Monday, January 30, 2017

@realDonaldTrump: Support Corporations, U.S. Economic Growth & Jobs - The Fiduciary Rule

If President  Trump truly desires to supercharge the American economy, protect American business, create more small businesses, and create more jobs, he will support the U.S. Department of Labor's "Conflicts of Interest" (Fiduciary) Rule.

Let's face it. There is some over-regulation by government in our economy. However, some regulations are well-deserved, and can aid business and the economy. As related in the Federalist Papers #51, James Madison famously wrote: "[W]hat is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary."

Wall Street and the insurance companies have shown that they are no angels. They continue to tout their role, in commercials and other advertisements, as trusted "financial advisors" and "wealth managers." Yet, in reality, much of Wall Street just uses these masks to deceive and to sell highly expensive, often inappropriate investments to individuals who are working hard to save and invest for their retirement and other personal financial needs.

Wall Street is currently not required to act in the best interests of their clients. Hundreds of millions of Americans see their retirement nest eggs impaired by excessive intermediation - high fees, costs. And, as the trust of individual Americans is destroyed, they withdraw from participation in America's capital markets, altogether. 

Yet, there is a solution.

The 237 words that form the U.S. Department of Labor's (DOL's) "impartial conduct standards" is at the heart of the DOL's "Conflict of Interest" (Fiduciary) Rule. Like Madison, the DOL recognizes that some government is necessary. And it imposes upon financial advisers to retirement accounts a simple, elegant solution - adhere to the fiduciary principle, and act in the best interests of your clients. (The remaining parts of the rule just serve to accommodate some of Wall Street's business practices, at Wall Street's request; hence the length of the rule releases.)

The harm imposed by Wall Street's current "sell expensive investment products to everyone" is detrimental to the American economy, and detrimental to American business.

  • As the returns of the capital markets are diverted away from individual Americans - the owners of capital - to Wall Street, the accumulation of capital falls. This results in less accumulated capital for investment purposes - an effect that compounds over time with severe negative consequences for the long-term health of the U.S. economy. The cost of capital to corporations increases. Innovation, without capital, equates to missed opportunities for economic growth.
    • (Indeed, Wall Street hurts itself, in the long run. If Wall Street's greed - in the form of high fees and costs from expensive products pushed upon our fellow Americans - was constrained, much great capital would exist in later years to manage. In essence, Wall Street extracts high fees today, preventing greater accumulations of savings and investment accounts. If the fiduciary standard were imposed and Wall Street's fees had to be simply "reasonable," greater accumulations would occur in investment accounts. Within years Wall Street would have much more to manage, albeit at at lower fees. Yet, Wall Street would be making just as much money. And America would be far better off.)
  • American business owners prudently provide retirement plans for their employees. These plan sponsors receive advice from "retirement consultants" (Wall Street firms, insurance companies) on what funds to choose. Later, when plan sponsors are sued for including expensive mutual funds in their plans, the "retirement consultants" are often relieved of liability (hiding behind the low standard of "suitability"), while the business owner remains on the hook. 
  • Many studies have demonstrated that Wall Street's excesses impair U.S. economic growth and the formation of new businesses and jobs. As just one example: "[F]inancialization depresses entrepreneurship. Paul Kedrosky and Dane Stangler of the Kauffman Foundation find that as financialization increases, startups per capita decrease, in part because the growth in the financial sector has distorted the allocation of talent. They estimate that if the sector were to shrink as a share of GDP back to the levels of the 1980s, new business formation would increase by two to three percentage points. We have substantial circumstantial evidence to show that these trends have had negative consequences at the macro level: 'the influence of finance sector size on economic growth turns negative when financial services become too large a share of an economy and that high levels of financial activity crowd out investment and R&D in the non-finance sector.'" (Emphasis added.) From a Brookings Institute report by William A. Galston and Elaine C. Kamarck. (The Brookings Institute is a conservative think tank.)
All Americans deserve expert fiduciary financial investment advice, delivered for reasonable, professional-level compensation. But Americans don't deserve to continue to be victimized by conflict-ridden, deceptive sales practices. Similar to Wells Fargo's recent egregious practices for which they received so much disdain, Wall Street does not need to continue to use the perverse incentives within their firms that drive the sale of high-cost, inappropriate investment products.

President-elect Trump ... are you just another politician, who will take Wall Street's money and betray the faith of the individual American voters who elected you? Or are you, truly, a man who wants to make America great again - by encouraging greater capital formation, by assisting American business owners who desire to provide retirement security for their employees, and by encouraging the formation of new American businesses?

President-elect Trump - support the DOL's fiduciary rule. At its core, it is an elegant, 237-word solution to a longstanding problem. It will put America's economic growth back on the right path, both now and for the long term.

Supporting the DOL's fiduciary rule will help define your legacy as the champion of American business, and as the restorer of U.S. economic growth.

Ron A. Rhoades, JD, CFP is an attorney, financial planner, investment adviser, professor of finance, and author. (This post represents his views only, and are not necessarily those of any institution, organization, firm or group with whom he may be associated.) Ron may be reached at:

Sunday, January 29, 2017

Investment Consumers: Protect Thyself with This Questionnaire; Find Your B.F.F.

The U.S. Department of Labor’s Conflict of Interest (“Fiduciary”) Rule is likely to be delayed – and then eventually killed – by the Trump Administration. This poses major problems for consumers.

I offer a solution. An easy-to-administer questionnaire, designed to assist consumers to find a "Bona Fide Fiduciary."


Many firms and advisors profess to work in your “best interests” or as “fiduciaries” – but after forming a relationship of trust they then engage in self-serving (and detrimental to the consumer) behaviors, such as:

  • First, they may recommend investments that pay them more compensation, by selling more expensive investments. Let’s make this clear – the higher the fees and costs of your investments, the lower your returns will be.
    • For example, if you are investing in “U.S. large company mutual funds” – you will be better off choosing an S&P 500 Index® fund that has lower expenses, than the same fund that has higher expenses.
    • Some mutual funds and ETFs are more expensive, if they invest in certain asset classes. For example, generally speaking foreign stock funds are more expensive than U.S. stock funds. It’s o.k. to invest in a more expensive asset class – provided it is not extraordinarily expensive.
  • Second, many investment salespeople use titles that imply that they are not selling to you, but rather advising you (as a fiduciary). The U.S. Securities and Exchange Commission permits this (a serious error on their part).
    • For example, many investment salespeople use titles such as “Financial Advisor” or “Financial Planner” or “Wealth Manager” – titles that imply that a relationship of trust and confidence exists, but much of the time such a relationship does not exist.
  • Third, few investment advisers adhere to the dictates of the prudent investor rule, when designing and managing an investment portfolio for you. Instead, they speculate with your hard-earned funds. Or, worse yet, they have only been trained to sell products, with little training in actually selecting investment strategies or investment products.
  • Fourth, even advisers who tout their status as a fiduciary often turn around and then disclaim their fiduciary liabilities. Or seek to have their customers waive away the fiduciary duties they would otherwise possess. These disclaimers and waivers are well-hidden in the dozens of pages of paper documents consumers receive when they open accounts.
The result is tremendous harm, plain an simple. Expensive, inappropriate investments that nearly always underperform over the long term. Huge and unnecessary taxes on investment returns. In short - a devastating blow to the financial goals, and dreams, of the consumer.

