In her soft-spoken way, Sheryl Garrett is a booming voice of the financial services industry. Despite that distinction, President Barack Obama is one of her biggest fans: In his speech last year pushing the Department of Labor to press on with its fiduciary standard rule, he pointed out Garrett by name as an FA who puts the best interests of her clients first. Attending the AARP event, Garrett, at Obama’s request, rose to a round of applause.
The prominent pioneer of hourly fee-only advice is founder of the Garrett Planning Network, with 275 members nationwide and based in Eureka Springs, Arkansas. Named six times to Investment Advisor magazine’s IA 25 list of the most influential people in financial planning, Garrett has worked with the House Financial Services Committee, addressing predatory lending regulation, and testified before Congress about Social Security reform.
Now that the DOL rule has been released, FAs who provide retirement-account advice are concerned about how their employer firms will handle complying with it. Many are going the independent route as a way to better control meeting the rule’s requirements, Garrett tells ThinkAdvisor in an interview.
When she launched GPN in 2000, the CFP was pioneering the concept of hourly fee-only financial advice for individuals of all income levels, in contrast to focusing on affluent clients. As she frames it, planners in her network don’t sell product; they sell their time and expertise.
That approach isn’t surprising: As a trainee with IDS Financial Services (a predecessor to Ameriprise) in 1987, Garrett so hated cold calling that she got “sick to [her] stomach every Monday morning because [she] couldn’t sell people things they didn’t need,” she told this reporter for a 2002 profile in Research magazine.
After IDS, and then working at a large independent financial planning firm, she co-created Stepp & Garrett, catering to a wealth management clientele of exclusively high-income individuals.
Finally, Garrett got her groove, if not found her calling, when she opened her own charge-by-the-hour fee-only shop in 1998 that sought mainly to serve middle-income individuals.
Today, no longer working with clients directly, Garrett applies her expertise to coaching financial advisors and planners.
ThinkAdvisor recently interviewed the Kansas native by phone about how the DOL rule is likely to rein in FA “gunslingers,” as she branded a certain segment of the industry when urging the government to mandate regulations to protect investors, and how it will affect a number of important aspects of the way retirement-account advice is dispensed – such as products and compensation – as well as how it will affect her own network of hourly planners. Here are highlights:
ThinkAdvisor: How is release of the DOL’s fiduciary standard rule affecting advisors thus far?
Sheryl Garrett: We’ve been seeing folks, like wirehouse advisors, doing a lot of shopping. They’re thinking, “Will my firm be ready? Will I be able to fulfill my obligation to clients if I’m working for the firm I’m now aligned with?” So people are making changes. A compliance firm told me they’re seeing about tenfold the number of wirehouse breakaways than before the rule was released and in anticipation of the SEC’s fiduciary rule. They want to be in control to comply rather than be with a firm they [believe] won’t be as aggressive at getting there. They see the fiduciary standard as the wave of the future. Do you forecast a fight for market share among advisor channels?
Pretty soon we’ll see commercials from some of the larger firms with deep pockets – wirehouses, discount brokers, mutual fund companies – saying they’re proud to comply with the rule: “We’ll be ready, and we’ll support what’s in the client’s best interest.” Their communications and marketing people are already working on campaigns, saying: “We’re not part of the outfits that have been fighting what’s in [clients’] best interest.”
Why advertise at this early date?
They want to be in the forefront of leadership in putting clients’ interest first because soon the public will be asking, “How will this rule affect me?” Companies that [mount] campaigns early will very likely gain market share.
What’s your reaction to the industry lawsuits seeking to vacate the rule?
DOL Secretary [Thomas E.] Perez had said that he’s never been involved in important rulemaking that didn’t result in a lawsuit. So I’m not surprised or concerned, though these suits are a waste of taxpayer money and not in the best interest of the people we’re trying to protect.
What’s the greatest impact of the rule on wirehouses?
