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Fuduciary Duty Goes Prime Time

John Oliver’s criticism – fiduciary duty goes prime time

Recent ‘Last Week Tonight’ segment is just one example of the growing awareness of this issue

Investment News, Mark Schoeff Jr. reported on June 19, 2016 – For the last six years, the debate over a Labor Department regulation to raise investment advice standards for retirement accounts has been conducted mostly among regulators, lawmakers, industry officials and financial advisers.

Now the people the regulation targets — investors — are getting into the conversation.

The process of taking fiduciary duty to Main Street was boosted by a segment on the HBO comedy program “Last Week Tonight with John Oliver.” Mr. Oliver applied his signature brand of mordant satire to a topic mostly discussed — and fiercely contested — in technical terms by industry insiders.

Previously, the topic had been considered too complicated or boring for the average person to understand. But that might be changing. Charles Schwab announced last week that it was launching a major advertising campaign on fiduciary aimed at investors, the first of what could be many such campaigns over the next year. The topic is also increasingly being addressed in general interest newspapers such as the Minneapolis Star Tribune and The New York Times.

On his program, which aired June 12, Mr. Oliver used humor to lambaste what he called hidden charges embedded in a 401(k) plan the production company for his show negotiated with insurer John Hancock, a spokeswoman for whom denied that it was leveling excessive fees. He also highlighted how high fees can eat away at retirement savings. Hitting the same talking points the Obama administration has used to promote the DOL rule, which would require financial advisers to act in the best interests of their clients, Mr. Oliver made the case for fiduciary duty with a common touch usually lacking in presentations by government and industry.

The profile of the topic was enhanced not just by exposure on HBO but through the millions of hits the segment has received on YouTube — and its ripple effects.

“I think the John Oliver video has been a true tipping point,” said David Siegel, CEO of Investopedia, an online financial-information resource for investors.

Last Monday, the day after the HBO broadcast, Investopedia experienced a significant increase in the number of page views for articles about fiduciary duty and fees. For instance, an article entitled “An introduction to fiduciary advisors” received 256 page views, up from an average of 15 over the prior week.
“The increase in demand has been maintained,” Mr. Siegel said.


Advocates for higher standards for investment advice are thrilled.

“John Oliver is the greatest thing that has ever happened to the fiduciary cause,” said Randy Bruns, a private wealth adviser at HighPoint Planning Partners. “It’s wrapping entertainment around it. It’s wrapping humor around it.”

The ad campaign launched by Charles Schwab’s custody unit, Schwab Advisor Services, is touting the virtues of financial advisers who put their clients’ interests ahead of their own. The campaign will include videos and will appear on social media, paid search channels and online media sites including the Wall Street Journal, Barron’s, Forbes, The Economist, CNNMoney, MarktWatch and Business Insider.

Other companies and organizations also considering public campaigns around RIAs and fiduciaries include TD Ameritrade, the National Association of Personal Financial Advisors and the Investment Advisor Association.

The topic also is making its way into general interest media. Rep. Tammy Duckworth, D-Ill., wrote an op-ed supporting the DOL rule in a recent edition of The New York Times. She highlighted the example of constituents who have been hurt by conflicted advice in a piece headlined “Isn’t honesty the best policy?” Read More>


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The DOL Fiduciary Rule Requires Levelized Compensation

DOL fiduciary rule will nudge 401(k) advisers to zero-revenue-share fund lineups

Such a strategy would aim at levelizing compensation, thereby dodging additional compliance requirements and litigation risk

Investment News, Greg Iacurci reported on June 28, 2016 that retirement plan advisers are likely to use 401(k) investment funds that unbundle revenue-sharing payments from their cost because of the new Department of Labor fiduciary rule.

The DOL rule exposes advisers receiving variable compensation, such as 12b-1 fees and commissions, to greater compliance requirements and litigation risk. Experts believe advisers will try to mitigate that risk by using funds that strip out such compensation.

“Fiduciary advisers are moving or thinking of moving to zero-revenue-sharing lineups as a direct result of the new conflict of interest … rules,” Marcia Wagner, principal at The Wagner Law Group, said.

In zero-revenue-share funds, participants only pay the investment management expense. Other fees, such as the adviser and record-keeping fee, would be billed as separate line items, paid in a hard-dollar or asset-based arrangement.

Plan advisers will have to comply with the Best Interest Contract Exemption (BICE) — a provision of the regulation imposing the additional hurdles — in order to receive variable compensation. However, compliance with the BICE isn’t required if an adviser’s 401(k) fees are level, which would preclude receipt of 12b-1 fees, Ms. Wagner said.

“The DOL rule is saying you have to have levelized compensation,” Sean Deviney, head of the retirement plan group at Provenance Wealth Advisors, said. “It means don’t take up-front money and don’t have different investments where you’re just collecting 12b-1 fees, because that doesn’t make you level. For an adviser to go to this model, it’s just kind of a no-brainer.”

Revenue sharing — which involves directing a portion of a mutual fund’s expense to pay for certain plan services — has been the traditional way to pay for plan services.

Nearly 52% of defined-contribution plans used revenue sharing to pay at least a portion of plan administrative expenses in 2015, according to the consulting firm Callan Associates. That trend is on the decline, though — 67% used revenue sharing in 2012.

At the same time, share classes of mutual funds stripping out revenue sharing payments, such as R6 shares, have been “growing like wildfire,” according to Chris Brown, founder and principal of Sway Research, an asset management distribution research shop.

For example, in 2015, 72% of assets held in the various “R” share classes were in those share classes that strip out a 12b-1 fee. By comparison, it was 56% in 2012.

Fee-disclosure regulation handed down by the Labor Department in 2012 and ongoing lawsuits targeting excessive 401(k) fees, which many times cite revenue-sharing payments for being too high, have contributed to this greater push toward fee transparency, advisers and other industry watchers say.

Some also consider it a best practice because it’s more equitable to participants. Participants investing in funds with higher revenue-sharing fees that are bundled in, effectively subsidize plan costs for others in lower-cost funds.

The DOL rule will likely accelerate the trend to unbundling revenue sharing.

“The DOL is going to promote advisers to do that, or do it faster,” Mr. Brown said of adopting zero-revenue-share funds in plan menus. Early results from an annual survey Mr. Brown is conducting of advisers specializing in retirement plans indicates more than half of advisers anticipate switching to such a model. Read More>


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The Least Affected by the DOL Fiduciary Rule

The four Large brokerages have emerged among the least affected by the DOL Fiduciary Rule to hit the financial advice market in decades

Investment News, Christine Idzeli., reported, on May 22, 2016, about the impact of the disruptive Labor Department fiduciary rule, the wirehouses have sought to reassure their shareholders that the sky is not about to fall. Bank of America Corp.’s chief financial officer, Paul Donofrio, said during an earnings call last month that the Department of Labor’s new rule will affect less than 10% of the $2 trillion in assets at its wealth management business. During Morgan Stanley’s first-quarter earnings call, CEO James Gorman said of the DOL Fiduciary Rule, “it’s not the be-all and end-all” for the bank’s brokerage business.

The wirehouses have good reason to minimize the impact of the DOL Fiduciary Rule, which requires financial advisers to put their clients’ interests ahead of their own when giving retirement advice. In the final version, the Labor Department threw the big broker-dealers a bone by allowing them to continue selling proprietary investment products in the retirement market. Even without the reversal on proprietary products, the wirehouses are probably better-positioned to weather the fiduciary storm than many of their counterparts, especially small, independent broker-dealers with limited resources. The cost of compliance — and even the ability to analyze the rule and figure out what they will have to do to comply —favors bigger firms with deep pockets.

(More insight: Advisory firms now face the challenge of adapting to the fiduciary rule)

Still, the main challenge of implementation lies ahead. “They’re dealing with such a large pool of advisers,” said Danny Sarch, president of wealth management recruiting firm Leitner Sarch Consultants. “You got this extra liability that the firms haven’t put their arms around yet.” The wirehouses — Morgan Stanley, Bank of America Merrill Lynch, Wells Fargo & Co. and UBS Group AG — have been combing through the lengthy, prescriptive regulation released April 6. It prompted a sweeping review of their business models and technology, including the supervision of the more than 50,000 advisers at the four firms combined.
“We are in the process of digesting the 1,000-plus pages of this DOL Fiduciary Rule and related exemptions,” Christine Jockle, a spokeswoman for Morgan Stanley, said in an emailed statement. “We have a year before the first stage of the rule goes into effect, which gives us time to determine the new policies and procedures we will implement to comply.” The firm’s been preparing in part by making the necessary investments in technology, and it is setting up a fiduciary help desk for its advisers, the spokeswoman said last month.


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