Per State Law on 7/1/2017

Overview. On July 1, 2017, nearly all of those providing financial planning services, or holding out as financial planners, to clients located in Nevada, or those investment advisers and registered representatives who are located in Nevada, become subject to fiduciary duties as defined by Nevada state law.

 The definition of "financial planner" is quite broad, as it applies both to:
    (1) those who advise others upon the investment of money or upon provision for income to be needed in the future;
    (2) any individual who holds himself or herself out as qualified to perform either of these functions.

However, as set forth below, insurance agents who provide "incidental" advice, and attorneys and CPAs, remain excluded from the definition of "financial planner."

This Law Will Spread to Additional States. This new law in Nevada is likely to be copied by several other states in the next few years. In the legislatures of several states, concerns exist regarding the Trump Administration's efforts to reverse the U.S. Department of Labor rule-making as to fiduciary, as well as the inaction of the SEC (since they were authorized in 2010 by the Dodd Frank Act) on the fiduciary issue.

Interaction with Federal Law. This is an additional obligation imposed upon broker dealers, RIA firms, and their representatives (registered representatives and investment adviser representatives). ERISA preempts state law, but only as to the duties applicable to ERISA-covered retirement plans. The DOL's rules as to IRA accounts do not provide for preemption, nor do the federal securities acts preempt Nevada state law.

"Financial Planner" Now Includes Broker-Dealers/Registered Representatives and Investment Advisers/Representatives. Since 1993 Nevada law defined a “financial planner” as "a person who for compensation advises others upon the investment of money or upon provision for income to be needed in the future, or who holds himself or herself out as qualified to perform either of these functions." However, under prior law, the definition of "financial planner" excluded broker-dealers, sales representatives (i.e., registered representatives), and investment advisers. The 2017 legislation, now signed into law, eliminates these exemptions and thereby makes such persons subject to the provisions of existing law governing financial planners.

The Exclusions: Attorney, CPA, Insurance Agents Whose Advice is "Incidental." Still excluded from the definition of financial planners are attorneys and producers. Also excluded is "a producer of insurance licensed pursuant to chapter 683A of NRS or an insurance consultant licensed pursuant to chapter 683C of NRS, whose advice upon investment or provision of future income is incidental to the practice of his or her profession or business."

The Fiduciary Duty, Disclosure of Compensation, Duty to Know Client. The prior section of the statute describing the duties of a financial planner was not amended, and it provides: A financial planner has the duty of a fiduciary toward a client. A financial planner shall disclose to a client, at the time advice is given, any gain the financial planner may receive, such as profit or commission, if the advice is followed. A financial planner shall make diligent inquiry of each client to ascertain initially, and keep currently informed concerning, the client’s financial circumstances and obligations and the client’s present and anticipated obligations to and goals for his or her family.

Enforcement by the Securities Administrator. The new legislation enacts a provision to enable the Nevada Administrator of Securities "to enforce the fiduciary duty imposed on broker-dealers, sales representatives, investment advisers and representatives of investment advisers."

Enforcement by Private Right of Action. The section of the law providing for a civil remedy for clients was not changed, and provides: "Liability of financial planner.
      1. If loss results from following a financial planner’s advice under any of the circumstances listed in subsection 2, the client may recover from the financial planner in a civil action the amount of the economic loss and all costs of litigation and attorney’s fees.
      2. The circumstances giving rise to liability of a financial planner are that the financial planner:
         (a) Violated any element of his or her fiduciary duty;
         (b) Was grossly negligent in selecting the course of action advised, in the light of all the client’s circumstances known to the financial planner; or
         (c) Violated any law of this State in recommending the investment or service."

Rulemaking on Fiduciary Duty Authorized and Will be Closely Watched. The Nevada law also authorizes the Administrator of Securities "to adopt regulations defining or excluding acts, practices or courses of business as violations of that fiduciary duty and prescribing means to prevent violations of that fiduciary duty."

It is one thing to state that one is a fiduciary. It is another to then define the parameters of the fiduciary obligation. The rule making by the Administrator of Securities will be crucial in order to preserve a bona fide fiduciary standard upon financial planners in Nevada.

Other issues exist as to coverage of who is a "financial planner" under the statute. For example, is the term "Certified Financial Planner(tm)" or the acronym "CFP(r)" "holding out" as a financial planner. One could easily conclude that this is "holding out," under the plain language of the statute. Similarly, other designations and certifications using the terms "financial consultant" or similar terms might trigger application of the statute. There is increased interest in regulation of the use of titles. Hence, Nevada's rules in this area will be closely watched.

Tuesday, June 13, 2017

8 Thoughts and 4 Questions on the DOL Fiduciary Rule and Its Impacts

As I write this on Tues., 6/13, the fourth day of adherence to the DOL's fiduciary rules (i.e., its "Conflict of Interest Rule" and related prohibited transaction class exemptions) has been completed. And the world of financial services continues to revolve.

Over the past few weeks I've had a number of thoughts about the rule:

1. Who do you represent? It seems to me that most of the problems exist when a person tries to wear two hats. In the end, you either represent the manufacturer of a product well (in an arms-length relationship, typically), or you represent the client well (as a fiduciary). You can't do both - successfully.

Here's a rule designed to keep you out of trouble ... If you represent the client, get paid only by the client. If you represent the product manufacturer, and you distribute products, get paid from the product. Don't mix the two.

2. The impartial conduct standards, with their application of the prudent investor rule, are tough in their application of the investment adviser's duty of due care. 

Advisers of all ranks need to step up their due diligence. To me, there have always been two key inquiries: investment strategy; and investment security or product due diligence.

