— As head of the largest independently owned financial
advising firm in the Pittsburgh region, managing
billions of dollars in clients’ money, Kimberly
Fleming is feeling the weight of responsibility to get
her staff trained on procedures to meet sweeping rules
the federal government plans to impose in April.
has felt like my life. It’s so important to me. I want
us to deal with it constructively," said Fleming,
chairman of the Hefren-Tillotson financial planning
new regulations handed down in April 2016 by the U.S.
Department of Labor are designed to tackle the problem
of conflicted advice in the financial services industry.
April 10, all advisers working with clients’
retirement accounts are expected to act under a stricter
"fiduciary" standard, where previously they
had a choice of acting under a less rigorous
"suitability" standard when offering advice on
IRAs, 401(k)s and 403(b)s.
government’s goal is to create uniformity so that
there will no longer be two different groups of
financial advisers working under two different
working under the suitability standard are only required
to recommend investments that are suitable for clients.
That doesn’t always mean the advice is bad but it
opens the door to a number of abuses, such as
unnecessary high commissions and fees for investment
products and advice.
White House Council of Economic Advisers estimates $17
billion is drained out of retirement accounts each year
due to conflicts of interest by investment advisers who
sell commissioned products to their clients.
fiduciary standard requires advisers to act solely in
the client’s best interest when offering financial
at Hefren-Tillotson have operated under both standards,
letting the client choose how to work with advisers.
Fleming would not say what percentage of her firm’s
business is generated by commissioned sales versus
fee-based financial advice, but with $11 billion in
client assets under management, even 10 percent would be
a sizable amount.
operated under suitability, or what we think is in the
best interest for (clients), but in a flexible
way," said Fleming. "This really narrows the
choices that clients have and how they work with
new rule) has really turned over the whole industry in
ways," she said. "Some are good and some are
not. I would say we’ve always felt like fiduciaries.
We do comprehensive planning and we really understand
out from the fiduciary rule going into effect, many
advisers and firms across the country are struggling to
understand the full scope of how the rules will affect
the impact is already being felt.
Lynch recently announced it will no longer sell
commissioned products in retirement accounts. Some
smaller firms hope to survive by merging with larger
ones to afford the high cost of implementing changes.
Others are getting rid of divisions within their
business that are driven by commissioned sales. Some
advisers who make a living selling commissioned products
are exiting the business altogether.
to Limra, a worldwide association of insurance and
financial services companies based in Windsor, Conn., 54
percent of broker-dealers surveyed late last year
believe some of their advisers will retire rather than
adapt to the fiduciary rule.
the rule increases advisers’ liability, broker-dealers
also expect their advisers to stop providing advice to
clients with lower IRA account balances," said
Kathy Krozel, research director for Limra Distribution
Research. "At a time when more Americans need
access to advice, it appears that the new DOL rule may
actually reduce access for middle income
many investment firms are hoping President Donald Trump’s
administration will either kill or replace the fiduciary
rule based on his general intention to drastically
reduce government regulation.
something changes, everyone’s working assumption is
the rule will be implemented in April, said Tim Kober,
chairman of the National Association of Personal
Financial Advisors in Chicago.
big takeaway is, regardless of what happens with the
rule based on the political environment, consumers now
have an increasing awareness of the two types of
standards," Kober said. "That, for us, is the
bottom line. That is why we have a conviction that
regardless of the regulatory path, consumers will demand
advice delivered under a fiduciary standard of
STORY CAN END HERE)
Fleming’s standpoint, her firm has provided clients
with the best of both worlds. Clients have had the
flexibility to work with advisers either on a fee-basis
or a commissioned basis.
may have paid commissions on investments made years ago
and have held onto the investment. In order to convert
to a fee basis, they may incur another commission to
sell the investment and then be charged an annual fee
based on the size of the account.
number of those accounts are well positioned and they
might fall under what is called a grandfather provision,
which would enable those accounts to stay as they
are," Fleming said.
company is evaluating the way the commissions are
structured to make sure they make sense. "If they
do, and we feel it is in the clients’ best interest
… we will continue to operate with them with
commissions. If not, we have the fee-based advisory that
Hefren-Tillotson is investing in training and new
programs that will make it easier for advisers to work
within the new rules.
lot of the preparation also has involved distributing
information that the firm is required to disclose to
clients and creating documents declaring that advisers
at the firm are fiduciaries.
has been a huge undertaking," Fleming said,
"for the whole industry, not just for
employs a staff of 220 total employees, including 80
independent advisory firms are paying close attention.
of them have always been fiduciaries and sell no
commissioned products. Some who offer fee-based and
commission-based services have converted most of their
accounts to a fee-only status. Some will rely on an
exemption, which allows firms to continue selling
commissioned products with the client’s permission.
clients want to continue using commission-based
products, we will allow that, but the vast majority of
our accounts are fee-based," said John Jones, the
chief operating officer for Bill Few Associates in one
of the firm’s Pittsburgh-area offices. "The rule
in and of itself doesn’t have a significant impact on
Few Associates, with $800 million in client assets under
management, has a broker-dealer component of the
business called Bill Few Securities, which sells
commissioned products. The company said that was never a
significant part of its total revenue.
Few processes about 25,000 trades a year and 23,000 of
those are placed by advisers who operate under the
regulations will allow firms to sell commissioned
products to clients as long as the account is a
non-retirement account or if clients are willing to sign
an agreement called a best interest contract or BIC.
exemption will permit firms to sell commissioned
products such as annuities and managed account programs
as long as the firm acknowledges its fiduciary status,
gives prudent and impartial advice, discloses potential
conflicts of interest and information about the revenue
model, avoids misleading statements and receives no more
than reasonable compensation.
national firms such as JP Morgan and Morgan Stanley have
said they will continue selling commissioned products in
retirement accounts under BIC exemption.
Fragasso, chairman and CEO of Fragasso Financial
Advisors in downtown Pittsburgh, said the BIC exemption
contracts are Band-Aids, and there is no guarantee they
will protect firms against a class-action suit. He said
insurance companies in the retirement planning business
face the greatest risk selling variable annuities, which
have a reputation for high commissions.
a question of whether they are appropriate," said
Fragasso, whose firm has $1.1 billion in client assets
under management and does not sell commissioned
products. "I come down on the side of
variable annuities are tax-protected until clients pull
the money out, he said, "A retirement plan is
already tax-deferred. So why would you pay all that
extra internal expense to put a double wrapper of
tax-deferral around the asset?"
Pitt Capital Group, also in the Pittsburgh region and
with $1.9 billion in assets under management, is a
fee-only investment adviser. Still, the firm is working
with an outside consultant to make whatever changes are
necessary to comply with the rule, said Todd Douds,
director of operations.
philosophy is we always have our clients’ best
interest in mind and we think these changes are good for
our industry," Douds said.
unlike many large fee-based firms, does not have an
account minimum, and Fleming said she has no plans to
change that, although she believes the Department of
Labor rules will make it more expensive for firms giving
investment advice to do business.
part doesn’t work to the benefit of the client,"
she said, adding that firms that don’t charge
commissions are likely to turn down business from people
with small accounts.
think what we’ve done is we have looked at different
ways that we work with clients and there aren’t any
ways we’re working with clients that we think we have
to stop," Fleming said.
said her firm has been transitioning clients to a
fee-based services since 1998 and the fiduciary rule
makes that business approach make more sense for more of
the firm’s accounts.
are trying to retain the flexibility for advisers and
clients to work together in a way that they feel makes
the most sense for that particular client."