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Being a Fiduciary Is More Than Offering the Lowest Cost Solution

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John Frownfelter believes there’s a misconception that being a “fiduciary” under the Department of Labor’s rule means offering clients the lowest cost investments.

“One of the biggest misconceptions I see with the DOL [fiduciary rule] is this whole idea that you have to invest in the lowest cost investments in order to comply with the rule,” Frownfelter, managing director of investment solutions at SEI Advisor Network, told ThinkAdvisor. Adding that, “as a fiduciary, providing the lowest cost solution is not always going to be the best solution for your clients.”

While the DOL fiduciary rule is currently in flux, Frownfelter believes the “train’s already left the station.”

The Labor Department released a proposed rule on March 1 to extend for 60 days the applicability date of its fiduciary rule, following President Donald Trump’s executive order directing the department to review the rule. The proposal, which included a 15-day comment period, would extend the rule’s April 10 compliance date to June 9.

The 15-day comment period on the proposed delay recently ended. DOL is also taking comments for 45 days on a list of questions about the impact of the fiduciary regulation and the exemptions.

“Whether or not Department of Labor fiduciary rule actually gets delayed or gets revoked or whatever they do with this new administration, I think the situation is that a lot of firms have put into action a plan to conform with or deal with the DOL fiduciary rule,” Frownfelter said. “I think that they’re going to move forward with those actions regardless.”

According to Frownfelter, at the broker-dealer level especially, they’ve already started the process of segmenting their business into what’s DOL-compliant and what’s not.  

“A lot of broker-dealers already put the wheels in motion,” he said. “They’ve already spent a lot of money. I can’t imagine them upending that today if we end up delaying it.”

This is why Frownfelter, and SEI Advisor Network, is still working on educating advisors that the rule is not “telling you that you have to offer the lowest cost solution in order to be a fiduciary.”

“You still need to do your homework, and understand that there is sometimes value in the cost of paying for active managers,” he told ThinkAdvisor.

Active’s lackluster performance and passive’s near-bubble level has Frownfelter thinking there’s a direct link in this DOL fiduciary misconception to the passive-active debate.

“[People] are saying ‘I think passive’s the right way to go based on the information I’ve seen recently and why not go low-cost because low-cost is the right decision for the client,’” Frownfelter explained. “Now they’re driving that into the fiduciary rule, saying that ‘we need to do what’s best for our client. What’s best for our client is producing the lowest cost investment possible.’”

But by ignoring active investments in this process, advisors are overlooking asset classes that could provide a lot of value – including fixed income, emerging market equities, emerging market debt and multi-asset funds.

“There’s a lot of interest from clients and from advisors to move their businesses passive,” Frownfelter said.  “And we’re doing a lot of educating on our side, just trying to talk to them about why that may not be the best thing to do today given the environment we’re in. Now that interest rates are starting to increase, now that we’re out of this easy money environment.”

Frownfelter also warned that passive may be a bubble about to burst.

“You go back in time and look at every bubble we’ve had – a tech bubble in ’99, a real estate bubble in ’05, the mortgage crisis in ’08 – every bubble has burst,” he said. “And usually it happens when everyone gets in one bandwagon headed in one direction. I think passive’s almost one of those bubbles.”

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