     A) Investment Strategy Due Diligence. You have the duty to minimize idiosyncratic risk, under the prudent investor rule. This is more than just minimizing a portfolio's standard deviation. It also involves not suffering a permanent long-term underperformance of the portfolio.

Perhaps one way to address this issue is by asking this question ... "If you deviate from a "total stock market" / "total bond market" / "total universe of publicly traded REITs" portfolio, what solid reasons do you have for doing so?"

There are many solid reasons for deviating from such a portfolio. But which ones are supported by strong evidence? Can you back up your asset class selection, and your means of mixing those asset classes (i.e., through strategic or tactical asset allocation), via proper evidence, or is what you are doing more akin to speculation?

If your investment strategy is challenged, you are likely to possess the burden of proof. (Generally speaking, those who claim the use of a prohibited transaction exemption bear the burdens of demonstrating their allegiance to their conditions.) Accordingly, can you prove that your investment strategy is defensible? Specifically, can you prove your investment strategy makes sense by the support of expert testimony, and is not just based upon speculation? Will your expert's testimony even be admissible?

Note that to have your expert's testimony admitted in a judicial proceeding, Rule 702 of the Federal Rules of Evidence incorporates the Daubert standard, which is also followed by more than half of the state courts:

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:
(a) The expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
(b) The testimony is based on sufficient facts or data;
(c) The testimony is the product of reliable principles and methods; and
(d) The expert has reliably applied the principles and methods to the facts of the case.
(Emphasis added.)

Very generally, your expert's opinion must be based either on strong academic evidence, extensive back-testing, or some other robust and reliable analysis.

Ultimately, the judge is the gatekeeper, ruling upon whether an expert's testimony is reliable (and hence relevant to the matter at hand), and therefore admissible.

    B) Is Your Investment Product Due Diligence Up to Par?

Under the prudent investor rule, you possess the duty to not waste the client's assets. In the world of pooled investment vehicles, such as mutual funds, this means paying close attention to fees and costs. A huge amount of academic research supports the conclusion that higher investment product fees and costs lead to lower returns, especially over the long term.

While mutual funds and ETFs provide a means of diversification among individual securities, the fees and costs of such funds deserve intense scrutiny. In essence, as seen in many cases brought against plan sponsors over the past decade, if you have the ability to recommend a lower-fee-and-cost mutual fund or ETF versus a higher-cost mutual fund or ETF, all other things being equal, do so!

It's time to up your game, when you undertake due diligence. Do the factors you apply in selecting investment products (to implement your strategy) flow from either common sense or do they possess academic support? Are you examining all of the fees and costs of the fund at hand? Are you comparing the product to all others in the marketplace?

If you are using alternative investments, then the degree of due diligence required only increases. Intense due diligence is required. Do you possess the expertise to undertake such due diligence? Have you throughly documented your due diligence efforts?

3. The impartial conduct standards impose a strict fiduciary duty of loyalty.

The impartial conduct standards override every other consideration in the DOL's rules.

Want to offer proprietary products? - Beware. Very, very difficult to justify, in my view.

Want to recommend products that pay your firm additional compensation? - Beware. You are probably wasting the client's assets.

Want to use B.I.C.E. to accept product-related compensation, including 12b-1 fees, payment for shelf space, soft dollar compensation, etc.? You are walking into a minefield.

Smart individual advisers will avoid using B.I.C.E.

The problem is not with the impartial conduct standard's "no more than reasonable compensation" requirement. If you are providing services which are difficult to quantify or compare (such as financial planning which is goals-based, and especially life planning services), you won't need to be concerned much about challenges to your fees. It is very, very difficult to "benchmark" professional counseling fees against other fees. In fact, courts resist interfering in fee disputes, unless the fees are clearly outrageous for the services provided.

But, if part of your fees are derived from the products, those fees come from somewhere. For example, payment for shelf space is derived from higher fund management fees. And 12b-1 fees that provide little or no benefit to fund shareholders. It is very, very difficult to justify higher product costs, especially when they increase your compensation. That's why it is important to levelize compensation (at the firm level), such as by crediting third-party compensation received against advisory fees.

Of course, it is far simpler - and less costly from a systems and technology standpoint - to just adopt an approach where all compensation is received from the client, directly, and product-related compensation is eschewed.

4. American business owners (i.e., plan sponsors) should rejoice.

Plan sponsors run businesses. They are not investment experts. So they turn to retirement plan consultants to assist them in fulfilling the plan sponsor's fiduciary duty. Plan sponsors rely upon the recommendations these consultants make.

But, as so often seen in the class action cases brought against plan sponsors to date, in nearly every instance the "retirement plan consultant" (broker-dealer) is dismissed from the case. Why? Because the consultant, under the DOL's prior definition of fiduciary, was not a fiduciary and did not possess a duty of care. They only possessed something less - the vague duty of suitability.

Now, plan sponsors will be able to hold their consultants responsible. And, as a result, consultants will give (collectively) much better recommendations on which funds to include in 401(k) and other ERISA-covered plan accounts.

The result is a shifting of costs (relating to potential liability for inappropriately choosing products) away from American business owners and onto the retirement plan consultants. As it should be - for when advice is provided by retirement plan consultants, they should be held accountable for that advice.

5. The American economy's future is brighter.

As consumers continue to possess savings from less fees and costs, their retirement account balances will grow larger over time.

These accumulated assets, in turn, provide the fuel for the American economy. As greater savings and larger investment balances take place, over time, greater capital is available. This lower the cost of capital for American business. It will provide the fuel to transform innovation into new products and services that benefit us all.

