Saturday, September 24, 2016

Consulting Engagements Available to Wealth Management / Financial & Investment Consulting Firms

Is your firm prepared for April 10, 2017?

Even with the aid of compliance consultants, many firms overlook key issues affecting wealth management firms as a result of the DOL's "Conflict of Interest" and related rules, such as:

  • Why the manner of compensation is far more important than the amount of compensation;
  • The 237 words that form the heart of the DOL's rule making efforts;
  • The need for Investment Committees to "up their game" as the prudent investor rule is applied, both as to selection and documentation of investment strategy and the selection of investment products;
  • Practicing defense, in a proactive fashion, by key inclusions in the investment policy statement delivered to clients;
  • Factors affecting IRA rollover due diligence, including changes in a firm's value proposition;
  • The impact of the DOL's rule making on the standards of conduct applicable to non qualified accounts;
  • Changes in compensation methods, and the rise of a new career path for interns and new associates; and
  • Financial adviser retention measures, and how to protect a firm against significant loss of shareholder value that may result from financial consultant departures.

Dr. Ron Rhoades has been hailed as a "one-man think tank" and as a visionary for the financial planning and investment advisory profession. He is a national expert in fiduciary law as applied to financial services. Over the past decade, he has frequently been called upon to share his insights with policy makers at the SEC, DOL, and on Capitol Hill. With his background as an attorney, investment adviser (including past service as Chief Compliance Officer and Investment Committee Chair of an RIA firm), and professor of finance and financial planning, Dr. Rhoades navigates and integrates key insights the fields of fiduciary law, financial services regulation, strategic business planning, financial planning, life coaching, and investment theory.

Ron Rhoades' unique insights for your firm and/or practice include zeroing in on the most important issues firms should address during the upcoming transformation of financial services, as well as suggesting practical solutions for implementation.

As a consultant to wealth management firms - from wirehouses to independent broker-dealer firms to larger and mid-size RIA firms - Dr. Rhoades assists a firm's management as they affirm or modify their vision and mission. He then assists firms in identifying and and assimilating a culture and structure designed for success in the new, fiduciary era of financial services. Dr. Rhoades provides key insights into investment committee due diligence, investment policy statements, compensation policies, and/or financial adviser retention structures.

How to Engage Dr. Rhoades.

Dr. Rhoades may be engaged for individual consultations to wealth management firms, and also for presentations to investment and/or financial services organizations. To inquire, please submit a request with a statement of desired topics to address during consultations and/or presentations, to Dr. Rhoades at Ron.Rhoades@wku.edu. Please also indicate your desired date(s) for consultation or speaking engagements (see list of available dates, below).

Consulting fees and honoraria.

Foundational consulting to wealth management / financial advisory firms and practices, including preliminary telephone conference to discuss objectives and gather preliminary data, followed by a one-day onsite visit. The onsite visit may include: (1) review of the firm's current culture, structure and strategies; (2) review of solutions under consideration by the firm; (3) presentation by Ron of key impacts to the firm resulting from changes to financial services regulation; (4) identification and discussion of key strategies and changes the firm may seek to implement; and/or (5) presentations and/or discussions of the DOL Rule with groups of executives, managers, and/or financial advisers. $4,500 flat fee, plus hotel costs and either air fare or mileage at standard IRS rates.

Additional coaching and implementation services are available following the foundational consultation, including coaching to leadership on effecting culture changes, review and/or design of investment committee investment strategies and investment product due diligence including adherence to the requirements of the prudent investor rule, investment policy statement design for reduction of the firm's risk exposures, coaching and/or presentations to middle managers, and/or training presentations for the firm's financial and investment advisers. Services and fees are negotiated. While fixed fees for projects are preferred, an hourly fee rate of $500/hour is available for consultations of more uncertain scope or duration.

Speaking engagements to groups of executives or managers: $2,500 honorarium for a 1-hour presentation; $500 each additional hour (maximum of four hours). Plus reimbursement of hotel, airfare, mileage, rental car, and/or taxi costs as incurred.

Remaining available dates for consulting visits or presentations: (as revised 9.24.16)

  • Thursday, Nov. 10, 2016;
  • Monday, Dec. 12, 2016;
  • Wed., Dec. 14, 2016;
  • Friday Dec. 16, 2016;
  • Monday, Jan. 2, 2017 through Friday, Jan. 6, 2017;
  • Wed., Jan. 11, 2017;
  • Thurs., Jan. 12, 2017;
  • Monday, Jan. 16, 2017;
  • Thursday, Feb. 2, 2017;
  • Thursday, Feb. 16, 2017;
  • Tuesday, Feb. 21, 2017; and
  • March 13-17, 2017.
Thank you.
Dr. Ron A. Rhoades


Speaking Engagements: Adjusting to a New Paradigm Under the DOL Conflict of Interest Rules

Ron's speaking schedule for September-November 2016 is now full. However, Ron is now accepting speaking engagements for Dec. 12-16, 2016 and Jan. 2 - Jan. 15, 2017, and on some Tuesdays and Thursdays from mid-February to late March, 2016. To inquire on Ron's availability, please contact him at: Ron.Rhoades@wku.edu.

INFORMATION ON BOOKING DR. RHOADES FOR YOUR EVENT:

About Professor Rhoades

Ron A. Rhoades, JD, CFP® is a researcher and frequent writer on all things fiduciary as applied to financial services. He is known for his "One Man Think Tank" column in RIABiz, blog posts at his popular Scholarly Financial Planner blog, and for many articles written for other publications.

A professor of finance and financial planning, estate planning and tax attorney, and investment adviser, Dr. Rhoades previously served as Co-Founder, Director of Research and CCO for a Florida RIA firm. After transitioning to his current full-time job as a university professor of finance and financial planning (now at Western Kentucky University's Gordon Ford College of Business), Ron continues to serve a select group of clients.

