A non-fiduciary’s guide to the DoL rule
July 11, 2017 by Bob Veres
Person A: Pssst. Hey, you.
Person B: What? Where are you?
A: Over here in the shadows. Come on over closer to this alley.
B: Okay… What can I do for you?
A: A bunch of us sales organizations are trying to figure out how to comply with these new DoL fiduciary regulations. We all agree that it’s crazy: putting the interests of the customer first, acting as a fiduciary with customers while we sell them non-traded REITs and high-commission annuities whose features even our reps don’t fully understand — how do they expect us to change our business model on a dime?
B: Didn’t the DoL start this process, with proposals and feedback, eight years ago?
A: That’s what I mean. They sprung it on us without proper warning.
B: And didn’t they give you basically 18 months to comply?
A: We’ve been filing a bunch of lawsuits that prove conclusively that this is not nearly enough time for us to totally change our mindset to actually start caring about the welfare of our customers. We called you over because it’s possible that our challenges will get tossed and we’ll actually have to do this thing they want us to do.
B: Okay, so what do you need?
A: You talk to a lot of these so-called fee-only advisers who seem to think they already comply with DoL fiduciary. We want you to help us understand their secret.
B: I don’t think there’s any secret —
A: So just tell us: how do they get away with recommending their proprietary and high-commission products under the best interest contract exemption? Our attorneys are nervous that some of our top-selling investments may not be compatible with serving as fiduciaries when we make those recommendations.
B: What, specifically, do they say is the problem?
A: Our proprietary funds have some of the highest expenses in the industry. And the annuities and nontraded REITs — let’s just say our reps can make a great living if they can just find a few gullible buyers.
B: And these fund expense ratios are how high?
A: Toward the top of the upper quadrant. Some of that is 12(b)-1 fees that, we’re told, are not specifically prohibited, but they get us all tangled up in this level fee thing the DoL insists on, where the compensation can’t be higher for people who recommend our funds than what we pay out if they recommend the much better options. It’s really too complicated to understand.
B: Maybe it doesn’t have to be. What if you drop the 12(b)-1s? What if you do away with the commissions?
A: Then what kind of idiot would recommend our funds? Who would sell non-traded REITs? Would YOU recommend crappy products if nobody paid you to do it?
B: I think I might have found your problem. Let’s start with a kind of thought experiment. What would the world look like if you told your reps to always recommend the very best investments they could find?
(Long silence.)
A: You’re kidding, right?
B: One of the secrets of these fiduciary advisers is that they make an honest effort to recommend best-in-breed, and go through a selection process which can be defended as sound and client-focused.
A: Maybe that’s the answer! You can help us rig up a process that will make it look like our funds are superior to those really great funds. You might even be able to show that it makes sense to pay 15% or more off the top and expect to get a high rate of return when only 85% of their money is invested in real estate projects.
B: Okay, let’s back up. Those advisers you want to copy are actually working on behalf of the customer. Not the product provider.
A: We would never let our reps do that. It would put us out of business.
B: Well … If your business model is to rake in as many dollars as possible without giving back a lot of value in return, I can see where that would be true.
A: I don’t see your point.
B: The point is to put the customer’s interests first.
A: Maybe we should move this conversation forward to the hidden fees. How are those so-called fiduciary advisers hiding those excess fees?
B: They aren’t.
A: How can that be true? We spent millions of dollars on various tests, and every single time, the results came back the same. Whenever we actually disclosed those extra fees, people objected.
B: I didn’t say they weren’t disclosing them. I mean that they weren’t charging them.
A: I suppose we could bury it in the fine print …
B: Would that be acting as a fiduciary?
A: Oh, right; the lawyers again. Maybe we could rename the charges. Call them ‘fiduciary fees.’ I kind of like the sound of that.
B: Look; did it occur to you that the whole point of the DoL rule was to get the full attention of the financial services industry, and give them a hard push to provide unbiased, helpful, client-centric advice to working people?
(Long silence.)
A: So what are you trying to say?
B: It’s been obvious for decades now that the future of the advice business is not trying to maximize commissions and sell junk products and engage in whatever self-dealing you can get away with. People don’t want conflicted advice or a relationship that they can’t trust, and they’re getting better and better at spotting the difference. Can you not see that?
A: So you’re saying we should throw away our revenue model just because that’s what people want? What are our reps going to sell under that model?
B: Not sell; recommend. Sell advice, not products. You have thousands of reps who genuinely want to do their best for their clients; ask them how to restructure your revenue model, and meanwhile dump the salespeople who aren’t ever going to get it anyway. They’re nothing more than a compliance and legal risk that will end up costing you more in legal fees than they’ll bring you in sales revenues. Instead of fighting the fiduciary concept, or trying to change it into a sales-related activity, embrace the whole idea of fiduciary — which really is: do your best for clients.
A: Hey, you know, I like that. I really do. ‘Do our best for clients’ has a very marketable ring to it. Now if we could just figure out how to hide the commissions, I think we might actually be able to make this DoL thing work — hey, where are you going? We’re still trying to work out the fine details here.