Hence, it is more important than ever for consumers to locate, and work with, bona fide fiduciaries. Yet, it is increasingly tough to discern “the bona fide fiduciaries” (BFFs, I call them) from the pretenders.


Here is a questionnaire I suggest EVERY consumer utilize, when evaluating their choice of financial and/or investment advisor. And – consumers should use this checklist to test out their current advisors. (Many consumers will be shocked at the results.)

If your current or prospective adviser says: “I can’t answer these questions in writing,” or “My firm won’t let me answer these questions,” or provides any other excuse for not answering these questions in writing – that’s a HUGE warning sign. The message you should take away is clear – start looking for another adviser.

As many a jurist has stated over the past few centuries - it is not possible to wear two hats at one time. Either a person is selling something to you, or that person is a fiduciary to you and thereby representing you and your interests alone. This questionnaire therefore rules out those firms - even some who possess excellent reputations - that don't practice as independent investment advisers, or whose firms are affiliated with brokerage firms or mutual fund complexes. Economic interests matter. True, bona fide fiduciaries do not possess economic ties to brokerage firms, product manufacturers, etc.

Your goal should be to work with a trusted, expert adviser who will manage your investment portfolio in accordance with the prudent investor rule, and who will keep your interests paramount at all times. Period and without exception.

Your goal is to find your "B.F.F." - your "Bona Fide Fiduciary" financial and investment adviser.

Each of these questions is designed to be easy to answer – either “yes” or “no.” If all of the answers are not “yes” – it’s time to look for a new adviser.

1. Will you (and your firm) be a fiduciary to me, under the law?

2. Will you (and your firm) be a fiduciary to me, at all times, for all parts of our relationship as advisor and client, and for all of the accounts I have with you?

3. Will you (and your firm) charge me only a reasonable fee, paid directly by me (or deducted from my investment accounts, if appropriate)? Will you also provide me with a statement of the fees paid by me to your firm each calendar quarter?

4. Will you (and your firm) not accept any material compensation from the manufacturers (mutual fund companies, insurance companies, etc.) of the investment products you recommend to me?

5. Will you ensure that I am never charged a commission (including but not limited to front-end sales loads and deferred sales charges), and that no commission (as defined previously) is never paid to you (or to your firm) in connection with any purchases or sales of investments or investment products?

[This exception is permitted: You may sell to me term life insurance (not cash value life insurance), or long-term care insurance (that has no cash value and is a tax-qualified policy), or disability insurance (that has no cash value component), provided that you fully disclose to me how much you (and your firm) are compensated in connection with such sale, and provided that you provide me with quotes from at least three different different insurance companies (and disclose the compensation you or your firm would receive from each suggested policy), and provided that none of the recommended policies are “proprietary products” (as defined in the next question). However, we should discuss whether you should credit against my advisory fees any portion of the commission(s) you receive.]

6. Will you ensure that no investment product charges me, or pays to you (or to your firm) any12b-1 fees, soft dollar compensation, payment for shelf space, or other forms of revenue sharing, or payment to sponsor any seminars or events you (or your firm) puts on?

7. Will you promise that I am never sold a proprietary product by you (or your firm)? (A “proprietary product” for this purpose is any investment or insurance product that is produced, or manufactured by, any affiliate of your firm, including but not limited to any company in which your firm or its affiliates owns more than a 2% interest.)

8. Will you ensure that I am never sold an investment product as a result of a “principal trade”?

9. Do you agree to recommend investments to me, and to design and manage my investment portfolio, during the term of our relationship, under the strict dictates of the "prudent investor rule"? In connection therewith, will you provide me with a written Investment Policy Statement, along with any other documents, in which the investment strategy recommended by you is documented, showing the support the investment strategy possesses (via extensive back testing and/or through generally accepted academic research)?

10. Will you agree to design and manage my investment portfolio with a view toward long-term tax efficiency?

11. Will you use an independent custodian (brokerage firm) to custody my assets that will send to me a monthly statement of my holdings?

12. Will you ensure that you (and your firm) will not take “custody” of my assets (except that you may deduct my advisory fees from accounts I maintain with a "qualified custodian" that is independent from you and your firm)?

13. Will you ensure that the fees and costs that I pay – both to you (and your firm) and in connection with the investments you recommend (including not only annual expense ratios but estimated transaction and opportunity costs within pooled investments) and in connection with the delivery of ongoing financial planning services - will not exceed, in total:
2.00% if I have under $75,000 in investments with your firm
1.75% if I have $75k - $200k in investments with your firm
1.25% if I have $200k-$500k in investments with your firm
1.20% if I have $500k-$1m in investments with your firm
1.10% if I have $1m to $2m in investments with your firm
0.95% if I have $2m to $3m in investments with your firm
0.80% if I have $3m to $5m in investments with your firm
0.75% if I have more than $5m in investments with your firm

14. Do you possess evidence of a minimum level of competency in association with either financial planning and/or investments, by possessing one or more of the following:
Certified Financial Planner™ certification?
Certified Public Accountant / Personal Financial Specialist designation?
Chartered Financial Analysist (CFA) designation.

15. Can you affirm to me that you have no disclosure events on your Form ADV, Part 2B? (This is an investor brochure that describes your individual adviser.)

16. Will you sign this “Fiduciary Oath” (promulgated by The Committee for the Fiduciary Standard)? And please so sign!

I believe in placing your best interests first.
Therefore, I am proud to commit to the following five fiduciary principles:

  1. I will always put your best interests first.
  2. I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.
  3. I will not mislead you, and I will provide conspicuous, full and fair disclosure of all important facts.
  4. I will avoid conflicts of interest.
  5. I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.

                Advisor Signature: ____________________________

                Firm Affiliation: ____________________________

                Date: ____________________________

15. Will you attach this form to our client services agreement, and again sign this below, thereby (by your signature, on behalf of your firm) agreeing that the terms of this form shall at all times supersede the terms set forth in the client services agreement, in the event of any conflict between the two?


In consideration for the fees you are to receive from me, in the future, and for my engagement (or continued engagement) as a client of you and your firm, you agree that the foregoing answers and representations are both true and correct. You further acknowledge that the legal consideration for entry into this agreement by you and your firm is both adequate and sufficient.

