If you’re an advisor focused on retirement planning, the Obama Administration has just blown up your own retirement plan, and your continued viability will require nothing less than a complete revamping of your business model.
So says Lou Harvey, the CEO of Boston-based consulting firm Dalbar, which has long counseled advisors, broker-dealers and retirement plan administrators on fiduciary compliance.
“Everybody and his brother on the street have heard about the baby boomers retiring and that big pot of retirement money” whose swelling assets are still years from peaking, Harvey tells ThinkAdvisor. “This proposal materially impacts advisors’ ability to obtain that rollover money.”
So if you’re a typical wirehouse advisor whose business model has been to cultivate pre-retirees and roll over their 401(k)s to IRAs as they seek financial advice over the next three decades of retirement, you now ostensibly face significantly reduced income for your services.
That is because the administration’s proposed rules will require that advisors providing retirement advice be held to a fiduciary standard whose definition is likely to be at odds with standard industry practices regarding advisors’ management of IRAs.
Harvey is convinced that IRAs (under final rules not yet hammered out) will not withstand the fiduciary redefinition, and will thus utterly destroy existing business models.
“How are you going to act in the best interest of your client if you’re going to double the fee the client is paying?” he says, noting that advisor-managed IRA fees are routinely twice as expensive as employer-sponsored plans, and will thus increase from, say, 80 to 160 basis points.
What’s more, while the industry is geared to fight the proposal, Harvey views such opposition as unlikely to succeed in the present instance.
“Unfortunately, what we’re looking at here is literally an out-of-control administration,” Harvey says.
“This administration doesn’t care about following Congress, and Congress has been ineffective at stopping administration [overreach]. This administration — they literally don’t give a damn; they’re not being re-elected again. I see no effort to support the party, to say ‘I don’t’ want to do this because it will alienate the donor sources,” he adds, noting that Democrats and Republicans alike are recipients of Wall Street contributions.
“How do you stop a suicide bomber?” he asks, saying the president has exhibited a pattern of forging heedlessly ahead.
“Take the Netanyahu speech [when the Israeli prime minster voiced his opposition to the administration’s plans to conclude a nuclear pact with Iran]. The press coverage was laudatory, but Obama says ‘there’s nothing new here, folks.’ He doesn’t care; it doesn’t matter to him. In that context … none of the lobbying or congressional pressure will have any effect.”
If that is the case — that the administration is months away from making advisors’ current practices illegal and that politicians and industry representatives will be unable to resist that effort, then advisors will need to take matters into their own hands.
What they will need to do in effect is establish a structure that mitigates the new risks of doing business.
“The big risk on Wall Street is conflicts of interest,” says Harvey. “If XYZ Mutual Fund Company is paying me $50,000 a year to put their fund in my client’s account, that becomes a prohibited activity under the fiduciary standard.”
The Department of Labor, Harvey says, will still allow advisors to earn commissions, but advisors must “levelize” the compensation, “so that a mutual fund company or any other product manufacturer can’t buy their advantage.”
In other words, go ahead and use American Funds products, so long as you don’t earn any more than you might with a Vanguard fund.
Harvey describes one way to neutralize the threat — to the advisor at least; it will be unwelcome news to many mutual fund companies.
“Go to the client and say, ‘Right now we are making $500 out of your account being paid to me by American Funds; I want to change the arrangement and act as your fiduciary with your best interests in mind. Therefore I don’t want you to pay $500 to American Funds; I want you to pay that $500 to me; the net loss to you will be zero.’”
The investor’s return will go up — since his fund investment is not reduced by the amount of the commission. And so too will the esteem in which the advisor is held by the client.