The New DOL Fiduciary Standard: Harmful or Helpful?

Well, the jury is still out since the rule is not in effect and the real impact will be properly assessed retrospectively, but there are real concerns, especially for those of you with not a lot of money.

And of course the people most likely to be directly affected are the ones who may be least aware of the change and how it may impact the products and services they have access too.

According to expert feedback the DOL rule will curtail some variable annuity sales (a lot by some estimation) and compel financial firms and advisors to redirect investor dollars that would have previously been recommended a variable annuity to managed money accounts, a la Registered Investment Advisers (RIA).

The reason?  Well, the new rule imposes a fiduciary standard to not only employer sponsored retirement plans (like 401ks) but also to non-employer sponsored retirement accounts, like Traditional and Roth IRAs.

In this regard, the DOL motivation is clear, variable annuities (VA) can have significant expenses, which the DOL interprets as excessive and that those advisors who sell them are not acting in the clients best interest.

At times, this is true, there are advisors who sell VAs to anyone and everyone simply for the compensation.  Some annuities do pay hefty commissions, and here again the DOL presumably thinks the commissions are in excess (and for certain there are annuities that pay huge commissions, but these are mostly issued by companies MainSstreet America never heard of before their salesman came a-calling).

So for lower asset level investors for whom a VA may have been used in the past, the DOL rule will presumably force advisors (who won’t risk violating the rule or at least want to avoid violating the current interpretation) will have to shift those client assets that would have landed in a VA to something else.  Most of the industry discussion in this regard is that those assets will move to managed money accounts, RIAs and the like.

So, most people will ask, what’s wrong with that?  I’ll tell you.

Most of the time, advisors who recommend VAs do so not for the commissions but because the VA is the best option.

You see, people with less money need greater guarantees, specifically when it comes to retirement.  Wealthy individuals aren’t worried about running out of money, “Mass Affluent” in America (people with $100k to $1mm in investable assets) do.  And those with less than $100k especially so.

If you’re worth a couple million and have a reasonable standard of living you have more choices as to where to invest your retirement assets for sustainable lifetime income.

But for people of lesser means the DoL rule may in fact cut off a valuable option for having a secure retirement.

VA’s offer guarantees that can not be had anywhere else.  An investor can buy a VA and rest assured that the income it produces will never end and may even increase depending on the product.

But RIAs, mutual fund portfolios, ETF portfolios, separately Managed Accounts (SMA), none of these provide guarantees.  And many of them are exclusive, meaning you need a minimum amount of money to open an account, commonly $500k, $1mm or more, although there are options for lower asset levels.

And if you investigate these lower-minimum programs, some as low as a $50k minimum, what you think you’re getting is not what you actually get. These mutual fund wrap programs simply bundle a bunch of mutual funds together, based upon 5 or 6 allocation types (Conservative to Aggressive) and charge an annual fee (a percentage of the assets invested) for “managing” the portfolio.

That’s terrific, until you realize that you have exactly the same portfolio as a million other people and your ultimate success or failure is really simply dependent on the market, not the management ability of the company running the portfolio.

Now here’s where the DoL misses the point with regard to fees: lower fees do not make a product or service better.

Lower fees makes one product in a category of comparable products better in that similar products (like S&P 500 Index Funds) with comparable strategies and allocations experience better performance due to the lower fees in comparison to the same type of product.

But comparing an index fund to a VA is stupid.  They serve different purposes.  People buy VAs for the guarantees and which for many investors and professional justifies the higher fees.  VAs offer guarantees with regard to Death Benefit, Growth, Lifetime Income etc.

Wrap programs, ETFs and Mutual Funds provide no guarantees.  So the lower level investor who really needs the guarantees will be rejected and forced into a non-guaranteed wrap account or worse, robo-advisor.

“Protecting” the little guy in this case may actually do a lot of harm.  People with lower asset levels need guarantees because the risk of running out of money is real, and managed money accounts cannot guarantee that.

And with many retirees expecting to live 20, 30 years and beyond, guarantees become more valuable than ever.  Forcing advisors to consider fees first, rather than what is truly in the clients best interest, may prove harmful to the Individual Investor.

And this impact is not just limited to VAs.  The DoL rule may have impact elsewhere.

But for the individual investor it is important to understand that advisors that are concerned about the new rule and the scrutiny every transaction will receive (not whether it’s right for the customer but whether it complies with the DoL’s mandate) will defer to a lower cost product or service, even if the argument can be made in favor of the most “costly”option, or they may reject the prospect entirely.

For firms and advisors, the benefit of the commissions received are greatly outweighed by the oversight and risk of intervention by the government, and the lawsuits that may follow.

So the rejected prospect or client will be forced to go to wherever he or she is welcome.   This means that the people who would most benefit from some higher fee products or services with guarantees will have less options to choose from, including those that might be completely appropriate, simply because the DoL is “protecting” them.

VAs with guarantees will be cast aside for a lower cost wrap account, which thanks to the DoL shifts the risk from the company (by guaranteeing against loss of income or asset in a VA) to the customer in a non-guaranteed wrap account.  A customer who often doesn’t know how to manage money or assess the performance a portfolio relative to sustainable and inflation adjusted lifetime income.  A customer who will be forced to rely on “Robo-Advisors” and online tools, and for many, a customer won’t realize something is wrong until it’s too late.




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