Wealth Management
(New York)
The new version of the fiduciary rule which is in the works will have a major effect on many financial advisors, but most think of this from a regulatory and customer interaction perspective. However, the rule will likely have an effect on some products too. One that seems likely to surge is usage are model portfolios. Model portfolios grew in prominence as the Obama era rule ascended. They tend to benefit clients and firms alike since they save time and money for advisors and give a great deal of outsourced investing expertise to clients. Also, because of their fee structure, they tend to create predictable revenue streams without any way to accuse an advisor of preferring specific funds which could be construed as not being in their clients’ best interests.
FINSUM: This makes total sense. Model portfolios were in part driven by the first version of the DOL rule, so a resurgence of the spirit of that rule will likely make firms and advisors push even further into this product.
(Washington)
Advisors better get ready because the Trumpian era of relatively loose SEC enforcement is about to come to an abrupt end. The SEC has just appointed a new enforcement chief and his record says everything about where the Commission is heading. Gurbir Grewal, former State Attorney General for New Jersey has been appointed as the SEC’s top enforcer. Very notably, Grewal proactively proposed a uniform fiduciary standard in his home state of New Jersey, which speaks volumes about his views.
FINSUM: So the bottom line here is that this is the clearest sign yet that the SEC seems likely to rather dramatically scale up its enforcement. Many are now expecting that the SEC will define “best interest” and then employ Grewal as a strongman on enforcement.
(Washington)
In what would come as very welcome news for financial advisors, the newest version of the fiduciary rule may have its implementation delayed. The rule was first thrown out by the fifth circuit court a few years ago, then reproposed and accepted in the early part of Biden’s term. Now it is set to go into effect in December. However, a large contingency of trade groups are putting together a formal request to have the DOL delay the full implementation of the rule to give firms more time to get into compliance.
FINSUM: This is potentially good news, but in the longer term it is likely a moot point since it is widely expected that Biden’s DOL will be redrafting an entirely new version of the rule, and probably one that is closely aligned with the original iteration from the Obama era.
More...
(New York)
As inflammatory as it may sound, most of the time media coverage on annuities does not speak the whole truth about why advisors often have a negative opinion of annuities. Of course, there are quite legitimate reasons like higher fees and the possibility of an esoteric product not being a good deal for what a specific retiree actually needs. However, when you get down to it, fee-based advisors have a significant financial incentive to dislike annuities. That incentive? It is that the advisor will not earn fees on the assets in an annuity, which means a client buying one can take recurring revenue out of an advisor’s pocket.
FINSUM: There are legitimate issues with annuities—including bad sales practices in the past—but when you realize this simple fact, it doubly reminds one why brokers sell 99.9% of annuities.
(Washington)
The Department of Labor has just clarified one of the major uncertainties surrounding the current iteration of the fiduciary rule, and the news is not good for advisors. The DOL now clearly states that any invest recommendations that would occur post rollover are directly akin to recommending the rollover itself. NAPA Net summarized the changed, which was clarified by Tim Hauser at the DOL (Deputy Assistant Secretary for National Office Operations at the Department of Labor’s Employee Benefits Security Administration) this way: “Suggesting investments that could occur after a rollover is tantamount to recommending a rollover, and if it meets the rest of the five-part test will constitute fiduciary advice, regardless of how it’s phrased. It doesn’t require the ‘magic words’”.
FINSUM: This is a response to some clever drafting that firms were trying to use to get around the “rollovers are fiduciary advice” mandate. Very important development.
(Washington)
We will be the first to admit we were wrong (at least partially). When the infrastructure bill passed without any of Biden’s proposed tax increases it seemed like we might be in the clear for the rest of 2021. While this newest “death knell” proposal likely won’t be finalized in calendar year 2021, we definitely spoke too soon. Biden’s new $3.5 spending package includes all the tax proposals advisors dreaded: like higher long-term capital gains taxes and the elimination of basis “step-up” in inheritance. FINSUM: The “death tax” of the elimination in “basis step-up” is very real as it means that unrealized gains accumulated over the course of a lifetime suddenly become taxable to the next generation. