What does the Department of Labor’s proposed expansion of thefiduciary standard mean to your relationships with retirementplans, their participants and IRA investors?


As the financial industry gears up to stop or alter the rule,the fight actually may be less about fiduciary duties and conflictsand more about costs and loss. As an ethical and successfulfinancial advisor, you can do math for your clients. If you canreduce a client’s plan costs by 35-50 basis points per year, youmay be able to increase assets available for retirement security byup to 10% over 30 years. And if you can offer solutions capable ofdoing that for IRA transfers/rollovers, a huge market will open foryou, and continue to reward you with loyal clients for two or threedecades per case.


There are three ways an advisor can cut costs in an IRA by 35-50basis points per year:


1. Mix in low-cost investments, especially stocks andbonds held in brokerage accounts, ETFs, and index mutual funds.


2. Be compensated through an advisory account with acompetitive fee structure.


3. Consolidate as many client assets as possible (plan andnon-plan) under the advisory account, to give the client the bestpossible service and economies-of-scale for advisory feepurposes.


For example, imagine that a client is transferring $200,000 froma 401(k) to an IRA at age 65. The client has $600,000 of otherfinancial assets which aren’t on the table right now but could movelater. Your offer is: 1) a diversified IRA portfolio that will cost30 basis points a year + a 50 basis point advisory fee – .80% intotal; and 2) an agreement to keep the advisory fee at 50 basispoints if the client brings you at least $400,000 of other assetsin the next two years.


With this offer, you will easily carve 35-50 basis points offthe costs of competitors who are offering IRA programs based onmutual fund C shares or R shares. You can include some activelymanaged funds (or separate accounts) in the client’s mix, alongwith low-cost index funds and ETFs, and still hit the 30-basispoint target. Finally, you’ve given the client incentive to stayloyal and bring you more assets.


Here are a few statistics from research by the InvestmentCompany Institute that may make this type of program attractive foryour practice:

  • 40% of all households that have completed a rollover/transferdid so in the last four years (2010-14).

  • 81% of households that have completed any rollover/transfer toan IRA rolled over their entireemployer-sponsored plan balance.

  • Among households that took any withdrawals from IRAs in tax year2013, 65% used required minimum distribution (RMD) calculations –i.e., withdrew the minimum.

In short, IRA rollovers/transfers areaccelerating. They move many years of retirement plan savings toIRAs at once, and the money is very sticky, usually staying on thebooks as long as the law allows. To capture this type of business,you can afford to be cost-competitive.


From lemons to lemonade


Here are specific ideas you can implement now to turn the lemonof DOL rulemaking into lemonade for your practice.

  1. Broaden the range of retirement plan investments yourepresent, with special emphasis on low-cost index mutualfunds and ETFs. Using a stock index fund with an expense ratio of10-20 basis points as the “core” of an IRA portfolio can go a longway toward managing a client’s all-in IRA cost.

  2. Build relationships with third-party administrators inyour market, so you don’t have to rely totally on mutualfund turnkey plans and recordkeepers.

  3. Emphasize investments with relatively low risk andvolatility. According to the ICI, only 29% of householdsin the prime rollover/transfer market (ages 55-64) say they arewilling to take above-average or substantial risk.

  4. Become a Registered Investment Adviser (RIA) orInvestment Adviser Representative (IAR) and start chargingfees for the investment advice and planning services youdeliver.

  5. Become the “go-to” advisor in your market foremployer-plan referrals to employees who are planning adistribution. Package the distribution-related services you offer –including coordination with a tax advisor, education on allavailable choices, and services for the employer on deliveringrequired distribution notices and WARN Act mass layoffannouncements. Charge the fees you deserve for these services.

  6. Evaluate changes in your revenue model, so youwon’t be dependent on mutual fund 12b-1 fees or vulnerable torestrictions on conflicts-of-interest – which probably are coming,in one way or another.

The financial media has begun to ask why financial companies areopposing the fiduciary rule with such vehemence. It’s not exactlyon the side of the angels. But there is no reason for your clientsand prospects to see you on the opposite side of their interests –especially when today’s rollover/transfer market is so huge andpotentially rewarding.

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