It is difficult to quantify the amount of increased capital accumulation, here in the United States, as a result of the new DOL rules. In part because the DOL's quantitative analysis focused on IRA accounts, and the often-cited "$17 billion a year in savings for retirement investors" does not include the additional savings likely in 401k and other ERISA-covered qualified retirement plans. Nor do the savings include the spillover likely to result as non-qualified assets are increasingly likely to be managed under a fiduciary standard.

Still, it might be speculated that the pool of capital available to American business owners, as a result of the DOL's fiduciary rule alone - should the rule continue - will be 10% greater in 15-20 years (and perhaps much, much greater). And, the effect is compounding, spurring on U.S. economic growth for generations to come.

6. Changes in law and regulation creates winners and losers; competition is enhanced.

ERISA, and the old DOL regulations, created winners and losers. For example, plan sponsors incurred liability to employees, while brokers (upon whom they relied) usually possessed none. This shifted costs from Wall Street and the insurance companies (the product manufacturers and their distributors) to American business owners (plan sponsors). In essence, the old DOL regulation, adopted in 1975 and much out-dated, prevented (through ERISA's preemption) the application of state common law fiduciary duties on those providing advice to sponsors of ERISA-covered retirement plans.

The changes in the law and regulation create winners and losers as well. There are many in American business that stand to benefit. First and foremost are plan sponsors - business owners that strive to do the right thing for their employees, by providing retirement security for them.

Of course, those who stand to lose under the changed regulations have, and continue to, scream the loudest. As seen in the media, they profess that they embrace acting in their customers' "best interests." But they resist real accountability for the advice they provide.

The fact of the matter is - when investment and insurance products are forced to compete on their merits - and not on the basis of how much revenue-sharing or other payments they provide - true competition among product providers results. And isn't true competition in the marketplace what we desire to promote?

7. Insurance companies and asset managers will continue to fight hard.

When you create true competition in the marketplace, the strong will survive. As it should be.

Some insurers stand to lose billions and billions of dollars a year from the changes in the proposed regulation. Even more than the DOL predicts, in my view, as a "tipping point" may have been reached in the marketplace. Not only IRA accounts and ERISA-covered retirement plans are affected, but the application of fiduciary principles will increasingly occur to other accounts, as well.

Low-cost investments will win out. (This includes many but not all passively managed investments, and some low-cost actively managed investments.)

But high-cost active management is on its way out the door (at least, substantially). Most high-cost variable annuities, hedge funds, and non-publicly traded REITs cannot be recommended under the prudent investment rule, once you undertake an independent, objective cost-benefit analysis of the product involved.

And recommendations to purchase immediate fixed annuities, or equity index annuities (also called fixed index annuities) - from insurance companies that are not highly rated as to their financial strength - are also problematic. (In Australia, when a similar standard was imposed, financial advisors largely discontinued recommending immediate lifetime annuities from insurers with low financial strength ratings). Fortunately, some good low-cost VAs, and immediate annuities from strong insurers exist. [And I hope that financial advisers will increasingly suggest for their retired clients annuitization of a portion of the retirement nest egg over the client's lifetime, given the robust academic support for this approach.]

The underlying investment concept of EIAs is a good one, from the standpoint that they could form a portion of a client's overall portfolio (generally, as part of a fixed income allocation, although other approaches to how EIAs are incorporated into an investment portfolio are possible). But the control by the insurance company of its own profits, the lack of transparency in the products, their complexity, and their high embedded costs create an opportunity for some company to come along and provide a much better EIA from a highly rated insurer.

Cash value life insurance sold as a retirement planning vehicle? Just say no. (The explanation of the tax trap that awaits, the the fees/costs incurred versus the benefits achieved, could occupy a dozen or more pages.) (However, there are instances, such as for asset protection purposes for clients engaged in high-risk professions, that the limited use of such tools can make sense.)

With so much money at stake, the insurance lobby's fight over the DOL rule's continuation, after 1/1/2018, will be brutal. In particular, the insurance lobby has always been among the most powerful in Washington, D.C. But, hopefully, common sense will prevail. But only if we continue to educate policy makers that the imposition of bona fide fiduciary obligations:

  • Creates true competition in the marketplace;
  • Aids American business;
  • Will spur on U.S. economic growth, especially over the long run; and
  • Provides increased retirement security to our fellow Americans.
8. We possess an inflection point that accelerates the trend toward fiduciary advice and away from product sales.

The transition from a product seller (paid from products) to a fiduciary adviser (paid by the client) can be a tough one. Especially so when credits must be provided against future advisory fees, due to commissions recently paid. Adviser's compensation may be depressed, at least for a period of time.

Yet, when the transition is made, it is readily apparent that:
   - Clients are happier; they have greater trust in their adviser; and
   - Advisers are happier; they prefer being on the same side of the table as the client.

Advisers who have transitioned from commission-based compensation (product sales) to fee-based compensation (advisory fees, in a fiduciary relationship) report that they enjoy going to work every day. Free from the need to undertake transactions to make a living, they can focus more on the objectives of the client. They tend to increase their own personal counseling abilities.

One can easily question the "value proposition" of many broker-dealer firms today. Especially from the fiduciary adviser's standpoint. Many RIA firms utilize discount brokerage firms as custodians (such as TD Ameritrade, Schwab, Fidelity, and several others). These discount brokerage firms compete to provide their services, to RIAs. The result is often far less costs incurred by clients.

So many registered representatives have left to form, or to join, fiduciary RIA firms in recent years. Yet, one hardly ever hears of advisers that move from RIA firms to broker-dealer firms (or from a fiduciary relationship with their clients to a non-fiduciary one).

The DOL fiduciary rules, even if only effective for 7 months or so, will accelerate the long-observed trend away from commission-based compensation,and toward fee-based accounts.

Questions Remain. In the months ahead, perhaps we will have answers.

    A. How enforceable are the impartial conduct standards today, via private action? Do they, as I have previously written about, constitute implied terms of express contracts? (Even though the DOL does not require during this transition period that the warranties to act in the client's best interests be expressly included in client agreements). If so, then these standards apply to existing IRA accounts that are not grandfathered. And that is a huge event - as the standards would be enforceable by private legal action (judicial actions or, much more commonly, individual arbitration proceedings).

(It is clear that the impartial conduct standards now apply to plans and accounts governed by ERISA, and also now apply during the IRA rollover decision-making process. But I continue to hear varied opinions as to whether the impartial conduct standards can be enforced as to IRA accounts where no IRA rollover takes place, and grandfathering of the account has not taken place.)

    B. Is commission-based compensation for mutual fund sales, such as Class A mutual fund share sales, incompatible with Modern Portfolio Theory (which, in turn, is incorporated into aspects of the prudent investor rule)? Given that asset classes need to be rebalanced - whether you are undertaking either strategic or tactical asset allocation - and that previous funds purchased on a commission basis would need to be sold (at least in part) within what, in some market situations, is a relatively short time, how can the payment of commissions not be deemed a waste of client assets?

   C. Will registered representatives see their U-4s dinged to a very large degree? One of the many things I don't like about B.I.C.E. is that firms can receive additional product-related compensation, but advisers' compensation arrangements must generally be level. That means that the economic incentives of broker-dealer firms and their advisers are different, and distinct.

And this creates, in turn, a terrible risk for advisers. Should clients file complaints and/or sue (or compel arbitration), firms may see the resulting liability simply as a "cost of doing business." Brokerage firms' reputational risks are generally minimal, as such firms can overcome bad publicity by extensive advertising, by blaming occurrences on "rogue brokers," or even by preventing publicity at all (in settlement agreements). But advisers have their U-4 at risk - and the adviser's reputation is everything.

I am concerned that advisers who practice in firms that use B.I.C.E. to receive additional compensation (paid to the firm) are putting themselves at risk. I suggest advisers insist on not using B.I.C.E. (except its requirements, under BICE Lite, for IRA rollovers). And ... no proprietary products. No principal trades. No products that pay 12b-1 fees or other forms of revenue sharing to the firm. And no substantial limits placed upon the adviser's ability to survey the universe of investment products and to recommend the best ones out there.

Again, keep your compensation received from the client completely separate from products fees and costs. When you mix them, bad results will occur.

    D. Will the DOL Rules Be Robustly Enforced in FINRA arbitrations?

I'll leave this question there ... otherwise I'll write 20 pages about FINRA.

These and many other questions exist. Including ... what will the future hold, as to the DOL rule's modification and/or continuation?

Until next time. - Ron

Thursday, June 1, 2017

On June 9th Strict Fiduciary Obligations to Arise for Advisors to Most ERISA, IRA Accounts: Are You Ready?

April 13, 2017, REVISED June 2, 2017


It was a somewhat surprising, and yet brilliant, move, the U.S. Department of Labor ("DoL") last week announced its 60-day delay of the applicability date of its "Conflict of Interest Rule" and related prohibited transaction exemptions (PTEs). The DoL delayed until Jan. 1, 2018 the many specific disclosure and certain other requirements of the rule and PTEs. However, and most importantly, the DoL stated that the new "definition of fiduciary" rule would go into effect, along with the Impartial Conduct Standards, on June 9, 2017.

In other words, fiduciary duties will apply, starting June 9, 2017, to nearly all ERISA-covered qualified plan accounts [401(k) accounts, and others], as well as to IRAs (of all types) and HSAs.

Note that this is a fairly strict fiduciary standard. The Impartial Conduct Standards impose, through elegant language, a "best interests" fiduciary standard of conduct. And it's a bona fide standard. No waivers permitted of core fiduciary duties. Conflicts of interest (at the firm level, not the adviser level) might exist, but the client cannot be harmed by the presence of such a conflict.

Moreover, the Impartial Conduct Standards incorporate the prudent investor rule (PIR). And the PIR has two tough requirements (among others):

     (1) that fiduciaries avoid idiosyncratic risk (i.e., diversifiable risk); and

     (2) that fiduciaries not waste client assets (i.e., if a mutual fund or ETF has a higher fee than a similar fund or ETF, then you need to justify it.

As I've explained previously, the Impartial Conduct Standards are so tough, you need to avoid gray areas. And that means avoiding the receipt of additional compensation received when recommending one product over another, unless fee offsets occur.

Lastly, despite the delay of the more specific rules requiring acknowledgment of fiduciary status in the contract, along with disclosure requirements and other provisions, as I've written previously the Impartial Contract Terms become implied terms of every contract between a fiduciary and a plan sponsor, plan participant or IRA owner, effective June 9, 2017. (That is, unless the account is, and remains, grandfathered.) In other words, the Impartial Conduct Standards are effective on June 9th, and they "mean business"! (Note, this is not an "implied contract"; rather, it is an implied term in an express contract. Just to be clear.)

There is an exception, however. For "level-fee fiduciaries" the Impartial Conduct Standards only appear to apply during the IRA rollover process, but not thereafter. The IRA rollover process logically includes implementation of the new portfolio, as to the strategic asset  allocation and products set forth in the analysis that was undertaken prior to the IRA rollover. However, precisely when non-rollover activities begin, is uncertain at the present time. Still, due diligence is required (by everyone, regardless of whether they are a level-fee fiduciary) during the IRA rollover process, and the tough Impartial Conduct Standards apply.


