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Don Trone: Father of Fiduciary—The 2015 IA 35 for 35

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Don Trone’s transition from Coast Guard helicopter pilot to a fiduciary leader was a personal one: “A mortgage broker took advantage of me and I hated the feeling. I reported the incident to the regulators and they did nothing.”

After leaving active duty in 1987, Trone began working on his master’s thesis titled, “Integrating a Fiduciary Standard of Care Into an Investment Advisory Practice.” While compiling the thesis’ bibliography, “I could only find three books on the subject of fiduciary responsibility,” Trone recalled. “What struck me is how could you have a topic that impacts so many people have so little academic rigor? That’s when I made the decision to pursue what we now call the fiduciary movement.”

He’s been in the driver’s seat of the fiduciary movement ever since—first launching the Foundation for Fiduciary Studies, becoming principal founder of fi360, to now heading 3ethos. “I’ve always been focused on advancing a professional standard of care for advisors,” Trone said.

The start of the fiduciary movement began in 1985, Trone said, when Charles Ellis released his book, “Investment Policy: Winning the Losers Game.” In 1987, Trone published his master’s thesis, which was later published in 1989 as the book “Procedural Prudence.”

“For the first 20 years, we defined the standard in terms of fiduciary responsibility. For the past eight years, we have shifted the focus of our research and training to define a professional standard in terms of leadership and stewardship,” Trone said.

The DOL’s attempt to redefine the term fiduciary under the Employee Retirement Income Security Act “proves the point that we’ve made for several years: that the regulators will likely go the route of defining a de minimis fiduciary standard—bronze instead of gold,” Trone continued. “An elite advisor who wants to be viewed as a professional will no longer feel comfortable distinguishing themselves as a ‘fiduciary,’” but as leaders.

Any fiduciary rule issued by the Securities and Exchange Commission, Trone said, will be a “compromise so it will be the minimum standard,” with “another 25 or so questions [being added to] the Series 7.”

As for the DOL’s reproposed fiduciary definition, Trone told the department in a May 26 comment letter that its plan “will not help American retirement savers.” Rather, “it will only add more paperwork and complexity.”

Trone argued in his comment letter that implementation of uniform fiduciary best practicescomes with a cost—“something that has not been taken into account” by either the DOL or the Council of Economic Advisors in their recent pronouncements.

He cited CEA’s Feb. 19 research which showed that conflicted advice is costing retirement savers more than $17 billion a year. “The DOL has relied on this research in the construct of its reproposed definition. Unfortunately, neither the DOL nor the CEA took into account the positive impact generally accepted fiduciary best practices are having on retirement savings,” Trone wrote. As a result, he continued, he believes that the CEA’s findings are not accurate; are overly inflated; and that they “were released for the primary purpose of inflaming and unnecessarily alarming the public.”

At a minimum, Trone continued, DOL’s fiduciary standard “would require 12 hours of work per annum by a typical retirement advisor. If the retirement advisor charged $175 per hour for their effort (a conservative figure), they would need to generate at least $2,100 per client engagement. Another $1,500 would have to be added to each engagement to cover the cost of compliance and oversight, and compensate the advisor for assuming the liability of serving as a fiduciary. That brings the total compensation to $3,600 per client engagement, per year.”

Apply $3,600 to the median IRA rollover account balance of $23,785 (as reported by the Employee Benefit Research Institute) “and the expense of providing a fiduciary standard of care would represent 15% of the IRA account balance per year—that’s 15 times more than the cost of conflicted advice as estimated and reported by the CEA,” Trone said.

Therefore, the provision of a fiduciary standard in accordance with existing ERISA and DOL requirements “would be cost prohibitive to any account of less than $360,000. (For a $360,000 account balance, $3,600–the cost of providing a fiduciary standard—would be 1%, or 100 basis points.)”

If the DOL’s reproposed fiduciary definition is passed, Trone said, “the effect would be to further drive up these costs because of increased complexity associated with compliance.”

The better approach to improving retirement savings: “Educate retirement advisors and plan sponsors on a prudent decisionmaking process,” Trone told DOL. “More rules and regulations will not improve the behavior of dishonest financial advisors and brokers; more rules and regulations will only make it more difficult for honest advisors to serve their clients.”

See the full 2015 IA 35 for 35 and the calendar for extended profiles of each honoree.