The Prudent Fiduciary

Scott Pritchard | Principal

A look at the major issues that are shaping fiduciary best practices today.

Take Two Weeks Off...Then Quit

February 2017

If you’ve ever picked up a golf club you can probably relate to my friend who upon having a particularly rough day on the course declared “I know what I’m going to do to fix my game. I’m going to take two weeks off and then quit.”

I can’t help but think of that as it relates to the new Fiduciary Rule.

Having written extensively in this space about the years of lead-up to the Fiduciary Rule, Wall Street’s challenges to the Fiduciary Rule and, finally last year, about the passage of the Fiduciary Rule into law, I’ve watched the developments of the past week somewhat bemused.

It now appears that the Fiduciary Rule may “take two weeks off and then quit.” Slated to take effect on April 10th, the rule is now being studied further by the DOL, with the speculation that it will likely be delayed and then eliminated altogether.

And despite being a long-time proponent of the rule, I’m okay with that.

I’m hopeful that news coverage of the rule may have educated enough investors to Wall Street’s inherent conflicts of interest that we’ll begin to see more consumer demand for investment advisors who willingly put the client’s interests ahead of the advisor’s own interests.

Whether lawmakers quit on the Fiduciary Rule or not, maybe investors will now seek out a Registered Investment Advisor who puts the investor’s interests first.

After all, if brokers aren’t required by law to be fiduciaries, can investors really count on them to do the right thing?

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CFO 2016 Trends & Tips

August 2016

CFO Magazine recently issued a special report titled “401(k) Trends and Tips for 2016”. The complete report is available online at 401(k) Trends and Tips for 2016.

But knowing that you are a busy professional, I thought you might appreciate the following “CliffsNotes” version:

1. There is a demonstrable shift away from conventional (aka “active”) investment strategies to evidence-based (aka “passive”) strategies…but perhaps for the wrong reason.

Lawsuits alleging breaches of fiduciary liability over high fees and/or poor performance have led many plan sponsors to realize that active strategies continue to largely under-perform their benchmarks, while also charging higher fees than passive strategies that tend to replicate their benchmarks.

But plan sponsors making the switch to evidence-based investments should be careful to document that the rationale is based on those options being more prudent and lower cost, rather than on making the move to protect their own interests.

2. The DOL’s new Fiduciary Rule will require more advisors to put participants’ interests first...and plan sponsors should verify the status of their “advisors”.

Set to take effect in April 2017, the new Fiduciary Rule will require that anyone providing advice to a 401(k) plan participant or an IRA holder place that investor’s interests ahead of their own.

Unfortunately, many plan sponsors may have been unaware that their current advisor wasn’t already required to do just that. Plans sold and serviced by brokerage firms, insurance companies, payroll companies and mutual fund companies have likely had conflicts of interest that allowed them to put their own interests ahead of those to whom they provided “advice”.

So, while advisors will be legally required to serve as fiduciaries, it will still be incumbent on the plan sponsors to “trust, but verify”.

3. The Pension Protection Act (PPA) of 2006 has helped in many ways…but may have also hurt in some.

Celebrating its 10th anniversary, the PPA gave us Automatic Enrollment and Automatic Escalation, but also spawned a reliance on Target Date Funds (TDFs).

Yes, TDFs have largely freed participants from the burden of building and managing their own portfolio (a task most were never equipped to do in the first place), but TDFs have also made it possible for fund companies to hide poorly performing funds and/or hide fees.

As with the new Fiduciary Rule, the report reminds plan sponsors that they still have to demand transparency around the investments offered to participants and the costs involved.

4. Adding value to a 401(k) plan with Roth features…a tax-diversification strategy.

The ability for participants to contribute Roth, after-tax dollars isn’t necessarily new, but it is certainly gaining momentum.

In-Plan Roth Conversions are also now available, but haven’t really taken off in popularity.

5. How 401(k) plans can emulate 403(b) plans…with a focus on income-replacement.

The focus of the 401(k) plan has historically been on building a nest-egg, not on how that nest-egg converts to income in retirement. Fortunately, more focus is being placed on income-replacement, which has been a focus of 403(b) plans for years.

The key takeaway from the CFO report is that the 401(k) marketplace continues to evolve and employers and fiduciaries should be sure that their retirement plans keep pace.

As always, please contact Capital Directions if we can help you with any aspect of your retirement plan.

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Whose Interests Come First? - Only Time Will Tell

April 2016

We finally have a new Fiduciary Rule that becomes the law of the land next year on April 10, 2017. Now what?

Unfortunately, as many cynics (and perhaps some realists) predicted, the final rule became the victim of Wall Street and insurance industry lobbyists.

Yes, the concept of requiring anyone providing investment advice to a 401(k) participant or IRA investor to put the investor’s interests ahead of their own remains, but the loopholes included in the final rule mean that it will be mostly business as usual.

Yes, brokers may migrate to fee-based accounts and away from commission-based accounts where they have historically been compensated more for recommending Fund A over Fund B, even though Fund B would have been better for the investor.

Yes, those same brokers may have to give up their “incentive trips” to the Bahamas for selling the most retirement plans or opening the most IRAs.

But will the average 401(k) participant be better served? Will the retiree seeking help with their rollover be more confident that they’re getting the right advice?

Just as before, the answer is “It depends”. The new Fiduciary Rule is well-intended, but every employer that offers a retirement plan and every individual with an IRA will still have to ask the same basic questions of their current or prospective advisor:

1. How much experience do you have helping others in my same situation?

2. Are there any conflicts of interest with your advice?

3. How are you compensated?

The answers to those questions will go much further than any new rule in helping employers and individual investors separate the wheat from the chaff when seeking investment advice.


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Whose Interests Come First? - Part Three

September 2015

When I began this series in March, I did so with an optimistic belief that a new fiduciary standard would soon become the law of the land.

After all, the debate over how to better protect investors from the rampant conflicts of interest in the financial services industry has been underway for years. In fact, I first wrote about the proposed changes in February of 2011 (The DOL Says No Advice Is Better Than "Schlocky" Advice).

After all, the White House Council of Economic Advisers estimates that the lack of a uniform fiduciary standard costs investors $17 billion per year.

Yet, here we are, heading into fall and there is still no resolution.

Is it really that difficult for everyone to agree that the interests of someone saving for retirement should come before the interests of that person’s advisor?

Michelle Singletary of The Washington Post wrote the following in her September 12th column (Is your adviser truly protecting your retirement?):

“The rules on the books now make for an uneven playing field for many of today’s investors, many of whom are overwhelmed by the options and could use some professional guidance. We need to ensure that people are getting the best advice possible to manage their savings, especially when it’s probably all they’ll have to lean on in retirement.”

The good news is that the playing field doesn’t have to be uneven. Unbiased, quality advice is already available, even without a new fiduciary standard.

Maybe my hope for a new fiduciary standard should be replaced by a hope that more individual investors, foundations, and corporate retirement plans simply become aware of their options.

If the government doesn’t force advisors to put their clients’ interests first, then perhaps those clients will gravitate to fee-only firms like Capital Directions.

Maybe this lack of a new fiduciary standard isn’t such a bad thing after all…


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