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Could The DOL’s New Fiduciary Duty Rule For Retirement Accounts Boomerang On Investors?

October 19, 2016 Blog

When the Department of Labor passed its Fiduciary Duty Rule earlier this year, the goal was for brokerage firms, such as Merrill Lynch and UBS, to put the client’s interests first when brokers were advising clients’ retirement accounts.

The objective of the new rule, which takes effect next April, is for firms to put the client’s interest first, a very simple proposition that most businesses understand but Wall Street will never really grasp.

Of course, Wall Street and the wider securities industry has been fighting the new DOL fiduciary standard tooth and nail.

In fact, an adviser to Republican Presidential candidate Donald Trump recently told industry trade paper InvestmentNews that Mr. Trump would rip up the DOL’s fiduciary rule once he is in office.

Indeed, the denizens of Wall Street hate the new rule so much that it has them tied up in rhetorical knots, according to InvestmentNews. “Anthony Scaramucci, managing partner of Skybridge Capital, said the new fiduciary measure, which requires financial advisers to act in the best interests of their clients in retirement accounts, is an example of government overreach that would divert too much capital into low-cost passive ETFs and index funds.

“We’re going to repeal it,” Mr. Scaramucci said on the sidelines of a conference in Washington last week. “It could be the dumbest decision to come out of the U.S. government in the last 50 to 60 years.” In an aside, Mr. Scaramucci compared the DOL rule to an 1857 Supreme Court ruling which held that African Americans were not U.S. citizens. “It’s about like the Dred Scott decision,” Mr. Scaramucci said. He made the analogy because he views the DOL rule as discriminatory, Mr. Scaramucci wrote in a follow-up email, according to InvestmentNews.

Slavery the same thing as a fiduciary standard to protect investors? We will withhold comment and let that one stand on its own.

Back in the nonpolitical world, brokerage firms are taking action that could backfire on investors.

In response to the fiduciary rule, Merrill Lynch and Edward Jones – and most likely many other firms – will eliminate commission only IRA accounts and will require those saving for retirement to engage the firm in fee-based accounts, according to recent news reports. In such accounts, the firm charges an annual fee of 1% or 2% fee on assets under management.

By avoiding charging commissions on every trade, brokerage firms may believe they are acting in the best interests of the client. The opposite, however, could very well be the case.

According to a recent Wall Street Journal article on Merrill Lynch’s new practice, fee-based accounts also tend to be more lucrative for brokerages. The article cites fund-tracker Morningstar, which estimates that fee based accounts generate 60% more revenue than accounts that charge a commission.

How then can a firm claim that by moving a retiree to a fee-based account, they are acting in the best interest of the client?

For example, take a retiree who is a buy and hold investor, meaning he holds his assets for years with very few trades. Say he has a $1 million retirement account and now will be charged an annual 1% fee rather than a one-time commission. That translates into the firm charging the client a whopping $10,000 a year, even though the adviser made few, if any transactions.

In such a circumstance, a commission-based account would likely yield the much lower fee. That clearly is in the customer’s, but not the firm’s, best interest.

What Merrill Lynch and other firms appear to be trying to avoid is giving actual advice to clients about what they should do with their retirement accounts.  As an example, if oil is going down dramatically in price, as it has the last two years, proper advice may be to lighten the portfolio of oil-related investments.  This would require active management, thoughtful research and actual contact with the clients.

Just simply charging a 1% or 2% fee without agreeing to give any actual or real advice is not in the client’s best interest.

It appears that the Fiduciary Duty Rule, as implemented by many major firms, could serve as a real boomerang and hurt clients rather than help them. Wall Street using the new rule to rack up fees over years in client’s retirement accounts is in complete contradiction of the rule’s spirit and intention. Could Wall Street use the new rule as a way to generate profits? Watch this blog.

Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.