You agree that this form shall constitute part of our client relationship / services agreement, and that the terms of this form shall supersede the terms of any and all other documents evidencing the agreements between us, to the extent any conflict exists between such form and/or documents.

Advisor Signature

              Firm Affiliation: ____________________________

              Date: ____________________________

        Witness: ____________________________

        Witness: ____________________________

(Provide an original signed document to the client. Retain a copy for the firm's file.)

Consumers: For additional details regarding the questions in this form, please refer to my prior post.

Wednesday, January 18, 2017

Thank You to a Small Team That Accomplished Great Things (DOL Fiduciary Rule)

Imagine being part of team that, through their strong efforts and tenacity, saved their fellow Americans billions and billions of dollars.

Imagine being part of a team that enhanced the retirement security of tens of millions of Americans.

Imagine being part of a team that, through their efforts, put in place policies that have led to, and will continue to lead to, increased accumulations of capital, providing the fuel for future U.S. economic growth.

The U.S. Department of Labor's Employee Benefits Security Administration is just such a team. With their dedication and perseverance, Asst. Secretary Phyllis Borzi and her team accomplished more than they will ever imagine.

This team vastly improved the disclosures made to plan sponsors and required benchmarking of fees. This step alone saved 401(k) investors billions and billions of dollars, as plan sponsors were alerted to the need to lower fees and costs. And many business owners, large and small, were able to avoid potential future liability in class-action suits as they thereafter adjusted the offerings in their companies' 401(k) plans.

This team then substantially improved the disclosures made to plan participants. More and more 401(k) plan participants began asking questions, in those instances where their plan sponsors had not taken action. This, in turn, led to many more billions of cost savings.

And, for their final act, this team adopted the "Conflict of Interest" Final Rule and its related exemptions, ushering in a strict fiduciary standard of conduct that required all advisors to ERISA-covered plans and IRAs to act with due care, unfettered loyalty to their client's best interests, and utmost good faith.

While this Final Rule remains under attack by Wall Street, both in the courts and in Washington, D.C., already the impacts of the rule have reverberated through the financial services industry. Many asset managers, forced to compete on the basis of the quality of their mutual funds or other products, and not based upon the amount of commissions or revenue-sharing paid to advisors, have already lowered their fees. Large financial services firms have abandoned the always-conflicted commission-based compensation in IRA accounts for fee-based compensation.

As a result of publicity about the Final Rule, consumers have been better trained to seek out - and demand - only fiduciary advisors. Not only for their 401k and IRA accounts, but for all of their investments.

Regardless of the finality of the DOL's Conflict of Interest Rule, its impact will carry forth, and propel the delivery of financial planning and investment advice closer to a true profession - bound together by the fiduciary principle that investment professionals should always keep their clients' best interests paramount.

This is a team that has accomplished a great deal. As the date for the new Administration approaches, some of the members of this team will depart, while others will (hopefully) remain on to carry forth their mission of protecting retirement savers.

So, in these last few days, to Phyllis Borzi, her chief of staff Jane Norman, Deputy Asst. Secretary Jude Mares, Deputy Assistant Secretary for Program Operations Timothy D. Hauser, Office Director (Exemptions) Lyssa Hall, Karen Lloyd of the Division of Class Exemptions, and to many others of the DOL / EBSA staff who worked on the rule and who made major contributions these past eight years during the regulatory processes, I would just like to say ...

      On behalf of the American people ...

      THANK YOU!

Saturday, January 14, 2017

A Proposal: One Defined Contribution Account (NIRA) To Rule Them All

As I've written before, some regulation - such as the DOL fiduciary rule - is simple, elegant and possesses substantial benefits not only for individual Americans but for corporations and the U.S. economy.

But, at times, undue complexity reigns in our statutory law and the regulations that follow. Often this is due to a mishmash of legislation adopted over time, amplified by the regulations that follow.

A perfect example is defined contribution plans. Look at what we have today for defined contribution plans ... 401(k) plans, 403(b) plans, 457 plans, Thrift Savings Plan, SIMPLE 401(k), SIMPLE IRAs, Individual IRAs (traditional), SEP IRAs, Keoughs, and many more.

Each type of plan is similar, as to its ability to contribute funds to a "retirement account" and receive a tax deduction for same, ongoing tax deferral, followed by required minimum distributions. Yet, each plan also has its unique features. Often these create tax traps for the unwary.

And, at times, they create unnecessary administrative costs for employers. An example is "plan administration" fees - often thousands of dollars a year, at a minimum, even for small plans.


Call it the "New Individual Retirement Account" or "New IRA" or "NIRA."

All existing defined contribution accounts to be rolled over into NIRAs within 24 months of enactment of legislation.

Who can establish?
   - Any person with earned income, or who desires rollover into a NIRA.
       - One-page form to establish.
   - A company, on behalf of its employees. One-page form to "adopt a NIRA for employees."
       - No annual filings, tax or otherwise.
       - Plan sponsor is fiduciary. Any provider of recommendations to plan sponsor must be a fiduciary, as well.

Corporate stock permitted in NIRAs?
   - Yes, but not to exceed 15% in value of any participant's account.
   - If corporate stock permitted and it exceeds 15% in value, participant has 6 months to reduce down to 15% level.
   - ESOPs not permitted any longer.

Who is custodian of the NIRA accounts?
   - Bank or brokerage firm (qualification standards exist)
   - Selected by employer, if the employer desires
   - Otherwise, selected by employee

Payroll deduction:
   - Must be permitted, by all employers (large or small)
   - Auto-enrollment, unless employee "opts out"
   - Auto-escalation, unless employee "opts out," wherein 1/2 of any wage/salary increase is dedicated to increasing the contribution to the NIRA account (employee may select 0% to 100% of wage/salary increases to go to NIRA account)
   - Default investment option is age-appropriate target date fund (employee may select other investments)

Advice providers to NIRAs as to investment recommendations - requirements:
   - Advice-providers must always possess fiduciary status. (No waivers, disclaimers.)
        - Fiduciary status, once acquired for NIRA, extends to all accounts of the client upon which advice is provided (qualified or non-qualified accounts)
   - Prudent investor rule applies to all advice provided.
   - Fees are paid directly by client. Must be reasonable fee. No commissions or other third-party compensation of any kind permitted to be paid to fiduciary advisers or their firms. Fee methods include:
        - Fixed fee for discrete (one-time) advice
        - Subscription fees (monthly)
        - Annual flat fee
        - Asset management fee (AUM fees)
   - Advisory fees can be deducted directly from the NIRA account, with client consent. Includes fees paid for investment management advice, as well as for financial planning advice.
   - Self-directed NIRAs permitted, in which no advice is provided. Information on products is permitted, with disclaimers that no advice is provided. General education about investments and financial planning is permitted, but no specific investment recommendations may be provided, nor may specific asset allocation recommendations be provided (other than through the use of target-date funds)
   - No proprietary products are permitted to be recommended by advice providers.

  - 100% immediate, for both employer and employee contributions.

Employer match?
  - Whatever the employer wants to do, maximum of 25% of salary.
  - Can do zero.
  - Can vary from year to year, based on profitability.
  - Can do through "bonuses" each year, as opposed to each pay period.

Maximum contribution?
  - Up to lesser of: (a) 35% of wage/salary income that year; and (b) $60,000 a year, to be adjusted for inflation.
  - No "nondeductible contributions" permitted

Ability to take loans against?
  - None. See loosening of early distribution provisions, below.

Early distributions permitted without any penalty?
  - 4% maximum per year, at any age. Regardless of whether working or not working.
  - May "turn on" and "turn off" early distributions at any time.
  - Distributions above 4% permitted, but subject to 5% additional tax (penalty) on top of regular income tax due for such distribution.

Required minimum distributions for owner:
  - Starting the year you turn age 75, and each year thereafter: 4% per year minimum, no maximum
  - If owner continues to work, the 4% per year minimum may be reduced by the amount of the salary/wage income that year.
  - Alternatively, at age 55 or thereafter, a NIRA owner - regardless of whether employment continues or not - may annuitize all or a portion of the NIRA over the owner's lifetime, or (if married) over lifetime of owner and owner's spouse (with ability to designate that spouse receives a lesser percentage annuity payment, or 100% of the primary NIRA's benefit amount). Any amount of the NIRA not annuitized remains subject to new RMD rules.

Required minimum distributions for heirs:
  - Spouse may rollover into his/her own NIRA, if done within 12 months of death of the IRA owner.
  - If spouse does not rollover, must be distributed within 5 years of death of NIRA owner. At any time during that period of time.
  - For all other heirs, must be distributed all within 5 years of death of NIRA owner. Up to heir when this is done.
  - If not an individual heir (such as a charity), must distribute all within 12 months of death of the NIRA owner.
  - Inherited NIRAs are subject to claims of creditors.
  - Use of irrevocable trusts for distributions of inherited NIRAs permitted, but distributions to same must all occur within 5 years of death of NIRA owner.

Protection from creditor claims:
  - For U.S. bankruptcy law purposes, up to $2,000,000 total for all accounts (to be adjusted for inflation), regardless of whether "contributory" or "rollover"
  - For state law purposes (outside of bankruptcy context)), exemptions are dependent upon state law

Roth IRA option:
  - None. U.S. Treasury loses far too much money by providing the Roth IRA tax benefit. We need to "balance the budget."
  - Existing Roth IRAs grandfathered during life of participant, but must be fully distributed to heirs within 12 months of death of the participant.

Transfers (rollovers):
  - Permitted at any time, into any NIRA account established by NIRA owner (or by NIRA owner's employer)
  - No limits on how many transfers/rollovers may be done in any year.
  - Must be done via direct custodian-to-custodian transfers
      - Custodian-to-custodian transfers, electronically; or
      - If check issued by prior custodian, must be payable to new custodian

Fee disclosures:
  - Required quarterly.
  - Each investment must have ongoing annual fees estimated, and provided in the statement for the account. Such as in one-line summary following the listing of each specific investment.'
  - Since no third-party compensation to brokers, custodians, permitted, there will be no commissions, payment for shelf space, soft dollar compensation, etc. to disclose.
  - The annual expense ratio must include an estimate of the anticipated brokerage costs for transactions within the mutual fund or ETF or other pooled investment. And anticipated (estimated) securities lending revenue must also be included in the annual expense ratio.
  - Advisory fees must also be included - either in custodial statement, or in separate statement, quarterly.
  - Fee disclosures must include this statement (or something similar): "Academic research has revealed that, for highly similar investments, higher fees and costs translate to lower returns for investors. You should always ascertain if a lower-fee-and-cost investment option is available, as to investments that are substantially similar to each other."

Plan administrator fees.
  - None, because plan administrators are no longer needed.

Recordkeeper and custodian fees:
  - Per account basis, only. Flat fee per year, per account. No percentage fees.
  - May be deducted from the account, or paid by the employer (if an employer-sponsored NIRA)
  - Fee must be disclosed on custodial statements (quarterly minimum), or on separate quarterly document furnished by record keeper
  - Negotiated by the account owner, or in the case of an employer-sponsored NIRA by the employer (aided by the investment adviser, if one exists)


This proposal for "New IRAs" or "NIRAs" will substantially lower the fees and costs of employer-associated retirement plans. It will eliminate tax traps for the unwary. It will prevent employees from taking loans from their NIRA accounts except when absolutely necessary. It will protect employers from undue liability, since only fiduciary investment advisers may provide recommendations to employers, and these fiduciary advisers can be held to account.

Thursday, January 12, 2017

B.I.C.E.: Financial Advisors Beware

This article was originally published at Advisor Perspectives.

B.I.C.E.: Financial Advisors Beware
By Ron A. Rhoades, JD, CFP®

As of the date of this writing, the future of the DOL “Fiduciary Rule” remains unclear. Judicial challenges remain, and the Trump administration has not yet (explicitly) expressed its view on whether the rule will be delayed and/or eventually repealed (and how long that will take). Many broker-dealer and dual registrant firms have already spent millions to comply with the rule – but are they choosing the right path for compliance?

Some broker-dealer firms – both wirehouses (e.g., Merrill Lynch, etc.) and IBDs – will choose not to use the DOL’s Best Interests Contract Exemption (B.I.C.E.) and will move their clients (to the extent not grandfathered) to fee-based accounts. Yet, other broker-dealer firms will embrace B.I.C.E., which contains a proverbial minefield of traps for both firms and their financial advisors.

What does this mean for financial advisors in those firms that utilize B.I.C.E.? Here are my insights and legal analysis. I question why any financial advisor would want to use B.I.C.E., given the likelihood of significant reputational damage that would result.

The U.S. Department of Labor issued its final “Conflict of Interest” (“C.O.I.”) regulation in April 2016, with the effective date of its core provisions on April 10, 2017. Under the C.O.I. regulation, fiduciary status is imposed on nearly everyone providing investment recommendations to ERISA-covered plan sponsors and plan participants, as well as to owners of IRA accounts, Keogh plan accounts and health savings accounts. While prohibited transaction exemptions (PTEs) (including the B.I.C.E. permit the receipt of third-party compensation, as a practical matter firms – and their advisors – should transition to fee-based accounts. Anything less will result in significant reputational risk to advisors, as well as substantially increased litigation risk to both firms and advisors.

The 237 words of the impartial conduct standards

B.I.C.E. permits commissions, 12b-1 fees and other third-party compensation to be paid to broker-dealer firms. Much attention has been focused on the voluminous disclosures required under B.I.C.E.; some firms may wrongly believe that they can conduct “business as usual” simply by providing these disclosures. However, the core of the DOL’s rules are found in the 237 words that comprise the Impartial Conduct Standards. These sStandards impose strict fiduciary duties of loyalty and due care upon firms and advisors, require the receipt of only reasonable compensation, and prohibit misleading statements. And, these Impartial Conduct Standards also apply to recommendations of proprietary funds, principal trades and fixed-index annuities.

B.I.C.E. imposes upon both firms and their advisors an extremely strong fiduciary duty of “loyalty” that cannot be disclaimed by the firm or advisor, nor waived by the client

Under B.I.C.E. and its Impartial Conduct Standards, recommendations must be given to clients “without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party.”[1] “[F]or example, an advisor, in choosing between two investments, could not select an investment because it is better for the advisor’s or financial institution’s bottom line .”[2] Moreover, neither the firm nor advisor may seek to limit its liability by disclaiming their core fiduciary duty or loyalty, nor may the firm seek to have the client waive the fiduciary duties owed to the client.[3]

The DOL’s strong fiduciary duty of due care is further rooted in the “prudent investor rule,” which includes the duty to not waste the client’s assets

The Impartial Conduct Standards also incorporate, as part of a firm’s and advisor’s fiduciary duty of due care, the tough “prudent investor rule” (PIR).[4] The PIR has a decades-long history of interpretation, as it is the core of a trustee’s duty to manage investment under trust law, and it is codified in most states as a version of the Uniform Prudent Investor Act. The PIR requires the advisor to manage risk across the investor’s portfolio, and to consider the risk and return objectives of the portfolio in making decisions. The duties to diversify investments and to avoid idiosyncratic risk are emphasized, in keeping with the findings of modern portfolio theory.

Additionally, under the PIRPIR, the firm and advisor possess a duty avoid waste. In other words, there exists a duty to minimize the costs incurred by the client when determining which investment products to select. “[F]iduciaries … ordinarily have a duty to seek … the lowest level of risk and cost for a particular level of expected return.”[5] In the particular context of mutual funds and other pooled investment vehicles, advisors must pay “special attention” to “sales charges, compensation, and other costs” and should “make careful overall cost comparisons, particularly among similar products of a specific type being considered for a … portfolio.”[6] Put simply, “[w]asting [clients’] money is imprudent.”[7]

The PIR’s duties to avoid idiosyncratic risk and to avoid waste of the client’s assets bring into doubt the efficacy of several programs already announced by certain firms. For example, an IRA platform for smaller clients consisting only of individual stocks and bonds may render it impossible for an advisor to minimize idiosyncratic risk.

The PIR also poses huge challenges to the use of expensive funds and annuity products, where less expensive alternatives are available. For example, a broker-dealer platform or program in which the financial advisor is confined to the use of higher-cost mutual funds or variable annuities would likely run afoul of the fiduciary’s duty to avoid waste of the client assets, especially where similar lower-cost investments were available in the marketplace. While the use of very-low-total-cost index funds and index ETFs is not explicitly required by the rule, their utilization is certainly implicitly favored and should be viewed as one step that could be taken along the path toward risk reduction for the firm and its advisors.

Academic research has not ruled out the utilization of all active management strategies. However, the research is compelling that high-cost actively managed funds should be avoided by advisors operating under the fiduciary duty of prudence, given the consistent inverse relationship between investment product fees and investor returns. Further research on the ability of very-low-cost actively managed funds to beat appropriately chosen benchmarks is desired, as the current research is insufficient to either support or undermine their utilization.

When providing advice to an account under the DOL Rules, it is far more likely that the entire relationship will be deemed to be one of trust and confidence, applying state common law

In private litigation and arbitration, firms and advisors are normally sued not only for breach of contract, but also under state common law for breach of fiduciary duty. In such proceedings broker-dealer firms and their advisors usually deny the existence of fiduciary status. However, when the prudent investor rule is imposed upon one portion of a client’s portfolio, other portions of the portfolio should also be managed prudently given the fiduciary’s duty to consider the client’s other investments and assets.[8]

When fiduciary duties are applicable contractually under B.I.C.E. for the management of IRA accounts, then it more likely that common law fiduciary status will be found to exist for the entirety of the advisor’s relationship with the client – including but not limited to the IRA account and other brokerage and investment advisory accounts upon which advice is provided. In other words, a court or arbitrator is more likely to find that a relationship of trust and confidence exists for non-qualified accounts when fiduciary duties are already imposed upon qualified accounts managed by the advisor.

Under state common law, the receipt of additional compensation by a firm or advisor is a breach of fiduciary duty, which requires proof that the client is not harmed

Given the higher likelihood of fiduciary status under state common law, methods to comply with state common law fiduciary duties should be reviewed.

The preferred method of complying with one’s fiduciary duty of loyalty under state common law is to seek, in advance of any investment recommendations, the client’s agreement to a reasonable “level fee” arrangement (i.e., the fee is independent of the product sold to the client). Such fee structures include asset-under-management fees, annual fixed fees, project-based fixed fees, hourly fees, subscription fees, and combinations thereof. After securing the client’s agreement on fees, the advisor should not recommend any investment product that would provide the advisor with additional compensation, absent an agreement to offset other fees the advisor receives. This is because, under state common law, a “fiduciary who receives compensation from an entity whose investment products the fiduciary recommends presumptively breaches the duty of loyalty … [T]he common law … tolerates authorized conflicts of interests, provided that the [advisor] acts fairly and in good faith in pursuit of the beneficiary’s best interest.”[9]

Once the burden of proof and/or persuasion shifts from the client to the firm and advisor, proof must be offered that the client was not harmed by the receipt of the additional compensation by the firm. As discussed below, given at additional compensation necessarily is paid by product providers from product fees, and that higher product fees on average lead to lower returns for investors, especially over the long term, this is a difficult burden of proof to meet.

The “careful scrutiny” of additional fees received by a firm under B.I.C.E.

Unlike ERISA’s statutory “sole interests” fiduciary standard (where conflicts of interest are prohibited), under B.I.C.E.’s “best interests” standard a conflict of interest is permitted to exist. Yet, when additional fees are received by a firm then the conduct of the firm and advisor “will be subject to especially careful scrutiny.”[10]

The DOL’s Impartial Conduct Standards do permit “differential compensation” between “reasonably designed investment categories” to financial advisors based upon “neutral factors” tied to the services delivered to the client.[11] The DOL provided the example that a difference in compensation to the advisor could be based upon the “time and analysis necessary to provide prudent advice with respect to different types of investments.”[12]

Self-dealing and the receipt of additional fees from product providers: the impact of the prudent investor rule and academic research

As indicated above, the receipt by of third-party compensation is likely to be closely scrutinized under B.I.C.E. This is especially true when additional compensation is received by a broker-dealer firm, such as through 12b-1 fees, payment for shelf space and other forms of revenue sharing and/or marketing reimbursements, as this amounts to a form of self-dealing.

