Building a New Foundation-The Fiduciary Rule

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It started with Dodd-Frank. The legislative response to the Financial Crises. The battle cry of never again has touched every corner of the financial and investment industry. Banks, mortgages, credit cards, investments, retirement plans and loans have all been reregulated. Banks are now required to keep higher capital requirements as a result of the expanded oversight by U.S Government Agencies and Basel III. Proprietary trading with depositors money is coming to an end at investment and commercial banks. Consumer credit cards and loans are regulated by the agencies they should be regulated by such as: the Federal Reserve, the Office of the Comptroller of the Currency, the U.S. Treasury and the expanded oversight of the Consumer Finance Protection Bureau. Not to mention, the adoption by state goverments of laws which embody these principles.

In many respects, the financial and regulatory landscape looks similar to the early 70’s prior to the deregulation of brokerage commissions, the creation of the 401(k) and the IRA. Beyond Dodd Frank, Rule 408(b)(2) created by the Employee Benefits Security Administration (an agency of the Department of Labor)  in 2012 cast the die because, it requires the fees charged in complex retirement plans such as a 401(k) be “reasonable”. It also requires, any plan expense or plan asset such as revenue sharing with Plan Sponsors (Employers) or Expenses (Fees) that are necessary to operate and maintain a retirement plan be looked at through the lens of what is in the best interest of employees and their beneficiaries. It applies this test to just about every party required to operationally run a 401(k). These parties are known as Covered Service Providers.  As a result of the rule, Plan Sponsors and Covered Service Providers are now Fiduciaries to Retirement Plans.

Dodd-Frank is the legislative basis under which our financial system and infrastructure governing saving, investing and lending became subject to expanded oversight. This involves the rules and regulations of just about every federal agency and Government Sponsored Enterprise regulating financial activity from: the SEC, to the Department of Labor, Housing and Urban Development, the U.S Treasury and the Federal Reserve. You can add dozens of agencies to the list.

Rule 408(b)(2) spawned a new body of law about Retirement Plan Fees.  Governed by ERISA, created and regulated by the Employee Benefits Security Administration, the cases that were subsequently litigated as a result went as high as the Supreme Court. The concept of the lowest cost investment is what prevailed in courts across the land and the principles of 408(b)(2) have been upheld.

With the release of the new Conflict of Interest Fiduciary Rule, Retirement Plan regulation now extends down to the Individual Retirement Account. Fiduciary Responsibility, Ownership of Recommendations and the potential resulting liability for Investment Advice which is provided to anyone, in any type of retirement plan, is now the subject of these rules with a few exceptions.

Not since Ronald Reagan became President and ushered in an era of deregulation has such a profound paradigm change occurred. The pendulum has swung and the investment industry has nobody to thank but itself. Finding multiple ways to charge the same client became the hallmark of financial innovation. The investment industry relied on creating accounts subject to complex documents to create them, along with the complexity of the financial instruments used to fund them. When the value of these investments fell, so did the fortune of America.  Smoke and mirrors is a phrase for such activity.

The most profound failure of the baby boom generation may be that the Financial Crises and the economic malaise that has followed were created by a generation that outsmarted itself. A generation who thought everything could be run by a model, by the numbers, on autopilot without the need for a person with common sense to review decisions. Where clients were charged multiple times in multiple ways. Millennials take note, technology seems to be heading down the same path.

Investment Advisors and Financial Advisors were always “supposed” to have their clients best interest in mind. However, only Investment Advisers, those registered under the Investment Advisers Act of 1940, had a recognized legal fiduciary obligation to do so. Investment Advisers have always been required to put client interests ahead of their own. Not only for retirement plans but, for anybody an Investment Adviser does business with.

It is unfortunate this will spawn a new wave of litigation. Unfortunate, because many firms are entangled in a web of revenue streams that have been hidden from their clients and not properly disclosed. There is no such thing as a free lunch. Regardless of where the compensation comes from the client pays. When methods of a firms compensation are not properly disclosed it becomes difficult for a client to know what is being payed for the service being provided. It also becomes difficult to know which master the advisor serves. Litigation in the United States is the mechanism used to test laws and regulations. Judicial decisions and the resulting common law, created on a case by case basis refines the meaning and scope of the regulation.

It is well known fees eat into returns. The effect high fees can have over the long term can substantially reduce the value of assets that are saved for any purpose. High fees can reduce how much income a person who is saving for retirement can create, how long their retirement savings may last during retirement and consequently, how much they will have to live on.

The problem is regulation sometimes obscures the real issue which is the creation of wealth. Growing the GDP pie is really what is important. Without growth it all becomes a bit meaningless. You can only split the existing pie so many ways.  It is a good thing that people are protected. It’s a good thing professionals in the investment industry will be held accountable for their recommendations and actions. It’s a good thing fees have to be in line with the investment services being provided. It’s a good thing lower fees will subtract less from assets which are saved for retirement. It is not such a good thing compounded rates of return will be lower for those currently saving for retirement unless growth returns. More than 50% of all working age Americans are not prepared for retirement. People can’t adequately save and invest for retirement if they don’t make enough to do so. You can’t protect people if they are afraid of the markets or if they can’t make enough money to participate.

The Investment Advisor, LLC is a Registered Investment Adviser. As the Managing Principal, I can tell you The Investment Advisor stands ready to help you with your financial concerns as a Fiduciary. This means your interests are held above the interests of the firm. It means when The Investment Advisor helps you with saving and investing for your retirement, your health care, the education of your children, your home, your business, your income and your estate, what you see is what you get. You won’t be charged in a myriad of different of ways. There are no conflicts of interest. If one appears or is created you will be told about it. The Investment Advisor will do this with a person advising you, to help you achieve your goals and leverage technology to your best advantage.

The Investment Advisor Helps Companies, Self-Employed Individuals and Non-Profit Organizations Manage their Qualified Retirement Plans. The Investment Advisor Provides a Comprehensive Consulting Service with Respect to Defined Contribution Qualified Retirement Plans. The Investment Advisor Also Performs Feasibility Studies For Those Companies, Self Employed Individuals and Non-Profit Organizations Who Wish to Create or Evaluate Their Existing Qualified Defined Contribution Plan such as Their 401(k), 403(b), Profit Sharing Plan, KEOGH, SEP-IRA, SIMPLE-IRA or IRA Plan.

The Investment Advisor Also Helps Families, Individuals, Small and Mid-Size Companies, Trusts and Estates Manage Their Savings, Investments, Life Insurance, Health Insurance and Planning Concerns to Help Them Meet Their Financial Goals.

For a Complementary Review of Your Retirement Plan and Investment Portfolio Contact The Investment Advisor by Phone at  (570)815-0770 or (877)414-9021 or on the website of The Investment Advisor at

The Investment Advisor LLC is a Registered Investment Adviser registered in the state of Pennsylvania. Pennsylvania is the only state in which The Investment Advisor is currently registered to conduct business.

The Investment Advisor is unable to accept trade instructions by email. If you are client of The Investment Advisor and have trade instructions for your account please contact The Investment Advisor by phone at (570)815-007 or (877)414-9021.

This communication should not under any circumstance be construed as a recommendation for any security or any type of financial planning activity. Recommendations are only made in individual consultation with each client after the individual and unique circumstances of each client have been disclosed by the client to The Investment Advisor.