Feigning Independence as Birds of a Different Feather

Feigning Independence as Birds of a Different Feather

It’s the beginning of November and we can all be thankful that the election season will soon be over. While there is no shortage of turkeys on Capitol Hill this year (nor any year for that matter) one lucky turkey will traditionally be spared by the president. Regrettably, however, we as citizens won’t be spared the drama in the run up to this year’s election, nor will we be spared from a great deal of new campaigning by big brokerage houses claiming that they are birds of a different feather now that a new rule has passed. What do I mean by this? The answer lies in the definition of what it means to have independence as a fiduciary and the Department of Labor’s new rule governing financial advisors.

What then is a fiduciary? A fiduciary is simply a professional that must put their clients’ interests first. Simple really. RHS Financial has been a fiduciary since it opened in March of 2009. We have always put our client’s interests ahead of our own. It is the main reason why I founded my own firm and left the brokerage world nearly eight years ago. Recently, the Department of Labor (DOL) set a ruling that requires all financial advisors (including brokerage houses) act like a fiduciary in managing client’s retirement accounts. The brokerage firm’s lobbyists fought this measure tooth and nail and the result was a watered-down version of the original rule. Therefore, the brokerage firms must start looking more like independent advisors. The key difference is, the rule requires that the Brokerage firms only act in their client’s best interests in retirement accounts. What? Shouldn’t they be acting in a client’s best interest in ALL accounts? They are not fiduciaries and therefore not independent. They are simply birds of a different feather. Recently at a conference, I heard it best put to me by another fiduciary advisor that “it’s like having a doctor that cares for your head and arms but skips your torso and legs.” Funny thing is they think that’s ok and will likely offer that kind of advice.

Merrill Lynch is leading this so-called charge (we call it jumping on the bandwagon) and doing away with commission based IRA accounts all together to comply with the rule. While Merrill is not required to do so, it will create confusion among its clients but it will also likely confuse all kinds of investors across the spectrum. Per Investment News magazine, only 41% of Morgan Stanley’s 2.1 Trillion assets under management is fee based. Basically, nearly 60% of their assets may be being managed not in their client’s best interest. Wow! Come April 10, 2017, most brokers will be faced with having to get their clients to sign a Best Interest Contract (BIC) saying that they can manage some of a client’s assets in their best interest and some of it they don’t have to. Brokers are legendary salespeople but selling this to a client will be truly difficult. I don’t envy them one bit.

It’s funny how regulation gets watered down due to powerful lobbyists because much effort was placed on killing this bill entirely. It’s even stranger that not being required to put your client’s interests first is mandatory in any advisory relationship. Alas, there are many very good brokers at the big wire houses that have acted as fiduciaries even when their employers didn’t mandate it, but what troubles me is (and I promise you this), we will see lots of advertising from the big firms hawking (no pun intended) that they are fiduciaries now and birds of a different feather. With all their enormous marketing budgets, they will call out that they are fiduciaries too. They will try to emulate the true fiduciary foundation of an independent advisor, but we all know better and that they are birds of a different feather. Happy Thanksgiving everyone.

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Risley Sams

Risley Sams

Risley Sams, CFP®, MBA, CPWA®, is the Founder and President of RHS Financial. He is responsible for the future of the firm and the strategic services that we deliver.