Best Interest

[vc_row][vc_column width=”1/1″][vc_row_inner][vc_column_inner width=”1/2″][vc_column_text]This week’s Update continues my ongoing discussion concerning the changing financial services’ landscape due to the new DoL Fiduciary Best Interest rule.

As I’ve stated before, beginning in April 2017, financial professionals will have to disclose all fees that accompany certain investment products, such as IRAs and qualified annuities.  Not only must advisors reveal what they charge, but they are also required to explain why the recommendations are in the client’s best interest – all while meeting “reasonable compensation” standards.

[/vc_column_text][/vc_column_inner][vc_column_inner width=”1/2″][vc_single_image image=”8615″ alignment=”right” border_color=”grey” img_link_target=”_self” img_size=”full”][/vc_column_inner][/vc_row_inner][vc_column_text]This DoL regulation is new, but I can assure readers that almost all financial professionals have been independently performing some type of cost-benefit analysis for decades.  Years ago, I sold investment management services to investors through advisors, and the prevalent concern was related to fees and expenses. (Believe me: advisors did their homework and required product vendors to clearly break down all expenses so they could assess whether costs were reasonable.)

So why are firms displeased with the “best interest” rule?

Because the financial liability for failing to comply with a loosely outlined standard could have significant financial consequences.

You see, the DoL has drafted a somewhat ambiguous definition of what is referred to as “reasonable compensation” and the term “best interest” isn’t very clear either.  Adding to the confusion is firms will need to determine how to document the thousands of interactions between clients and financial professionals.

Let me try to provide a parallel example to illustrate the complications that lie ahead.

You’re going to buy a new car – often a harrowing experience.  What’s one of the first questions a salesperson might ask?

“Buy or lease?”

Well the answer depends on a number of factors, including your available cash, the potential cost of a loan, expected number of miles driven per year, and how long you intend to keep the vehicle.

The next product-based question might be, “What type of car are you looking for?”

Most decent dealerships would have hundreds of cars to choose from, and depending on budget, choices could range from a Ford Focus to a Lincoln.  Once the make and model is selected, there are a host of other decisions: Corinthian leather or cloth?  Regular radio or satellite?  Should you add “ding protection?”

After all is said and done, you sign on the dotted line and drive home in your new car (which has devalued the second it hits the road).  No matter.  As long as it runs through the warranty, both parties are usually content.

Now, let’s add the DoL’s new fiduciary rule into the car buying equation.

The salesperson and dealership may be liable for damages under any of the following circumstances:

  • The buyer decides to lease a vehicle but needs to drive 30,000 miles a year
  • The buyer has a wife, three kids and a dog but purchases a Ford Focus
  • The buyer purchases a Lincoln but pays a price at the high end of the curve

Although none of us would mind placing this level of responsibility on the shoulders of auto dealers, lets see where problems could arise in the complicated world of financial services.

Similar to the “buy vs lease” option, advisors will have to recommend commission versus an ongoing fee based on the client’s best interest.  (I honestly don’t know the answer to this quandary.  A commission is paid once – and possibly followed by an additional fee, known as a trail.  On the other hand, a fee will probably be far less expensive in year one, but if the position is held long term, fees can far exceed commissions.)

Also, similar to the selection between a Ford Focus or a Lincoln, advisors must help investors select an appropriate mix of products to populate a portfolio based on their future needs.


As an example, investors may choose any of the following:

(Note that there are well over 7,000 open end mutual funds alone)

[wpsm_comparison_table id=”1″ class=””]

**In a separately managed account, the investor will likely pay a fee to the separate account manager and the advisor.

*… For stocks, bonds, mutual funds, and annuities, investors will pay either a commission or an advisor fee, not both.


[/vc_column_text][vc_column_text]Any one or combination of thousands of products that populate the list above may be included in a retirement portfolio, but they may also have varying cost structures, required holding periods, guarantees, risk, past performance, and tax consequences.

So with all of these variables, is it reasonable to assume that firms currently have an established algorithm to help clients evaluate fees, commissions, mix of product type(s) (insurance, capital market or both), risk, return, guarantees, etc.? And will the approach personally assess all of these variables based on a client’s specific goals?

Firms are currently attempting to address this very issue.

Product selection and product mix are not an exact science.  In fact, it is highly personal; therefore, in the future, investors must play an increasingly important role in decisions made by advisors on their behalf.

As mentioned in my last Update, Americans can no longer sit on the sidelines.  Instead, they must dedicate time to understanding different product offerings and their accompanying expenses.  Investors will also confirm in writing that the advisor has clearly explained all of their investment options and costs in comparison to available alternatives as well as the potential risks versus returns.[/vc_column_text][vc_row_inner css=”.vc_custom_1473697327581{padding: 10px !important;}”][vc_column_inner width=”1/1″ css=”.vc_custom_1473697361319{padding: 10px !important;background-color: #dddddd !important;}”][vc_column_text]

Bottom line: Shortly after the new year, expect to participate in a comprehensive evaluation process for all new and existing retirement accounts that require advice from a financial professional.