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How Fiduciary Rule Is Restricting Financial Advice

Recently LPL Financial, an independent financial services firm, announced that brokers will not be allowed to provide advice to clients related to 401(k) rollovers.

Financial advisors exist largely due to advising on IRA rollovers. It’s the largest issue that triggers clients to seek advice. Without being able to advise on this important issue, there wouldn’t be a need for most of the advisors that practice today.

The typical client of an advisor is retired, retiring or changing jobs and unsatisfied with their plan, wanting to pursue options to diversify and is in need of advice that they either are not receiving or feel is too conflicted from the 401(k) plan sponsor. The more nuanced client is still working and may be able to engage in strategies that allow clients to rollover parts of their 401(k) on a regular basis for diversification and tax advantages. In any case, not being able to advise on this critical issue will be harmful to planners and clients that need advice. (For more, see: What the ‘Fiduciary Rule’ Means for Investors.)

Education and Advice

LPL is making a distinction between education and advice, but it’s clear that the risk to advisors working with working age clients has increased. Many are ignoring that risk, but it’s wrong not to note that it exists and that clients will have fewer options for advice. 

Doctors who believe surgery is the right answer don’t just "educate" their patients without advising them what they believe is best. With a rollover, the potential benefits far outweigh the costs in most circumstances. It should be a non issue but, unfortunately, the Department of Labor’s fiduciary rule has made it one with the assumption that paid advisors are "conflicted." 

The result is advisors will make recommendations that they deem as "safe" rather than best, and will avoid higher-risk, lower-profit clients. This has the potential to stifle innovation and will impose additional costs that will be passed on to clients - similar to the doctor who knows a test is unnecessary, but recommends to protect himself, passing the cost and any consequences to the client.  

Some Solutions

Over time I’ve come with three solutions that would be preferable over the current state:  

  1. Increase scrutiny on products with large upfront sales charge or ongoing surrender penalty. Perhaps the largest concern I see from supporters of this rule is in regards to products that clients could not leave without having lost a significant amount.
  2. Allow credentialing institutions to solve the problem. Credentialing organizations set standards for advice today and I believe only they can implement a consistent standard across the vast market of advisors serving the needs of diverse clients. Some argue that these groups do not have "enforcement" abilities, but I think that argument is entirely incorrect. Most have ways for consumers to have complaints heard and the professional punishment of having public censure or revocation is a meaningful penalty to an advisor.
  3. Pursue policies that delink retirement savings opportunities from employment. We all know the problems with health care linked to employment - retirement accounts are likewise problematic. Employers could still offer a preferred provider as they do with Health Savings Accounts. But clients should be able to save where they choose and work with advisors right for their needs.

Any of the above would improve outcomes. We see this in a small part today in the university 403(b) market where large plans with competing providers often have additional benefits to savers of advice, self-directed brokerage accounts, and the ability to work with an advisor independent of the plan. These benefits are largely not available to 401(k) participants today due to today’s monopoly system. (For more from this author, see: Why Trump Should Stop the New Fiduciary Rule.)