Ron received the inaugurual "Fiduciary of the Year" award from The Committee for the Fiduciary Standard for "changing the course of the fiduciary debate in Washington, D.C." He was also named one of NAPFA's "30 Most Influential" persons in NAPFA's 30-year history.

Ron has been extensively involved in discussions with policy makers and others regarding the DOL's Conflict of Interest Rule, and has traveled frequently to Washington, D.C. As the DOL Rule proceeds to implementation, he is tracking the ongoing developments and reviewing how firms are responding to the rule, and he is discerning and predicting best practices for the future.

Suggested Topics Re: DOL Conflicts of Interest (Fiduciary) Rule, BICE, 84-24, and More

The U.S. Department of Labor's Conflict of Interest Rule will pose new challenges - and opportunities - for financial services firms. The greatest impacts will be felt by broker-dealer firms, dually registered firms, and their registered representatives. Also greatly affected will be asset managers, insurance companies, insurance marketing organizations, and insurance agents. Even "fee-only" registered investment advisers face new compliance challenges. Ron addresses the DOL "Fiduciary Rules" and their impact, including:
  • Understanding the DOL's (Final) Conflicts of Interest Rule and its Exemptions, Generally
  • 237 Words: The Impartial Conduct Standards (Overview)
  • Should You Use BICE? If so, when and how? What Alternative Exists?
  • Compensation: Why the Manner of Compensation is Much More Important than its Amount
  • The Prudent Investor Rule and its surprising impact on the formulation of investment strategy (policy) and the huge role in plays in the selection of pooled investment vehicles
  • VAs, EIAs and Fixed Annuities after the DOL Rules: Due Diligence and Your Cost/Benefit Analysis
  • How to Use Investment Policy Statements to Substantially Reduce Firm Exposure to Litigation Risks and Client Complaints
  • Impact of the DOL Rules Upon Asset Managers, Insurance Companies, and Advisory Firms Both Large and Small
  • Financial Advisor Compensation Structures Under the New Paradigm
    Honoraria & Travel Reimbursements for Presentations:
      Ron Rhoades is available for live, in-person presentations for your conference or private firm event, for presentations ranging from 1 hour to 3 hours. His content can fit into either keynote or breakout sessions. Honoraria for presentations in the continental U.S. are shown below.

      For for-profit firms: 
       - $2,500 for first hour;
       - $   750 for each additional hour
      (Maximum 4 hours of presentations in any one day = maximum of $4,750).
      The above rate is in addition to reimbursement for coach airfare (or, for locations within a 6-hour drive of Bowling Green, KY, mileage), 1-2 nights of accommodations as necessary based upon travel arrangements, parking at departure airport, and ground transportation to/from the conference location.

      For non-profit organizations: 
       - $1,250 for first hour of presentations; and
       - $   375 for each additional hour of presentations or part thereof.
      (Maximum 4 hours of presentations in any one day = maximum of $2,375)
      The above rate is in addition to reimbursement for coach airfare (or, for locations within a 6-hour drive of Bowling Green, KY, mileage), 1-2 nights of accommodations as necessary based upon travel arrangements, parking at departure airport, and ground transportation to/from the conference location.

      For university financial planning programs:
      There is no charge for webinars provided to university students only.
      For in-person presentations to university students, travel costs only (see above).

      Consulting Services to BDs and RIA Firms.   Please refer to separate blog post.

      Contact Information:
      Ron A. Rhoades, JD, CFP®
      1441 Riva Ridge Ave.
      Bowling Green, KY 42104
      Phone:  270-904-2728 (assistant: Cathy)


      Thank you. - Ron


      PLEASE JOIN ME AT ONE OF THE FOLLOWING
      UPCOMING EVENTS, PRESENTATIONS OR WEBINARS.

      October 11, 2016: 3:00pm-4:00pm Central Time
      Diligent Inquiry Series: “Investment Myths to Dispel”
      A lot of investment “sales techniques” have, over time, led to some common investment myths. Join Ron as he discusses the Dalbar QUIB studies (and similar Morningstar studies), the Brinson-Hood paper (often misquoted), the inaccuracy of “portfolio turnover” reporting, what is required to truly “tax efficient” funds and ETFs, the notion that Benjamin Graham was a great investor, and a closer look at Warren Buffet’s track record. Also examined are the “safety” of corporate bond funds in an era of low returns, the impact of taxes upon real investment rates of return, why we should view historical market returns through the lens of real return, market volatility personal risk factors, investment time horizons, the role of (and limits of) diversification, the necessity of rebalancing, various misleading historical charts, the illusion of "average" rates of return, and longevity statistics.
      For Garrett Planning Network members only. www.GarrettPlanningNetwork.com

      Join me at the the NAPFA '16 Fall Conference, Wednesday, October 12 - Saturday, October 15, in Arlington VA. Drop me a line at ron.rhoades@wku.edu, and I'll be pleased to meet with you, or a group, to discuss the DOL Fiduciary Rules and to answer questions.
      Attending a NAPFA Conference can pay big dividends - for you and for your clients. If you've never attended a NAPFA conference, you may not realize what you're missing.  But this year's Fall Conference, "Capitol Ideas - Leading in Times of Change", is one you should not miss. Sessions like Active Asset Allocation, Succession Planning, Advanced Student Loan Strategies and Helping Clients Adjust to Sudden Money, provide the basis for a conference filled with pragmatic information that will send you back to your office feeling like a frontrunner - well-informed, coached by a first-rate team and ready to spearhead change within your business.
      And you won't want to miss NAPFA's lineup of celebrated keynote speakers: 
      • Ascend to the heights of leadership with Lt. Col. Rob "Waldo" Waldman, leadership consultant, decorated fighter pilot and "Wingman";
      • Learn what it's like to have your ear to the ground in Washington, DC with Judy Woodruff:  As a broadcast journalist, she's covered it for over four decades;
      • Discover multi-asset strategies with Jeffrey Sherman, Deputy Chief Investment Officer and member of the Executive Management Team at DoubleLine.
      Just like in years past, networking will be a big part of the Fall Conference - we're planning for networking opportunities both during and after the conference day - as will the educational element.  You can earn over 20 CEs if you attend the entire program!