First, firms may comply with them. For example, firms could choose to comply with BICE, or they may use 84-24 for fixed annuities (and, at least until Jan. 1, 2018) fixed indexed annuities.

Second, firms don't have to use these exemptions. They don't have to have all of the compliance procedures in place, the disclosures done in contracts and web sites and otherwise, and possess various express contract language.

But - here's the key - the imposition of fiduciary status, with the Impartial Conduct Standards, carries with it the duty to avoid conflicts of interest. And unavoided conflicts of interest must be properly managed. Not only must the conflict of interest be affirmatively disclosed, but the adviser bears the burden of ensuring client understanding of both the conflict of interest and its implications. Thereafter the informed consent of the client must be received by the adviser. (And, here's the rub - no client is ever likely to provide informed consent to be harmed. And since the academic research is compelling that higher product fees lead to lower returns, all other things being equal, avoiding higher cost products becomes paramount.) Even then, the transaction must be substantively fair to the client.

So, any conflict of interest will trigger the need to undertake disclosures and proper management of the conflict, anyway. In other words, if a firm chooses not to utilize BICE, a firm will find that it still has to come up with disclosures and processes to effectively manage conflicts of interest. So, in essence, not much has changed.


At its core, fiduciary duties are principles-based standards. And these principles are eloquently stated in the 237 words that comprise the Impartial Conduct Standards. And, these principles are imposed upon advisers effective June 9, 2017, as they become implied terms of existing contracts (except as grandfathered) and all new contracts between firms and the clients.

What about all of those other provisions - contract terms, disclosures, etc. I submit that most of these specific requirements found in BICE, PTE 84-24, or the other PTEs, don't really matter all that much. Any specific rules adopted just illuminate the fiduciary principles that already exist. Even in the absence of specific disclosure and contractual requirements, the fiduciary standard as applied by the principles-based approach (as set forth in the Impartial Conduct Standards) is extremely strong. In fact, it may even be stronger.

Quite frankly, I hope that BICE is not adopted, nor the new PTE 84-24. Instead, just adopt this principles-based approach, as exemplified in the Impartial Conduct Standards. (A few specific rules may need to be adopted, but nothing like the extensive requirements set forth in BICE.)


There are some eight weeks left, at the time of this writing, until June 9th.

It is possible that the DoL will gain new leadership, and under that leadership that the DoL will seek a new delay (for the definition of fiduciary, and the impartial conduct standards) past June 9th. However, to do so would violate the Administrative Procedures Act. It is just not possible to do a thorough economic analysis (which needs to counter the prior economic analysis undertaken) by June 9th. And, without such occurring, any attempt to substantially delay or to rescind the DOL fiduciary rule would likely be met by a challenge in court.

Also, as others have observed, judges don't like government agencies that do 180-degree turns in their rule-making, simply because a new Administration takes office. (Still, a delay past June 9th is possible, and no doubt broker-dealer and insurance company lobbyists are hard at work to make that happen.)

I've been saying, ever since Trump was elected President, that the DOL Rule was likely dead. Yet, here we are in mid-April, and its core provisions remain eight weeks away from becoming effective. I don't mind, as I would love it if my earlier prognostications are proved wrong.

Other challenges remain. New legislation is being introduced in Congress to stop the DoL. While certain to pass the U.S. House of Representatives, passage in the U.S. Senate is unlikely - provided the Democratic Senators continue to unite together. (Not always a certain thing, especially when Wall Street's money and influence are brought to bear.)


First, all firms (whether level-fee or not) should adopt policies and procedures regarding rollovers from ERISA-covered qualified retirement plans and IRAs. Again, please refer to my prior post for insights into what is required. Even if the DoL changes course, other regulators (SEC, states) are stepping up their scrutiny in this area.

Second, broker-dealer firms and insurance marketing organizations should go ahead and implement all of their compliance policies and procedures and plans. If you are going to utilize BICE, or PTE 84-24, or another PTE, by all means go ahead and implement, by June 9th. (You could design new policies and procedures to just apply the Impartial Conduct Standards, without complying with all of the specific, delayed-until-1/1/18 requirements of the PTEs. But then you would likely just be re-doing your procedures again, less than 7 months later.)

Of course, you could wait awhile. To see if the DoL under new leadership (likely to be confirmed by the Senate within the next few weeks) changes course prior to June 9th. Or you might wait to see if the U.S. Congress is able to pass legislation that stops "fiduciary" in its track. How long you can wait depends on how long it takes to implement policies and procedures, implement the systems you require, education your staff, etc. For most firms, they can't wait much longer.

Third, advisers whose firms choose to utilize BICE should be wary, and they may desire to consider a move to a firm that embraces a truer fiduciary environment. Advisers in firms that choose to use the PTEs will likely be placed in a situation where their economic interests are not aligned with those of their firm. Firms may see the additional revenue streams that come from conflicts of interest as too tempting; any claims brought (and they will be brought, at least by some fraction of clients) will just be subjected to negotiation, arbitration and some losses to the firms. But, absent the availability of class-action claims, compensation provided to those individual clients who actually pursue claims will just be a "cost of doing business." Any damage to a firm's reputation is easily fixed.

Because of this (and for other reasons), some large firms (e.g., Merrill Lynch) are choosing to not utilize BICE, and instead will move to adopt level-fee compensation for IRA accounts; this is not only good for consumers, but also good for the long-term health of the firm and of its advisers.