As we move into a fiduciary culture, they’re going to make a lot of significant changes to remain on par with what an independent BD or independent RIA will deliver to their advisors. A lot of the way that wirehouses have been doing business will [disappear] because of the fiduciary overlay: they’ll have to defend that a recommendation was indeed in the client’s best interest, and it’s extremely onerous to make that argument with some of the products and compensation layers that have been inherent in the industry.
Do you see any wirehouses actually going out of the financial advisory business?
No, I just anticipate that their market share will continue to shrink as more and more advisors choose to go to some level of independence. Over the last 15 years, we’ve seen the wirehouses lose market share to the independent channel. I expect that to continue — unless they start providing the type of holistic financial planning and levelized compensation that will support advisors in fulfilling their fiduciary responsibilities.
What effect will the rule have on investment choices?
I fully expect wirehouses and independent BDs to implement rules of their own to govern advisors. They will prohibit certain types of investments and also [dictate] a list of approved investments.
What could the firms prohibit?
These will either be severely restricted or prohibited: Higher priced, more complex products that have issues of liquidity and lack of transparency, such as non-publicly traded REITs, variable annuities, proprietary products or limited partnerships of certain types. Revenue that can be generated by the sale of such products is just not worth the risk, I expect firms to say.
What changes in advisor compensation do you anticipate in complying with the new rule?
Eventually, I see flat fees, fixed fees and hourly fees becoming more and more common. In the transition, there will be more fees, more ongoing management and fewer commissions because of the [best interest contract exemption], which is somewhere between complex and vague. But it’s really beautiful because it [provides for] the client’s best interest.
Will the change to level fees require advisor training?
Significant advisor training. And in adopting the fiduciary culture, the emphasis on due diligence regarding specific products is substantial.
How else might the big firms change their M.O.?
Revenue-sharing arrangements – paying for shelf space – will start going away because that [sort of] compensation is very difficult to justify. So products with 12b-1 fees and [FA] trips are not going to have the opportunity to be presented to the client because they have inherent potential conflicts. Again, the wirehouses may prohibit them because if it’s questionable as to how appropriate they are, it will be very hard to justify that they’re in the client’s best interest. The firms will feel it’s just not worth it. What do you think will happen when it comes to financial planning?
We’ll see more financial planning by the whole industry, with a more robust inquiry [process] and discussion of investing options. The rule requires knowing the client and understanding the source of funds; for example, should they be rolled over to an IRA? Or would it be better if they stayed in a qualified plan?
What impact will the rule have on your firm and others who charge by the hour?
A natural outcome is going to be more holistic planning. We are first and foremost financial planners and also registered investment advisors. So there will be greater emphasis on retirement planning, retirement distributions and all the nuances.
Will that mean spending more hours with clients?
It doesn’t have to. Rather, it’s how the hours are spent. So, instead of lots of sales-type meetings with clients, there will be a lot more consultative meetings not specifically related to investments – yet. Fiduciaries need to get additional data and clarification and a better understanding of the client’s [needs], and then document all of that. Versus the [brokerage] suitability standard, there are more pieces to the puzzle than simply [saying], “This is the perfect investment for you.”
So will advisors in your network raise their hourly fees?
Not necessarily. I don’t foresee hourly advisors, in general, changing much. We already have levelized compensation in our firm, and we acknowledge our fiduciary relationship in our client services agreement. So we have much less of a transition to the new reality.
But the DOL extends the fiduciary standard to rollovers.
Yes, but I would be hard-pressed to think of a fiduciary who doesn’t already take into account where the money is coming from when they make a recommendation — it’s part of the process. Before recommending a rollover, you have to look at every option: Should I stay in my defined benefit pension plan? If I roll it over, what are the pros and cons?
The new rule’s implications for the future?
The rule is a catalyst to propel the industry to the place it was going naturally. The DOL is just pushing us there faster. A fiduciary obligation is to do no harm. That sounds like a doctor’s [duty]. But it’s more than that: It’s do no harm, and do it in the client’s best interest by doing the right thing. You can’t just say, “Okay, let’s take this money and do something great for you.”
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