Segment Wealth Management Blog Going Off Half Cocked


That old saying was one of my Dad's favorites when he was describing taking on a task for which one is ill prepared to complete. Such is the case with former President Obama's prodding the DOL to pass the so-called "Fiduciary Rule" requiring brokerages to adopt a fiduciary level of care for clients, but only for retirement accounts.

This is a great idea in concept, and one I embraced as the exclusive way we do business starting nearly seven years ago. Let me be clear, I run a fiduciary-only practice and am subject to a full fiduciary level of care for all client assets, not just retirement accounts. Clearly I think it's a great idea, but then why not all accounts? Why just retirement accounts? That leads me to a question on this hypothetical situation: let's say you inherited some shares in an IRA and you need some general advice on selling it and taking a distribution. What broker would take the risk to advise you when this arrangement oozes fiduciary liability for him and there is no long term advantage for him in an ongoing relationship? What happens if his advice turns out later to be wrong? The fiduciary envelope has no place in this type of situation. Would he charge a $29 commission for simply dropping a sell ticket? Not with fiduciary liability he won't. Maybe $500? This type of advice will suddenly get very expensive. This will drive clients into the fiduciary-only space where I live exclusively.

Segment Wealth Management clients

While clearly this trend benefits me, I have doubts about its advisability as policy. Is this a good idea for all clients? Some wouldn't want that level of care and cost, and small clients will get priced out of the market for advice. Many will end up with some 1-800 service or an algorithm service like Betterment, with no advisor who knows them and their family. We already help more clients get out of Betterment than get into it. This shows that clients want more advice, not less. This is especially true of the larger accounts, where our fees are roughly the same and the service is remarkably different.

Singling out retirement accounts for special legislated treatment also has other warped outcomes. What do you do when a client has a more passive and cheaper approach in his non-IRA accounts and gets a cheaper fee? But the more active strategy in the IRA may be a good idea for tax reasons. Strict interpretation of the new fiduciary rule would say that retirement accounts must be treated "best". This example would be a violation since the IRA's fee is higher. But what about the taxes you might save? That presents a situation where benefiting the client overall might pose a liability to the advisor since the IRA is being singled out as different with a higher fee. Our compliance attorney suggested increasing client fees on the other accounts to lower the distinction in IRA accounts as a method to reduce liability. That's a non-starter for us, and I don't think that's what Obama had in mind. However, this is a glaring example of why meddling in matters by bureaucrats with limited or no industry experience is a bad idea. Donald Trump seems to agree, having vowed to stop the progress of this legislation in its tracks. The system is not perfect, but the "Fiduciary Rule" will create more problems for investors than it solves.

  • Main 713.800.7150
  • Toll Free 877.499.7150
  • Fax 713.800.7066

Segment Wealth Management