      NAPFA conferences are easily affordable when you take advantage of advance registration promotions and discounts.  The cost for a member to attend is just $1,095.  But, if you register prior to September 9, you'll receive $200 off the full member price.  In addition, if you are a first-time conference attendee, you'll get $100 off the already reduced member price.* All attendees will have full access to all sessions, networking and exhibit hall activities.  It's the same conference at a lower rate.

      You must register prior to September 9 to take full advantage of advance registration pricing.  For more information, to see a preliminary agenda, or to begin the registration process visit the NAPFA Conference home page.

      *Please contact Dianna Leja (lejad@napfa.org) or Robin Gemeinhardt (gemeinhardtr@napfa.org) for information on how to obtain a first-time attendee discount. (Also, for new members of NAPFA, there's another special benefit that's huge!)

      Thursday, October 20, 2016, 5:30pm-8:00pm: FPA of Southwest Florida
      "The New DOL Rule - Fiduciary Standards for Advisors"

      Ron provides a 1.5-hour presentation on the DOL Rules and Its Impact on All Types of Advisers, and Takes Questions from Attendees

      Location: Estero County Club, 19501 Vintage Trace Cir, Fort Myers, FL 33967
      For registration information, please visit: http://fpa-swfl.org/meetinginfo.php

      Friday, Nov. 4, 2016, 1:00pm-4:20pm ET: The Department of Labor Fiduciary Rules: Implications for Investment Advisers and their Firms. A 3-Hour Webinar from RIA in a Box. The U.S. Department of Labor's Conflict of Interest Rule poses new challenges - and opportunities - for financial services firms. Even "fee-only" registered investment advisers face new compliance and due diligence challenges. Ron addresses the DOL "Fiduciary Rules" and their impact on registered investment advisors, offering practical insights and illustrating best practices. Handouts to be provided to attendees include: (1)  Memorandum, “The Key Aspects of the Fiduciary Rule for RIA-Only Firms and their Advisers”; (2)  Sample Checklist, IRA Rollovers: Information Gathering and Analysis; (3)  Sample Memorandum, Documenting the Determination of a Client’s Best Interests for an IRA Rollover; (4)  Sample Investment Committee Due Diligence Memorandum, Applying the Prudent Investor Rule; (5)  Sample Investment Policy Statement (illustrating methods to reduce risks for advisers and their firms). Registration information to be provided later, from RIAinaBox.com.

      Tuesday, November 8, 2016: 3:00pm-4:00pm Central Time
      Diligent Inquiry Series: “Preparing the Investment Policy Statement”
      Some legal/compliance consultants suggest a one-page IPS. But, can an IPS do more, to protect you against potential claims should a deep and/or prolonged stock market return take place? Yes! Ron shares his own Investment Policy Statement, highlighting various statistical data that can be incorporated into the IPS for purposes of client education and risk reduction. The responsibilities of the adviser and client are explored, as well as the process for monitoring the IPS.
      For Garrett Planning Network members only. www.GarrettPlanningNetwork.com


      The MarketCounsel Summit, at the Fontainebleau Miami Beach from December 5—8, 2016. Learn from the powerful agenda and speakers and, most importantly, engage in intimate networking among the industry’s leading growth-oriented firms. With the drastically-evolving regulatory landscape, a controversial election cycle, and emerging new business opportunities, this Summit will tackle all of the hot issues head on. Ron will participate in a panel discussion on Tuesday, December 6th, with Phyllis Borzi, Asst. Secretary, U.S. Department of Labor. Learn more about the Summit.

      Tuesday, December 13, 2016: 3:00pm-4:00pm Central Time
      Diligent Inquiry Series: Advance Health Care Directives
      Why should everyone possess an advance health care directive? What is the distinction between a “Power of Attorney for Health Care” and a “Designation of Health Care Surrogate”? What is a “Living Will” and what happens if you have one, or don’t have one? Are there ways to add value through better forms? What are DNROs? What is a grant of authority under HIPAA? Ron explores these topics in this foundational webinar on health care decision-making.
      For Garrett Planning Network members only. www.GarrettPlanningNetwork.com


      PAST SPEAKING ENGAGEMENTS THIS FALL:

      Tuesday, August 9, 2016: FPA Kentuckiana Chapter Meeting
      "DOL Fiduciary Rules: Overview and Impacts" - Louisville, Kentucky
      Held at the Big Spring Country Club, 5901 Dutchmans Lane, Louisville, KY 40205

      Wednesday, August 31, 2016, 2-3pm ET
      Journal of Financial Planning: "Journal in the Round" - webinar on Fiduciary Issues
      Ron will participate in a panel discussion of topics relating to the DOL Rule, with additional insights provided as a follow-up to his article appearing in the August 2016 edition of the Journal of Financial Planning.

      This month's Journal in the Round features key contributors to the August Journal of Financial Planning Fiduciary Issue. Our expert panelists Blaine Aiken, Ron Rhoades and Doug Lennick will dig into the DOL Conflict of Interest Rule, sharing thoughts on its historical perspective, on preparing for the certainty and uncertainty it brings to the financial planning industry, and on ways to understand and interpret the BICE standards. Their discussion is followed by a lively Q and A moderated by Ed Gjertsen, Chair of the FPA Board of Directors and Karen Nystrom, FPA'sDirector of Advocacy.