If additional fees and costs are received from the recommendation of a particular investment, such additional compensation is necessarily derived from the product’s costs. And here’s the rub … the academic research is strong and compelling – higher product fees and costs result, on average, in lower returns for investors.[13]

Hence, under B.I.C.E. the test for receipt of additional compensation is a tough one. “[A]n 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.”[14] Furthermore, under B.I.C.E. “full disclosure is not a defense to making an imprudent recommendation or favoring one’s own interests at the Retirement Investor’s expense.”[15]

“Commissions are better for investors”? Not so fast!

Some financial advisors might argue that mutual fund A share classes are better for investors, as the client does not need to pay ongoing fees – just an upfront commission. Leaving aside for a minute that most class A shares still impose a 0.25% or less annual 12b-1 fee, the impact of the sales commission is often understated.

A 5.75% sales charge requires a mutual fund to earn a 1.20% greater annual return (assuming a hypothetical 10% level return of the fund), if the fund is held for five years. If held for 10 years, the impact of the sales charge falls to 0.59% annually. If held for 15 years, the impact falls to 0.43%. But, here’s the rub – according to the Investment Company Institute the average holding period for stock mutual funds is only four years, and for bond mutual funds only three years. With these average holding periods a 5.75% sales charge translates into an annual fee well above 1.2% a year.

In addition, the application of Modern Portfolio Theory often leads to the need to rebalance a client’s investment portfolio. And, if the financial advisor just deals with mutual fund A share classes, it may very well occur that the advisor would recommend that some of the shares of a fund purchased by a client just a few months or few years before would need to be sold for rebalancing purposes. In essence, commission-based compensation is inconsistent with the application of Modern Portfolio Theory.

Some financial advisors will still argue that breakpoint discounts on mutual fund A share class commissions will significantly lower the commissions paid. Yet, in hundreds and hundreds of investment portfolios I’ve reviewed, implemented by brokers, nearly 90% of them appeared to be structured to avoid breakpoint discounts by spreading out investments among funds from different fund companies. Under a fiduciary standard the level of scrutiny intensifies, and it would be hard for brokers to justify such a practice given the prudent investor rule’s duty to avoid the waste of client assets. Financial advisors who operate under a fiduciary standard will have to justify any action that negates breakpoint discounts; given the existence of the conflict of interest in connection with breakpoint discounts, the burden of proof and persuasion falls upon the financial advisor, not the client. Subjective “good faith” is insufficient to meet this burden, as the actions of the financial advisor are judged under an objective standard.

Lastly, the comparison of “sales commission” to “1% annual fee” is often comparing apples to oranges. When a mutual fund A share class is sold, the broker has no duty to continue to monitor the portfolio. (However, several courts has found that, in situations when trailing compensation exists and continued advice is provided to the investor, fiduciary status existed under state common law, which included an ongoing duty.[16]) In contrast, investment advisors who charge 1% annual fees often provide a large amount of ongoing financial planning and investment advice. And, of course, many investment advisors charge less than 1%, particularly on larger accounts.

‘Relying on 12b-1 fees? Don’t!

In 2010 the U.S. Securities and Exchange Commission (SEC) held hearings on whether 12b-1 fees should be continued. While no action was taken by the SEC at that time, since then various SEC officials have indicated that 12b-1 fees remain under review.

Even before the enactment of Rule 12b-1 the SEC had generally opposed the use of fund assets
for the purpose of financing the distribution of mutual fund shares, noting that "existing shareholders of a fund often derive little or no benefit from the sale of new shares."[17] Given the substantial evidence that investors fail to understand 12b-1 fees, their uncompetitive nature (as they generally cannot be negotiated), and the indefinite continuation of 12b-1 fees in many instances even if the client no longer desires ongoing investment advice, it is likely that 12b-1 fees will be repealed at some future date.

The Manner of compensation is much more suspect than the amount of compensation

The DOL’s Impartial Conduct Standards set forth the existing requirement that the both the firm and advisor receive no more than “reasonable compensation.”[18] As a result of this standard, firms will likely benchmark their services and fees against those of other firms in order to ensure that the total fees paid by the client to the firm are not excessive.[19] Yet, as Tim Hauser, the Deputy Assistant Secretary for Program Operations of EBSA at the DOL, explained at the Financial Planning Association's national conference in the Fall of 2016, it is very difficult for a plaintiff’s attorney or an agency to prevail on allegations of unreasonable compensation.[20] The courts generally defer to the parties to negotiate fees, provided the negotiation occurs in an arms’-length bargaining and not as a result of self-dealing by a fiduciary, in order that courts not get involved in rate-setting.[21]

B.I.C.E. can result in a misalignment of the interests of the firm and those of its advisors, for the firm can receive more compensation while the advisor’s compensation generally must not vary

Under B.I.C.E. the firm may receive additional compensation from the recommendation of particular products, but the firm must adopt policies and procedures to ensure that individual advisors do not receive differential compensation, bonuses, or awards “to the extent they are intended to or would reasonably be expected to cause Advisers to make recommendations that are not in the Best Interest of the Retirement Investor.”[22] In other words, while firms can receive additional compensation for the recommendation of certain products, the advisor must not receive any portion of such additional compensation. The distinction between compensation received by the firm, versus those received by the advisor, results in a significant disconnect between the interests of the firm and the interests of the advisor.

It is possible under B.I.C.E. to pay advisors additional compensation when a more complex product, that requires additional time to explain, is provided to a client. But plaintiff’s attorneys will likely question advisors on the additional time spent to understand more complex products (which time, in theory, would be allocated among many clients), and to explain the more complex product to a specific client. These plaintiff’s attorneys will likely assert that the amount of additional compensation provided to the advisor could easily become an improper incentive to the advisor under B.I.C.E., given the relatively small amount of additional time spent by the advisor with each individual client.

Over time, the economic incentives present will result in pressures placed upon advisors by their firms to not act in the best interests of the client

Where financial products are recommended, due to the vast asymmetry of information between a financial firm and its clients, incentives exist for the firm to pass off low-quality goods as higher-quality ones.[23] Over time, such economic incentives tend to distort a fiduciary’s judgment, as has often been recognized by the courts.