When combined with the use of low-cost mutual funds or ETFs, structured by experienced portfolio managers following evidence-based investing practices, it is likely that this approach will lead to far less claims by clients against their advisers and firms. In other words, much less liability, and much less reputational risk for the adviser. Advisers' reputations are not easily fixed, and marks on the advisers U-4 are likely to stay there for decades to come.

Quite frankly, if I were in a broker-dealer firm that wanted to use BICE, I would find another firm.

There is just too much risk to you (the individual adviser), and to your reputation, in using BICE. Proper adherence to BICE does not really provide any real benefit to you (compared to just providing level fee advice) - but it can cause you a lot of headaches.

I predict that a shakeout will occur. Advisers who don't desire to fully embrace the fiduciary standard will shift to firms that use BICE, and they will choose to assume the reputational and fiscal risks that accompany such a choice.

But the most excellent, ethical advisers will (more slowly) move away from firms that use BICE. For these advisers will realize that old writ, "A man cannot serve two masters," has a lot of truth to it.

When (such as under BICE) firms can receive greater compensation if their advisers recommend one product over another (even though the adviser receives no greater compensation as a result), over time such firms will ask their advisers to venture into the "gray." And, as a result, individual advisers will be brought into arbitrations, and have their U-4 dinged. Not fun. No conducive to having a long-term and successful career as a financial adviser.


Absent another change of direction by the DoL prior to June 9, 2017, a new era is upon us.

At least for IRA accounts, salespeople will become fiduciaries. Instead of pushing products, they will be required to step into the shoes of the client, with all the required expertise expected, and to select the best products in the marketplace for their clients.
  • Some will be able to make this transition. Others, stuck in a "sales mentality," will not. The latter will eventually leave firms that seek a proper transition away from the sell-side and to the buy-side.
Broker-dealer firms will continue to diverge in their approaches to the rule.
  • Some with weak leadership and poor foresight will chose to use the PTEs (including BICE), as they continue to seek revenue-sharing and other arrangements. But, the harsh reality is that additional third-party compensation, to recommend one product over another, will just result in liability.
  • Firms with strong leadership will realize that the fiduciary tide has turned, and they will choose to work to adopt level-fee compensation and a true fiduciary culture. It will take massive efforts to do this correctly.
Advisers will increasingly shift from one firm to another. Many of the older advisers, who want to try to remain as salespeople and who don't want to become true fiduciaries, will migrate to firms that will utilize BICE and the other PTEs. Those firms will welcome such advisers. But it's a devil's bargain - for both the firm and the adviser. It will trigger an inevitable decline in morale at the firms, as claims begin to be asserted for improper management of conflicts of interest. Even journalists in the consumer space will take note - and begin telling their readers to avoid firms that utilize BICE and the other PTEs.

Then, new advisers in firms that request the advisers to use BICE and the other PTEs, rather than level compensation, will eventually wise up and depart for a purer fiduciary pasture. They will move to broker-dealer firms (dual registrants, such as Merrill Lynch) that adopt level-fee compensation. Such firms are protecting their own good will, and the reputations of their advisers. In other instances, advisers will join RIA firms, eschewing the historical "sales culture" of wirehouses altogether in favor of a more client-centric, true fiduciary business model.
  • Independent B/Ds that don't adopt a true fiduciary culture will also see an exodus.
  • BDs affiliated with insurance companies will likely see the first major exodus. Fiduciaries don't want to be pressured to sell expensive products (including cash value life insurance that most consumers don't need).
Asset managers (i.e., product manufacturers) will undergo massive changes. Fees will fall (as indeed they already have, though more in coming). Advisers will scrutinize more intensely the apparent low-cost index funds and ETFs for "hidden fees" - such as diversion of securities lending revenue, higher-than-appropriate payments to affiliated service providers, and payment of soft dollars. This will lead to another shakeout among asset managers. Only those asset managers that quickly and truly lower their "total fees and costs" and, in the process, gain market share, will survive.


Every broker-dealer firm and dual registrant that does not adopt a level-fee approach, eschewing the use of BICE and the other PTEs. Over time, since the economic interests of the fir and the adviser are not aligned, the good advisers will flee such firms.

Advisers who don't move to become true fiduciaries. Their days are numbered. Sure, they'll hang around for a dozen or so years. But eventually they will be out of the business.

Insurance companies. Most won't have the products that fiduciaries are able to recommend. (A few will thrive, but just a few low-cost providers.) Time to sell stock in many of these companies!
  • Want to sell high-cost variable annuities, whose 3% to 4% total annual fees and costs make the "guarantees" offered somewhat illusory? Fiduciaries know that the cost-benefit analysis leads, 99% of the time, to a "just say no" answer. High-cost VAs will disappear.
  • Want to sell fixed indexed annuities, and fixed annuities, from low-rated insurance companies (in terms of their financial strength)? Fiduciaries can't do this. Fixed annuities from low-rated insurance companies will see their sales decline. (See further discussion of EIAs, below.)
  • Want to recommend cash value life insurance as an "income tax free" vehicle for retirement savings? Fiduciaries can't do this (except when asset protection reasons exist, and there is no better alternative to meet the asset protection need). Cash value life insurance sales, which have already declined by 50% over the past decade, will continue to decline.
Higher-cost mutual fund complexes. When you create an army of expert fiduciary advisers to scrutinize products, only the best will survive.

Variable annuities? The high-cost ones, which often possess 3% to 4% (or more) annual total fees and costs, won't survive. Lower-cost ones will survive. Look for stripped-down versions of annuities (some already exist).