      CFB Board topics include financial services regulations and requirements; consumer protection laws; fiduciary. Level of Competency:  Intermediate 

      FREE to FPA members; CE available. Non-members and the public: 50% discount with the following coupon: JIRAug16 (only $29 with coupon); link for registration: http://fpa.peachnewmedia.com/store/seminar/seminar.php?seminar=77579

      Tuesday, September 6, 2016, 4:00pm-5:00pm ET: NAPFA Webinar - for NAPFA South Region Members: "The DOL Fiduciary Rule: Implications for Fee-Only Advisers"
      The DOL’s Conflicts of Interest Rule is scheduled for implementation in April 2017. The “BICE Lite” (streamlined exemption) mandates new due diligence and documentation in connection with IRA rollovers. Investment strategy and investment product due diligence are also likely to receive increased scrutiny. How is the securities industry adapting, and what steps might NAPFA members undertake in the months ahead? Ron Rhoades, Director of the Financial Planning Program in the Gordon Ford College of Business at Western Kentucky University, and a frequent writer and speaker on fiduciary issues, provides his unique perspective on these issues.
      NAPFA South Region members have received notification of this webinar directly from NAPFA.

      Mid-September, 2016: IBM Big Data & Analytics Hub, Wealth Management Podcast.  Ron joins the team at IBM to discuss implications of the DOL rule making for wealth management firms, from the perspective of surveillance and technology. The Podcast will be available at: http://www.ibmbigdatahub.com/industry/wealth-management

      Tuesday, Sept. 13, 2016: 2:30pm-3:30pm Central Time
      Diligent Inquiry Series: "The DOL Fiduciary Rule: Implications for Fee-Only Advisers"
      The DOL’s Conflicts of Interest Rule is scheduled for implementation in April 2017. The “BICE Lite” (streamlined exemption) mandates new due diligence and documentation in connection with IRA rollovers. Investment strategy and investment product due diligence are also likely to receive increased scrutiny. How is the securities industry adapting, and what steps might Garrett Planning Network's members undertake in the months ahead? Ron Rhoades, Director of the Financial Planning Program in the Gordon Ford College of Business at Western Kentucky University, and a frequent writer and speaker on fiduciary issues, provides his unique perspective on these issues.
      For Garrett Planning Network members only. www.GarrettPlanningNetwork.com

      Friday, September 16, 2016, 1:00pm-2:00pm: "Deconstructing the Fiduciary Rule," at the FPA BE Conference, Baltimore I'll be doing a "fireside chat" with Tim Hauser, Deputy Assistant Secretary for Program Operations of the Employee Benefits Security Administration, at the Financial Planning Association's BE Conference, in a session hosted by Jamie Green, Group Editorial Director of the Investment Advisory Group at ALM Media (AdvisorOne.com, and Investment Advisor and Research magazines). We will focus on our observations about developments in the DOL fiduciary rules since they were announced, including how they are being implemented. Join us for the discussion! For information on the conference, please visit: http://www.eventscribe.com/2016/FPA-Fall/

      Thursday, September 22, 2016, 9:00am-3:00pm: FPA of Oregon & Southwest Oregon
      "FPA Fiduciary Day" - Featuring Ron Rhoades and John Lenz
      Ron provides 4 hours of detailed discussion of the new DOL Rules and their impact on broker-dealers, registered representatives, insurance companies, insurance marketing organizations, insurance agents, and registered investment advisers.
      For registration information, please visit: http://www.fpa-or.org/events

      Saturday, April 30, 2016

      DOL Fiduciary Rule: What "Best Interests" Means, Impacts on Financial Services

      Introduction.

      Congress will not stall the DOL Rule in 2016. What occurs in 2017 may well be determined by the upcoming Presidential election, and even then great uncertainty exists as to whether the DOL's Conflict of Interest Rule would or could be timely repealed by a new Administration. Court challenges to the DOL Rule will occur, but their likelihood of success is below 50/50. As a result, all firms and advisers should be seeking to adapt to the new Rule.

      In adapting, firms and advisers should take care to fully comply with the Impartial Conduct Standards required under the Best Interests Contract Exemption. Given the substantial academic research regarding the impact of fees and costs on investor returns, and the express language used by the DOL in announcing BICE, the receipt of additional third-party compensation - without fee offsets - may be problematic. The result will likely be a substantial movement toward AUM fees, and to the selection of low-cost investment products.

      Congress Continues to Serve Wall Street, Not Main Street - But Congress Will Not Stop the DOL Final Rule.

      As the Republicans in Congress continue to vote on resolutions and bills that would seek to stop the implementation of the DOL's Final Rule, permit me to briefly comment on this political state of affairs.

      I have always been for government of a small size. There are a great many things that government fails to do well. Yet, there are areas where laws and regulation, carefully crafted, are required.

      The DOL's "Conflict of Interest Rule" (a.k.a., "Fiduciary Rule") is altogether necessary. In this most complex financial world, the vast information asymmetry between financial/investment adviser and client cannot be overcome through financial literacy efforts, nor through disclosures. The application of fiduciary standards to such a relationship is a natural consequence, supported by many public policy goals. Just as attorneys are not permitted to take advantage of unsuspecting clients, neither should investment advisers.

      Congress is 2017 will not succeed. It will make many efforts, but all will stall in the U.S. Senate or be vetoed by President Obama. Republicans, in undertaking these many but doomed legislative efforts, will continue to be seen as under the control of Wall Street. (Although, to be fair, a large number of "corporate Dems" in Congress have also been viewed as under Wall Street's influence). It could be said that voters of tired of the compact between Congress and monied interests - hence the rise of such polarizing personalities as Donald Trump and Bernie Sanders.

      And, as I set forth later in this post, Congress has been misled by Wall Street on the DOL's rule-making effort. (As Congress has previously been misled by Wall Street and the insurance companies, many times over.) You think Congress would learn. Then again, monied interests continued to possess outsize influence over our policy makers.

      Other developments could stop the DOL's Final Rule. Lawsuits are certain to be filed, probably with the insurance industry leading the way. But I would put their likelihood of success, in stopping the DOL Final Rule's implementation, at less than 50/50.

      And, a new Administration could seek to enact a new rule in 2017, that effectively would repeal the DOL's April 2016 Final Rule. But there is no assurance that such would occur, regardless of who is elected. Also, government rule-making in adherence to existing laws defining the scope of review and public commentary, takes tremendous time - far more time than the 2-1/2 month window between the installation of a new Administration and the April 1, 2017 effective date of the core of the DOL's rule's requirements.

      A new Congress could also enact legislation that more quickly and effectively stops the DOL's Rule, but getting enough votes in the U.S. Senate, in which neither party will likely possess a fillibuster-proof majority, may be problematic.

      The DOL's Admirable "Sole Interests" Application of the Fiduciary Standard.

      As as a principles-based rule, the DOL Final Rule sets forth principles that must be followed in the course of a relationship of trust and confidence. Even Adam Smith, the founder of modern capitalism, supported ethical rules of conduct.

      Ignoring the several exemptions the DOL promulgated, the Final Rule, at its core, is an example of the best form of government regulation. It applies ERISA's tough sole interests fiduciary standard of conduct, by requiring conflicts of interest to be avoided. ERISA's tough prohibited transaction rules are also applied, in the context of the statutory exemption from same that permits "necessary" services for "reasonable compensation."

      In essence, the DOL's Final Rule is elegant in its simplicity and in its application. It is an example of government getting things right.

      "BICE" - The "Best Interests" Version of the Fiduciary Standard - Did the DOL "Get It Right"?

      In contrast to the core of the DOL's Final Rule, the DOL also issued or modified several class exemptions. These exemptions, requested by the financial services industry, are far more complicated than the rule itself. (Wall Street complains about this complexity, but the DOL was only trying to meet Wall Street's requests while still availing consumers of ERISA's mandate that they be protected.)

      The "Best Interests Contract Exemption" is an attempt by the DOL to accommodate the wearing of "two hats" by a fiduciary - i.e., serving as the purchaser's representative while also permitting the receipt of third-party compensation (commissions, 12b-1 fees, payment for shelf space, soft dollar compensation, and other revenue-sharing). It seeks to ban the worst practices (sales quotas, prizes and trips and awards for reaching certain sales targets for a product, etc.), while permitting compensation by different means. In so doing, despite many changes to the rule, it mandates many disclosures to individual investors (although we all know such disclosures are largely ineffective as a means of consumer protection).

      However, in the Best Interests Contract Exemption (BICE) the DOL quite explicitly applied its strict "Impartial Conduct Standards." When you read the language of the BICE release carefully, you will find a strong (and correct) application of the "best interests" fiduciary duty of loyalty. In essence, the client cannot be harmed by the receipt of third-party compensation. Given the substantial (some would say overwhelming) academic research that higher fees and costs associated with investment products lead to lower returns for investors, one can easily conclude that the only way for a firm to receive additional compensation and fulfill BICE's requirements is to offset additional compensation against other fees the client pays.

      I believe most advisers, and eventually most firms, will conclude that either fee-offsets must be undertaken (to return the arrangement to agreed-in-advance reasonable and levelized compensation), or they will simply switch to some form of level fee arrangement (assets-under-management percentage fee, annual retainer, fixed fee for discrete advice, subscription-based fees, and hourly fees). In other words, I suspect BICE will not be used all that much.

      There is much to like about the final version of BICE and some of the changes the DOL undertook. For example, I like the fact that the DOL abandoned having a "legal list" of investments, and instead relying upon the required due diligence of investment advisers to properly formulate investment strategies and to select investment products. I also admire the DOL's elicitation of the best interests fiduciary standard, and the DOL's resistance to Wall Street's many attempts to redefine "best interests" as a version of suitability.

      I remain concerned about BICE's enforcement. It remains to be seen whether broker-dealers will be subject to more (successful) class action claims, given the difficulty of certifying a "class." The removal of punitive damages as a remedy, with only compensatory damages available, may lead firms to regard the costs of failing to comply with BICE's fiduciary duties as just a mere "cost of doing business." (Sadly, many individual advisers will see their reputations ruined in the process, while firms just trudge along.) And, FINRA's mandatory arbitration - with its emphasis on a "fair" or "equitable" remedy (appropriate when dealing with the weak suitability standard) - may serve to substantially weaken the enforcement of the fiduciary standard of conduct, and especially the enforcement of the BICE's Impartial Conduct Standards.

      I would also have preferred to see BICE sunset, in 6-7 years, as a temporary measure as the industry adjusts; I fear that, over time, BICE will be interpreted incorrectly and will then permit certain nefarious practices. We can only hope that a future Administration will repeal BICE, while preserving the Final Rule itself, once the industry has move much further toward the provision of advice under levelized compensation arrangements.

      The Interrelationship Between BICE's Impartial Conduct Standards and Academic Research

      A further "deep dive" into BICE is appropriate, in considering how to comply with its many requirements.
       
      A key aspect of the U.S. Department of Labor's Final Rule ("Conflicts of Interest") and its related Best Interests Contract Exemption (BICE) Final Rule deserve further analysis: "What does the term 'best interest" mean? And, how is it possible to comply with BICE'S Impartial Conduct Standards?"

      I was struck by an article appearing at WealthManagement.com written by David Armstrong, "Fiduciary Rule Takes Center Stage in Nashville," regarding comments made at the NAPA 401(k) summit in mid-April 2016. Leaving aside the credit that NAPA took for getting the streamlined exemption in place for level-fee advisers (the credit goes to many others, in my opinion, who were far more influential in both identifying the need for this and in promoting it to the DOL), the article stated:
      • "Leaders of the association, the largest trade group for retirement plan advisors in the country, kicked off the three-day event with a muted victory lap."
      • "'Ultimately, firms are going to have to decide if they are 'full BIC or BIC light' ... There is no third option.' There is more flexibility in how an advisor is compensated if they are using the full best interest contract exemption, but also more liability from trial lawyers. There’s less flexibility in compensation under the streamlined level-to-level version, but less liability.'”
      • "RIAs will go for the BIC light version, while deep-pocketed wirehouses will likely chose the full BIC version. 'How hybrid firms thread that needle remains to be seen,' Graff said."
      • "“One thing the DOL did not take away was the ability of trial lawyers to file class-action lawsuits” against firms thought to be in violation of the best interest contract exemption. “We have to see it as a cost of doing business,” he said.
      Additionally, over the past couple of weeks, I have spoken to many securities lawyers and compliance consultants. Many of these attorneys and consultants seem to be focusing on BICE's "policies and procedures," rather than the substantive requirements of the Impartial Conduct Standards applicable under BICE.

      Consultants have further stated to me that insurance company executives are "O.K." with BICE, and that insurance company executives are not troubled by its greater transparency requirements. And others have stated that BD executives believe not much will change, for their firms, in the end - under BICE.

      It seems to me that far too many BD and insurance company executives, and even the compliance / securities law consultants that provide advice in this area, have opined that it will be largely "business as usual" in dealing with IRA accounts. I suspect they are wrong. Please permit me to explain why.

      ERISA's sole interest standard is tough - it prohibits any conflicts of interest. In turn, the prohibited transaction requirements of ERISA serve to strengthen this requirement. If it were not for the statutory 408(b)(2) exemption, even fee-only advisers could not provide services to plans covered by ERISA.

      Yet, ERISA permits the DOL to issue class exemptions from the prohibited transaction rules - as the DOL has done with the Best Interests Contract Exemption (BICE). Yet, the requirement for a class exemption is that the exemption is "in the [best] interests of the plan and its participants and beneficiaries." Another requirement for a class exemption is that the exemption is "protective of the rights of particiapnts and beneficiaries of such plan." 29 U.S.C. Sect. 1108(a).

      Under state common law, and English law from which American common law is derived, technically the existence of a conflict of interest is a breach of a fiduciary duty. Under the sole interest (trust law-based) fiduciary standard, there is no method to cure for the breach by the fiduciary. Any conflict of interest is, per se, wrongful. And recession of the transaction, even when the entrustor (beneficiary, or client) is a remedy frequently applied.

      But, under the common law's best interest fiduciary standard, the conflict of interest are strongly disfavored, but is permitted in certain instances. A conflict of interest is a breach of one's fiduciary duty, but the assertion of a defense to the breach can occur. In essence, the breach of the fiduciary obligation can be "cured" - by only by demonstrating that the clients' best interests were not subordinated. Several steps are required for such a cure, including: (1) affirmative disclosure of the conflict of interest and all material facts regarding it; (2) ensuring the client understands the conflict (a burden placed on the adviser, not the client, recognizing that the duty to read when receiving advice from a fiduciary is somewhat abrogated, and that even with extensive counsel some clients may not be able to understand the material facts and the conflict of interest and its ramifications); (3) the client's informed consent; and (4) even then, that the transaction remain substantively fair to the client. And the courts take the view, properly so, that clients would never provide informed consent to be harmed.

      If you delve into the Final Rule and BICE, the DOL in its releases has a lot of language which sets forth that, although commission-based compensation might be acceptable (although I have concerns about the reasonableness of compensation for larger transactions), and differential compensation can be paid to a firm, still the client cannot be harmed.

      Just consider these excerpts from the DOL's release:
      • The advice must be provided “without regard to financial or other interests of the Adviser, Financial Institution, or any Affiliate, Related Entity or any other party.
      • Financial Institutions must refrain from giving or using incentives for Advisers to act contrary to the customer’s best interest.
      • Stated differently, “[t]he Adviser may not base his or her recommendations on the Adviser’s own financial interest in the transaction.”
      • However, the DOL noted that BICE’s “goal is not to wring out every potential conflict, no matter how slight, but rather to ensure that Financial Institutions and Advisers put Retirement Investors’ interests first, take care to minimize incentives to act contrary to investors’ interests, and carefully police those conflicts that remain."
      • As to the use of the phrase “other party,” the DOL stated that it “intends the reference to make clear that an Adviser and Financial Institution operating within the Impartial Conduct Standards should not take into account the interests of any party other than the Retirement Investor – whether the other party is related to the Adviser or Financial Institution or not – in making a recommendation. For example, an entity that may be unrelated to the Adviser or Financial Institution but could still constitute an ‘other party,’ for these purposes, is the manufacturer of the investment product being recommended.”
      • The DOL noted that “full disclosure is not a defense to making an imprudent recommendation or favoring one’s own interests at the Retirement Investor’s expense.”
      • The DOL provided a specific example of the application of these requirements: “[F]or example, an Adviser, in choosing between two investments, could not select an investment because it is better for the Adviser’s or Financial Institution’s bottom line, even though it is a worse choice for the Retirement Investor.”
      • The DOL also cited several decisions addressing the requirements when a conflict of interest is present: “Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir. 1982) (“the[] decisions [of the fiduciary] must be made with an eye single to the interests of the participants and beneficiaries”);
      So, here's the rub. Where does additional (differential) compensation paid to the firm come from? From the products that are recommended. And, all things being equal (i.e., same asset class, same characteristics), that product will have higher expenses, to pay for such additional compensation to the firm recommending the product under BICE.

      Please note that an overwhelming body of academic research reveals (and, I would say, concludes) that higher fees and costs for mutual funds (and, by extension, to other products) results in lower returns to the investor. Witness the following research in this regard:
      • Actively managed funds tend to underperform their benchmarks after adjusting for expenses, and the probability of earning a positive risk-adjusted return is inversely related to expense ratios. (Haslem et al., 2008).
      • Although a small number of early studies find that mutual funds having a common objective (e.g., growth) outperform passive benchmark portfolios, Elton, Gruber, and Blake (1996)  argue that most of these studies would reach the opposite conclusion if survivorship bias and/or adjustments for risk were properly taken into account.
      • Expense ratios and turnover are negatively correlated with return. (Carhart, 1997 ; Dellva & Olson, 1998 ; O’Neal, 2004).
      • Loads are also negatively associated with fund performance (Carhart, 1997 ; Dellva & Olson, 1998 ).
      • Load funds underperform no-load funds by an estimated 80 basis points (bps) per year (Carhart, 1997).
      • Transaction costs also decrease the potential benefit of active management (Carhart, 1997).
      • Opportunity costs exist due to cash holdings by funds. Hence, part of this underperformance is because actively managed mutual funds have higher liquidity needs for frequent purchases and redemptions. (O’Neal, 2004).
      • Lower performing fund have higher fees, and high-quality funds do not charge comparatively higher fees. (Gil-Bazo & Ruiz-Verdu, 2008).
      • As a result of lower expenses, broad index funds tend to outperform actively managed funds with equivalent risk. Therefore, the best way for most investors to improve performance is to have a broad index fund with minimal costs (Malkiel, 2003).
      • As stated in a 2011 paper, using data on active and passive US domestic equity funds (the sample included a total of 13817 funds while the CRSP Mutual Fund Database) from 1963 to 2008, the authors observed: “Similar to others, we first show that fees are an important determinant of fund underperformance – that is, investors earn low returns on high fee funds, which indicates that investors are not rewarded through superior performance when purchasing ‘expensive’ funds. We explore a number of hypotheses to explain the dispersion in fees and find that none adequately explain the data. Most importantly, there is very little evidence that funds change their fees over time. In fact the most important determinant of a fund’s fee is the initial fee that it charges when it enters the market. There is little evidence that funds reduce their fees following entry by similar funds or that they raise their fees following large outflows as predicted by the strategic fee setting hypothesis. We also do not find evidence that higher fees are associated with proxies for higher service levels provided to investors. Overall, our findings provide little evidence that competitive pricing exists in the market for mutual funds.”
      • Vidal et. al., 2015: High Mutual Fund Fees Predict Lower Returns. “[We confirm the negative relation between funds´ before fee performance and the fees they charge to investors. Second, we find that mutual fund fees are a significant return predictor for funds, fees are negatively associated with return predictability. These results are robust to several empirical models and alternative variables.” Marta Vidal, Javier Vidal-García, Hooi Hooi Lean, and Gazi Salah Uddin, The Relation between Fees and Return Predictability in the Mutual Fund Industry (Feb. 2015).
      • Sheng-Ching Wu, 2014: High-Turnover Funds Have Inferior Performance. “[F]unds with higher portfolio turnovers exhibit inferior performance compared with funds having lower turnovers. Moreover, funds with poor performance exhibit higher portfolio turnover. The findings support the assumptions that active trading erodes performance….]
      • Blake, 2014 (UK): Average Fund Manager in UK Unable to Deliver Outperformance Using Either Selection or Market Timing. “[U]sing a new dataset on equity mutual funds [returns from January 1998–September 2008] in the UK … [we] find that: the average equity mutual fund manager is unable to deliver outperformance from stock selection or market timing, once allowance is made for fund manager fees and for a set of common risk factors that are known to influence returns; 95% of fund managers on the basis of the first bootstrap and almost all fund managers on the basis of the second bootstrap fail to outperform the zero-skill distribution net of fees; and both bootstraps show that there are a small group of ‘star’ fund managers who are able to generate superior performance (in excess of operating and trading costs), but they extract the whole of this superior performance for themselves via their fees, leaving nothing for investors.”
      • Ferri and Benke (2012). Using the “CRSP Survivor-Bias-Free US Mutual Fund Database … maintained by the Center for Research in Security Prices (CRSP®), an integral part of the University of Chicago Booth School of Business … In all portfolio tests, there was some benefit to using low-cost actively managed funds, but not as much as we expected, given the reported impact that fees have on individual fund performance. The probability of outperformance by the all index fund portfolios remained above 70% in all scenarios … We speculate that filtering actively managed funds may shift the probability curve closer to an all index fund portfolio as in the low-expense example, but we are not convinced that any filtering methodology will significantly alter the balance in favor of all actively managed funds. This may be an area for future research … A diversified portfolio holding only index funds in all asset classes is difficult to beat in the short-term and becomes more difficult to beat over time. An investor increases their probability of meeting their investment goals with a diversified all index fund portfolio held for the long term.”
      Please note that I am not stating that index funds are required to be utilized. I don't believe the body of research regarding the use of low-cost actively managed funds has been fully developed, yet. And, some index funds suffer from substantial market impact costs during reconstitution. More research in this area is required, and I believe we might suggest that low-cost index funds are (usually) a prudent choice for advisers. Yet, very low-cost actively managed funds might also be prudent, and some research appears to support this view.

      Yet, given the strong academic evidence available, I believe it is reasonable to conculde that, to the extent investment advisers believe that they can recommend higher-cost products that pay their firm more, with no harm to the client, these investment advisers are not acting as expert advisers with the due care required of a fiduciary. And, if those higher-cost products result in additional compensation to the adviser's firm, that's also a breach of the fiduciary duty of loyalty.

      So, under BICE - the allowance of differential compensation cannot, under the express language the DOL has utilized in its release, in several places - harm the client. Yet, the academic research is clear - higher compensation flows for recommending higher fee/cost products which, all things being equal, result in lower returns to the investor. Many experts from the world of academia will be available to testify for this proposition.

      The DOL did set forth examples on how to cure the breach of fiduciary duty that flows from the conflict of interest resulting from differential compensation. For example, the receipt of additional compensation could serve to offset other fees - essentially returning to a level-fee arrangement. When banks were permitted around the early 1990's to convert common trust funds to proprietary mutual funds, the approach taken by many (but not all) state legislatures was to require proprietary fund management fees to be credited against trustee fees. (Although, the presence of relatively high fund administrative fees, paid in part to affiliates, reveals a weakness in enforcement of the principles involved, by the FDIC and OCC.)

      In essence, the way I read the DOL's Best Interests Contract Exemption, most firms and advisers should embrace AUM fees. However, for the very small clients (perhaps with accounts of $25,000 or less) a commission-based platform could be used - provided the commissions for all products on the platform are the same (at least for similar products) (otherwise, a conflict of interest exists that cannot be properly managed).

      I have heard BD execs say, "We are not worried about increased transparency" or "higher disclosure burdens." Of course, this is because disclosures are largely ineffective.

      I have also heard BD/insurance company execs state that should clients complain about the conflicts of interest / higher-fee products, that resolving such complaints is just a "cost of doing business." The DOL Final Rule prohibits punitive damages, which would serve to deter bad conduct. And rescission as a remedy is also unavailable. [Class actions are permitted, but under what circumstances can you certify a class of IRA owners? That's an open question.]

      Additionally, concerns exist regarding the efficacy of arbitration. One might argue that arbitration, with FINRA's instruction to arbitrators to be guided by equity (i.e., to do what is "fair"), can easily diminish the fiduciary protections, which should be strictly enforced. This remains to be seen. (One can also argue that the pursuit of "fairness" also helps complainants, in arbitration, to prevail when the low "suitabiity" standard would not permit recovery.)

      This sets up an interesting dynamic. Firms won't fully comply with the Impartial Conduct Standards' requirements, in order to secure more profits. And they will litigate/settle complaints, as a cost of doing business, given that the size of any compensatory damages awards would be far less than the additional profits firm make by ignoring the Impartial Conduct Standards. Any reputational risk at the firm level is mitigated - first by settlement "keep quiet" clauses - and next by large advertising budgets and the short memories of the public.

      Yet, advisers will see preservation of their reputation as a most important factor driving their business and everyday decisions. Individual advisers will not want to see complaints that lead to their U-4s being tarnished.

      Also, note that differential compensation will be paid to the firm, but not passed on to the adviser, as under BICE the individual advisers cannot be incentivized to do harm.

      So, what will happen? If BD firms don't move to fee offsets, or (preferably) AUM platforms with low-cost investment products (with no product provider compensation to the BD firm), then in all likelihod individual brokers will be conflicted - and worried about their reputation. And these individual brokers will speak with their feet - by departing the firm.

      As a result - in order to retain advisers (and reduce compliance and litigation costs) - I suspect that some, perhaps the majority, of larger BD firms will embrace largely conflict-free AUM platforms for their registered reps to use. These AUM platforms will use low-cost ETFs and low-cost funds that provide no additional compensation to the BD firm or its representatives.

      But, many BD firms will not properly adopt a true fiduciary culture - and the reps in those firms will suffer, or depart, or both.

      If I am correct, then the DOL rule - with its application of the fiduciary standard to DB, DC and IRA accounts - about 60% of publicly traded investments in the US (if you exclude bank deposits) - will be transformational in financial services. It will accelerate the move toward fee-based compensation that was already largely underway.

      In the end, the DOL's rule-making efforts will force investment products to compete on their merits, not on the basis of how much commission is paid or how much revenue sharing or "marketing support" payments are paid to the BD firm.
      The DOL's Fiduciary Rule: Impacts Upon Financial Services.

      The DOL's Fiduciary Rule, if properly applied and enforced, will serve to transform the financial services industry. We have already seen a major shift in recent years toward levelized compensation arrangements, and the DOL's Rule will only accelerate this process. We have already seen low-cost products gain market share, and we have seen competitive pressures (via new applications of technology, and otherwise) force adviser's compensation lower.

      As the DOL's rule is applied, and firms continue to adjust, greater competitive pressures will emerge over time. leading to even lower fees and costs associated with investment products and the receipt of investment advice. This is good for consumers. And, as greater capital accumulations will result, this is good for the U.S. economy.

      The provision of investment advice continues to migrate toward a professional services business model. Yes, there will still be "mega-firms" of advisers, much of the same size of the largest broker-dealer firms today. But, similar to the legal and accounting professions, many mid-size regional and local firms will continue to expand in number. And, it is likely that the majority of advisers will reside in 1-5 person firms.

      One huge consequence of the DOL's Final Rule is the need to justify (and document), in the IRA rollover context, the value of the services provided. As a result, firms will continue to expand their value-added service offerings, including all-important financial and tax planning services. With the rise in financial planning services will come increased demand for new financial planners; this bodes well for our universities as they accelerate enrollment in their undergraduate financial planning programs.

      Additionally, all advisers need to get better at due diligence, in both investment strategies and investment product selection. Greater scrutiny is required of the strategies and products already utilized by advisers, and greater inquiry is needed into the universe of strategies and products to discern the very best that can be employed to serve client needs.

      Finally, if we continue to evolve toward a model in which consumers can trust their financial services providers, and if we continue to get better in our expertise, there could well be an explosion in the demand for financial planning advice over the next decade.

      Eventually financial planning may become a true profession, bound together by the fiduciary principle. Many steps remain, but the DOL Fiduciary Rule is a significant advancement toward that goal.