For example, the U.S. Supreme Court, in discussing conflicts of interest, stated: “The reason of the rule inhibiting a party who occupies confidential and fiduciary relations toward another from assuming antagonistic positions to his principal in matters involving the subject matter of the trust is sometimes said to rest in a sound public policy, but it also is justified in a recognition of the authoritative declaration that no man can serve two masters; and considering that human nature must be dealt with, the rule does not stop with actual violations of such trust relations, but includes within its purpose the removal of any temptation to violate them ....”[24] And, as the U.S. Supreme Court stated 170 years ago, the law “acts not on the possibility, that, in some cases the sense of duty may prevail over the motive of self-interest, but it provides against the probability in many cases, and the danger in all cases, that the dictates of self-interest will exercise a predominant influence, and supersede that of duty.”[25]

As an eloquent Tennessee jurist put it before the Civil War, the doctrine that conflicts of interest should be avoided “has its foundation, not so much in the commission of actual fraud, but in that profound knowledge of the human heart which dictated that hallowed petition, ‘Lead us not into temptation, but deliver us from evil,’ and that caused the announcement of the infallible truth, that ‘a man cannot serve two masters.’”[26]

B.I.C.E. effectively limits the ability of individual advisors to receive additional compensation. But under B.I.C.E. firms will still possess the economic incentive to encourage their advisors to promote to clients investment products that pay the firm (but not the advisor) additional compensation. Advisors working in firms that utilize B.I.C.E. must confront the substantial likelihood that their own interests will not align with those of their firms.

The reputational risk for the individual advisor is far greater than that of the typical firm

The single most important asset a financial advisor possesses is her or his personal reputation. Damage to the advisor’s reputation is the greatest risk individual advisors face today. Such risk is realized should client complaints, usually triggered by the presence of conflicts of interest, lead to resolutions that mandate disclosures of settlements or arbitration awards to current clients of the advisor as well as to future potential clients.

Yet, for the larger financial services firm, reputational risk is far less consequential. Those firms can more easily mask transgressions via nondisclosure agreements with claimants during settlements, mandatory arbitration of individual claims and voluminous documents that are seldom read by clients. Moreover, a firm’s reputation is more easily repaired via marketing and promotion, explaining away past transgressions as due to “rogue advisors” who are no longer with the firm, and the inevitable passage of time that dims consumer’s memories.

B.I.C.E. requires voluminous, client-repulsive disclosures

Although much research has revealed the ineffectiveness of disclosures due to various behavioral biases consumers possess, fiduciary duties generally impose the burden upon individual advisors to ensure that their clients understand when a conflict of interest is present, as well as understand the consequences of such conflict of interest.[27] Hence, advisors who practice under B.I.C.E. will be confronted with an affirmative duty to ensure client understanding of disclosures that are both voluminous and onerous.

In the competition for clients, firms that use fee-based accounts will possess a huge marketing advantage over firms that utilize B.I.C.E.

Over the next several years many advisors will see a lot of “money in motion.” Triggered by changing fee and compensation structures, enhanced disclosures and the consumer press, clients will increasingly review their relationship with their current advisor and seek out second opinions.

As the distinctions between firms that utilize B.I.C.E. and those that don’t become known, the consumer press will steer their readers to firms that don’t use B.I.C.E. for IRA accounts. Additionally, savvy fee-only firms already provide questionnaires and checklists for prospective clients to utilize when shopping for new advisors. These questionnaires highlight the benefits of compensation structures that are more aligned with client interests.

As studies have demonstrated, the vast majority of consumers prefer fee-based compensation over commissions. Over the past two decades, more and more accounts have transitioned from commission-based to fee-based in reaction to consumer preferences. The DOL’s COI rule only accelerates this trend; fee-based accounts will rise from perhaps 40% of accounts today to 60% or greater within a short time.

B.I.C.E. is unlikely to survive the next decade

In other nations, such as Australia, New Zealand, and England, regulation has progressed much further, in that commissions paid to financial advisors for investment management services are largely banned. While these developments have not yet reached U.S. shores, they are an indication of future policy changes that may occur.

More important, however, will be the adverse result of firms using B.I.C.E. Some firms may see the increased cost of doing business under B.I.C.E. – primarily in the form of increased litigation costs – as just a “cost of doing business.” As abuses take place, the DOL may well re-evaluate whether B.I.C.E. is an effective solution. Should the courts set aside the DOL’s prohibition on the inclusion of clauses in client agreements that negate the ability of the client to participate in class actions, the DOL may become more concerned that B.I.C.E.’s remaining enforcement mechanisms are insufficient to deter bad conduct. As a result, a future administration may seek to sunset B.I.C.E. and require all financial advisors to utilize level-fee compensation methods.

Avoiding B.I.C.E. is the “right thing to do”

Finally, the most compelling reason to embrace “level-fee” compensation and to avoid B.I.C.E. is simply this – to serve the client in the best manner possible. Firms that embrace level fees, and eschew the receipt of product-based compensation, will truly act as representatives of the client.

Larger firms will use the collective purchasing power of their advisors and clients to squeeze asset manager’s compensation, in order to boost the returns their clients enjoy. These firms may also require annuity and other product manufacturers to create better and more transparent products.

As a result, products will compete – not on the basis of the amount of revenue sharing provided to the product’s distributors – but rather on the basis of each product’s individual merits. The real impact of the DOL’s Conflict of Interest Rule and its exemptions will be upon asset managers. Some financial advisors merely need to adjust the manner by which they receive their compensation.

In conclusion, here is my message to financial advisors (i.e., dual registrants and registered representatives). B.I.C.E. is a minefield that will generate a huge number of explosions. Don’t be around when the minefield starts to erupt. Rather, avoid B.I.C.E. and use a level-fee methodology. It’s the right thing to do – for the firm, its clients and especially for you, the financial advisor.

Ron A. Rhoades, JD, CFP® serves as director of the financial planning program for Western Kentucky University’s Gordon Ford College of Business. He is an assistant professor – finance, an attorney, an investment advisor and a frequent writer on the fiduciary standard as applied to financial services. A frequent speaker at national and regional conferences, he also serves as a consultant to firms on the application of the DOL Conflict of Interest Rules, fiduciary law and related issues. This article represents his views only, and not those of any institution, firm or organization with whom he may be associated. This article is believed to be correct at the time it is written; subsequent laws, regulations, and/or developments regarding the interpretation or enforcement of ERISA, the I.R.C., and DOL regulations should be consulted. Please direct all questions and requests via email:

[1] “The phrase ‘without regard to’ is a concise expression of ERISA’s duty of loyalty, as expressed in section 404(a)(1)(A) of ERISA and applied in the context of advice.” 81 Fed.Reg. 21,026 (April 8, 2016).
[2] 81 Fed.Reg. 21,027 (April 8, 2016).
[3] “Section II(f)(1) prohibits all exculpatory provisions disclaiming or otherwise limiting liability of the AdviserAdvisor or Financial Institution for a violation of the [B.I.C.E.] contract's terms, and Section II(g)(5) prohibits Financial Institutions and AdviserAdvisors from purporting to disclaim any responsibility or liability for any responsibility, obligation, or duty under Title I of ERISA to the extent the disclaimer would be prohibited by Section 410 of ERISA.” 81 Fed.Reg. 21,042 (April 8, 2016).
[4] “[A] Financial Institution and AdviserAdvisor act in the Best Interest of a Retirement Investor when they provide investment advice ‘that reflects the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor, without regard to the financial or other interests of the AdviserAdvisor, Financial Institution or any Affiliate, Related Entity, or other party.’” 81 Fed.Reg. 21,053 (April 8, 2016).
[5] Restatement (Third) of Trusts § 90 cmt. f(1), at 308; see id. § 88 cmt. a, at 256 (trustee has “a duty to be cost-conscious”).
[6] Restatement (Third) of Trusts § 90 cmt. m, at 332.
[7] Uniform Prudent Investor Act § 7 & cmt., 7B U.L.A. 37 (2006).
[8] While the U.S. Department of Labor does not possess the ability to impose fiduciary standards on non-ERISA, non-IRA accounts, prudent investor rule experts Max M. Schanzenbach and Robert H. Sitkoff rightfully conclude that “proper diversification requires an assessment of the portfolio as a whole, including the other assets of the investor.” Schanzenbach, Max M. and Sitkoff, Robert H., Financial AdviserAdvisors Can't Overlook the Prudent Investor Rule (August 1, 2016). Journal of Financial Planning (August 2016).
[9] Schanzenbach, Max M. and Sitkoff, Robert H., Fiduciary Financial AdviserAdvisors and the Incoherence of a 'High-Quality Low-Fee' Safe Harbor (September 16, 2015). Northwestern Law & Econ Research Paper No. 15-18. Available at, citing see Restatement (Third) of Trusts § 78 cmt. c(2); Jesse Dukeminier & Robert H. Sitkoff, Wills, Trusts, and Estates 591, 593 (9th ed. 2013).
[10] See Restatement (Third) of Trusts § 37 cmt. f(1); see also Dukeminier & Sitkoff, supra note 9, at 593.
[11] 81 Fed. Reg. 21,036 (Apr. 8, 2016).
[12] Id.
[13] For a list of academic articles, please see Rhoades, Scholarly Financial Blog, “Part 3: Professional and Other Fees Matter” (Jan. 1, 2016), located at
[14] 81 Fed. Reg. 21,027 (Apr. 8, 2016). However, “[d]ifferential compensation between categories of investments could be permissible as long as the compensation structure and lines between categories were drawn based on neutral factors that were not tied to the Financial Institution’s own conflicts of interest, such as the time or complexity of the advisory work, rather than on promoting sales of the most lucrative products.” Id. at 21,037.
[15] 81 Fed. Reg. 21,028 (Apr. 8, 2016).
[16] See, e.g., Western Reserve Life Assurance Company of Ohio vs. Graben, No. 2-05-328-CV (Tex. App. 6/28/2007) (Tex. App., 2007).  (A dual registrant crossed the line in "holding out" as a financial advisor, and in stating that ongoing advice would be provided, and other representations, and in so doing the dual registrant, who sold a variable annuity, and was found to have formed a relationship of trust and confidence with the customers to which fiduciary status attached. The court stated: "Obviously, when a person such as Hutton is acting as a financial advisor, that role extends well beyond a simple arms'-length business transaction. An unsophisticated investor is necessarily entrusting his funds to one who is representing that he will place the funds in a suitable investment and manage the funds appropriately for the benefit of his investor/entrustor. The relationship goes well beyond a traditional arms'-length business transaction that provides 'mutual benefit' for both parties.") See also, e.g., Johnson v. John Hancock Funds, No. M2005-00356-COA-R3-CV (Tenn. App. 6/30/2006) (Tenn. App., 2006) (in a case involving sale of Class B mutual fund shares, the court stated: “If the transaction is non-discretionary and at arm's length, i.e., a simple order to buy or sell a particular stock, the relationship does not give rise to general fiduciary duties. However, if the client has requested the broker or advisor to provide investment advice or has given the broker discretion to select his or her investments, the broker or advisor assumes broad fiduciary obligations that extend beyond the individual transactions.) … When a stock broker or financial advisor is providing financial or investment advice, he or she is required to exercise the utmost good faith, loyalty, and honesty toward the client.”
[17] See Bearing of Distribution Expenses by Mutual Funds: Statutory Interpretation, Investment Company Act Release No. 9915 (Aug. 31, 1977) [42 FR 44810 (Sept. 7, 1977)] (quoting SEC, Future Structure of the Securities Markets (Feb. 2, 1972) [37 FR 5286 (Mar. 14, 1972)]).
[18] 81 Fed. Reg. 21,007 (Apr. 8, 2016). As stated by the DOL, “ERISA  section 408(b)(2) and Code section 4975(d)(2) require that services  arrangements involving plans and IRAs result in no more than reasonable  compensation to the service provider. Accordingly, Advisors and  Financial Institutions – as service providers – have long been subject to  this requirement, regardless of their fiduciary status.” Id. at 21,029.
[19][T]he  standard simply requires that compensation not be excessive, as  measured by the market value of the particular services, rights, and  benefits the Advisor and Financial Institution are delivering to the  Retirement Investor.” 81 Fed. Reg. 21,029 (Apr. 8, 2016).
[20] Paraphrasing Tim Hauser, speaking with the author during a session entitled “Deconstructing the DOL Fiduciary Rule,” where both Tim Hauser and the author were panelists, at the Financial Planning Association’s BE Conference, September 16, 2016.
[21] See, e.g. Brock v. Robbins, 830 F.2d 640 (7th Cir. 1987).
[22] 81 Fed. Reg. 21, 033 (Apr. 8, 2016). Under B.I.C.E. both the firm and the advisor possess a fiduciary duty of loyalty to the client. While the fiduciary duty of the advisor to the firm still exists, the duty to the client is paramount. In other words, there is an “ordering” of the fiduciary duties, and any duty of loyalty owed by the advisor to the advisor’s firm is subservient to the primary duty of loyalty owed to the client.
[23] See, e.g., Akerlof, George, "The Market for Lemons: Quality Uncertainty and the Market Mechanism" (1970).
[24] SEC v. Capital Gains Research Bureau, 375 U.S. at 196 (citing United States v. Mississippi Valley Generating Co., 364 U.S. 520 (1961)); id. at 196 n.50
[25] Michoud v. Girod, 45 U.S. 503 555 (1846). The U.S. Supreme Court also stated in that decision: “if persons having a confidential character were permitted to avail themselves of any knowledge acquired in that capacity, they might be induced to conceal their information and not to exercise it for the benefit of the persons relying upon their integrity. The characters are inconsistent. Emptor emit quam minimo potest, venditor vendit quam maximo potest.” [The buyer buys for as little as possible; the vendor sells for as much as possible.] Id. at 554.
[26] Tisdale v. Tisdale, 2 Sneed 596 (Tenn. 1855).
[27] Study on Investment AdviserAdvisors and Broker-Dealers (As Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, by the Staff of the U.S. Securities and Exchange Commission (Jan. 2011).