Equity-indexed annuities (EIAs)? Most won't survive. Anytime a fiduciary recommends the purchase of a fixed annuity from an insurance company with low financial strength, the fiduciary's judgment will be (rightfully) questioned. And, many claims will be brought against advisers recommending EIAs because the actual returns seen will often be far less than the returns that are illustrated (a fact a good fiduciary would know, and disclose, prior to recommending the product). Insurance company control over the level of profits it makes (via control over participation rates and caps, and by other means) will also be questioned.
  • [It is possible that good EIAs might appear in the marketplace - designed with transparency in mind and with low cost structures and from insurance companies with very high financial strength ratings. (If you know of any in the marketplace, drop me a line!)]
Revenue sharing, including 12b-1 fees? They will disappear, over time. Within a few years, the marketplace will be transformed into a "level compensation" environment. Rather than keep track of "fee offsets" (a difficult and expensive system to adopt and maintain), firms will become revenue-sharing-free and commission-free. The marketplace will put an end to 12b-1 fees, payment for shelf space, soft dollar compensation and other forms of revenue sharing - long before the SEC acts in this area.

Proprietary product recommendations? Eventually, they will largely disappear. You just can't represent the seller (your firm, or its affiliate, producing and selling an product) and the buyer (the client) at the same time. Eventually the investment community will come to realize this. Proprietary products will be shed by BD firms - a movement that began over a decade ago will accelerate.

Principal trading? Same result. It will be difficult in most instances for a fiduciary to justify a principal trade, unless they can prove that it is in the client's best interests. Let's be frank - principal trades make BD firms more money than agency trades. And it can lead to the dumping of securities. And other practices adverse to clients' interests. Except in a few cases (such as in a few states, where limited dealers of muni bonds exist), BD firms will migrate more to serving in an agency role, rather than as a principal. Perhaps the long-awaited split of brokerage away from dealers (that FINRA, f/k/a NASD, boasted that it was able to negate, in the 1940's) will finally occur. Again, from marketplace pressures, not due to explicit regulation. (This will take time.)

FINRA. It's opposition to the application of fiduciary duties to fee-based accounts in 2005, and its stated opposition to the DoL fiduciary rule (in favor of a new "best interests" standard that is anything but), will come back to haunt them. More and more Senators and Representatives in the U.S. Congress will question why FINRA even exists, given its opposition to raising standards of conduct, as evidenced by its actions over many decades. Increasing calls will occur for market conduct regulation to be stripped from FINRA, and given to a combination of the SEC and the states, or perhaps to a new professional regulatory organization (new formed, or adapted from an existing professional organization).


Large and small business owners (i.e., plan sponsors). They will be served by fiduciaries. In class-action litigation, they won't be left hanging out to dry, while their "retirement counselors" hide behind the shield of "suitability." Also, 401(k) product fees will continue to plummet, as fiduciary advisers rush to ensure participant funds are not "wasted."

401(k) plans. More small businesses will offer them, once their fears of liability are diminished, through the receipt of fiduciary advice from advisors that can be held accountable if things go wrong.

Plan participants and IRA account owners? Huge winners. Individual client portfolios will be (largely) managed under the dictates of the prudent investor rule. Lower fees and costs result. Less risk will be assumed by individual investors in many instances. And greater portfolio returns, especially over the long term, will flow to the individual investors. As a result, our fellow U.S. citizens will amass greater amounts for their retirement needs, and during retirement their nest eggs will be managed far better.

Lower-fee fiduciary advisers will gain market share. Including robo-advisers (although challenges exist for the "pure" robo in terms of providing the necessary advice without human intervention). Better yet will be the "hybrid" advisers - where personal contact is offered at the onset of the client relationship, and periodically thereafter. Individual advisers will team up with robo-advisor solutions, to more efficiently serve clients.

But, fears of the requirements of "reasonable compensation" are overblown. Generally, courts don't like to delve into this issue, and will permit the marketplace to set fees. We'll still see AUM fees of 1% and greater, especially when financial planning and life planning services are provided as part of such fee.

Lower-cost mutual fund and ETF providers will see large market share gains. But only the best will survive. Any attempts to "hide" fees (through excessive sharing of securities lending revenue, high payments to affiliate, payment of soft dollars) will eventually be unveiled by the army of expert fiduciaries.

Winners will likely be Dimensional Funds Advisors (DFA) and Vanguard. DFA offers compelling offerings with its core equity funds, providing high levels of exposure to several factors for relatively low cost. DFA also has excellent tax-efficient funds, and tax-efficient stock mutual funds will become necessary in taxable accounts as the fiduciary duties spread. But, over time, DFA will be challenged by the emergence of more multi-factor funds and ETFs; continued innovation by DFA may, however, keep them ahead of the rest of the pack.

Vanguard has a number of very-low-cost funds and ETFs, although it lacks offerings in some key asset classes. And it lacks broad market fund with multi-factor tilts, designed to minimize transaction costs and to promote tax efficiencies. If Vanguard can expand its offerings more intelligently than it has in the past, it could become even larger.

Some low-cost, but not always exceptionally low-cost, fund complexes will survive, at least for a while. TIAA-CREF and Fidelity come to mind. Over time, they will need to continue to lower their fees, to adequately compete. Otherwise their market share will slowly decline.

The possible elimination of 403(b) plans during tax reform [in favor of just having 401(k) plans] could also serve as an impediment to TIAA-CREF, to some degree. During any changeover many formerly 403(b) plans will likely re-examine their choice of investment adviser.

Some of the lower-cost ETF providers will survive, but others will fall by the wayside. It all depends on which ones become the low-cost leaders, achieve full transparency on fees and costs, and survive the waves of extensive due diligence that will be coming. Again, asset managers that aggressively cut fees and costs (not just the annual expense ratio, but also transaction and opportunity costs and diversion of revenue sharing dollars), and who go for market share, will likely be the survivors.

Many Discount Brokers/Custodians. TD Ameritrade, Schwab, Fidelity, and others will continue to grow as more and more independent RIAs and independent BDs require custodial services. Some challenges exist, but as RIA firms and independent BDs continue to gain market share, then these custodians will continue to benefit. Especially if the custodians, themselves, eschew conflicts of interest in their own practices.

Under the Impartial Conduct Standards, some practices of mutual fund complexes and custodians - such as providing "free" educational conferences (even if the participants pay their own travel costs) - will need to be altered. Don't be surprised to see all custodians start charging fixed fees for conference attendance, and even annual fees for access to trading software, rebalancing software, and research. Small RIAs will bear the brunt of such fees, and it will increase the cost of entry into this investment advisory profession.

The U.S. Economy and U.S. Corporate Profits. A huge win. Greater accumulation of capital results, accelerating over time. This lowers the cost of capital for U.S. companies, and provides the fuel for U.S. economic growth.

Professional Associations, Generally? Too soon to tell. But, generally, as the members of FPA, AICPA/PFP division, NAPFA, CFA Institute, and CFP Board converge around common standards (such as the fiduciary standard), these organizations begin to look more and more the same. And, as conference sponsorship revenues fall (especially as high-cost product providers evaporate), financial pressures may be brought upon them to merge, or at least become more closely aligned. Some organizations may share common technology (web-based software) platforms, for example, to save fees, costs and staffing expenses.

Certified Financial Planner(tm) Certification? A clear winner. The way you distinguish yourself, in a fiduciary era where everyone is using low-cost products, is to offer financial planning. And providing financial planning in different ways, to fit the desires of different clients, will become necessary.

An embrace of life planning with further add to the CFP(r)'s value proposition, and will stem the rise of "artificial intelligence" to provide financial planning advice.

Also, the Certified Financial Planner(tm) certification has become the most recognized among consumers (although much work remains in that area); I don't see any other designation being close to challenging the CFP mark, in terms of consumer awareness.

Newly Minted CFPs. Firms' demand for newly minted CFPs will soar. College undergraduate programs may well see the number of graduates rise, especially as a larger number of "good jobs" and internships become available as firms shift toward fiduciary business models. Problems continue in attracting minorities and women to the field, but efforts will continue to be made.

There are significant differences in the level of education provided in some college programs, versus many of the certificate programs that "teach to the CFP exam." These distinctions will become more widely known, and firms may begin to recruit more heavily from top-tier university programs that teach all aspects of financial planning and investments, including client relationship management skills and foundational knowledge as to the use of various software.

For example, the depth of the corporate finance / investments background that Financial Planning Track graduates of Western Kentucky University receive, along with training in networking and ongoing enhancement of interpersonal skills, will set these graduates apart. If demand increases for our graduates from firms practicing under the fiduciary standard, then WKU will be willing to expand its programs to increase its number of graduates.

Other institutions will become known for producing graduates with an emphasis on financial counseling, or who also possess strong business education, or for more in-depth practice management knowledge. The CFP Board will continue to evolve its student learning objectives, however, thereby providing a core common course of study that binds all of the university programs together.

Chartered Financial Analyst designation? The CFA is most respected designation, within the larger financial services industry. But will it further shed its security analysis roots, and embrace more comprehensive education and testing around "wealth management" (i.e., financial planning plus investment portfolio management)? Will it survive the passive investment research onslaught? Don't get me wrong - we'll always have securities analysts (for without them, the market would not be as efficient as it is now). And we'll need investment bankers (although I predict investment banking fees will diminish over time, especially for equities). The question is how many securities analysts will be hired, in the future, as technology continues to displace workers in this area and as the number of actively managed portfolios decline.

CPA/PFS designation? Likely a boost, over time. Simply because, as trust in financial advisors becomes more widespread among consumers, the demand for all financial planning services will rise. The question is whether the CPA/PFS becomes aligned with the CFP(r) designation, in some fashion. The CFP has greater brand recognition (as a financial planning designation). But the CPA designation is perhaps the most highly trusted by consumers, and the required tax and financial planning knowledge to become a CPA/PFS continues to make it one of the few premier designations available today. A closer alignment between CFP and CPA/PFS could be undertaken, if visionaries exist along with those who can make it happen.


That's what the June 9th date promises.

But only if the DoL's Definition of Fiduciary and Impartial Conduct Standards are actually implemented on that date. Eight weeks is a short time, but it is also a long time - in terms of what could happen in Washington to derail the new June 9th applicability date for the core, important parts of the DoL rules.

Let's hope that June 9th arrives with the application of the broader definition of fiduciary and with the application of the Impartial Conduct Standards. For on that day, the financial planning and investment advisory emerging profession(s) will take a huge step forward toward laying further foundations for a true profession someday.

Ron A. Rhoades, JD, CFP(r) serves as Director of Western Kentucky University's Financial Planning Program. He is also a tax and estate planning adviser, a Certified Financial Planner, and a registered investment adviser. He frequently consults to firms on the application of the fiduciary standard of conduct, and he is a frequent speaker on fiduciary standards generally as well as investment due diligence.

This blog is written on his own behalf, and does not represent the views of any institution, firm or organization with whom he may be associated.

For questions, comments, suggestions, and inquiries, Please contact Ron via e-mail: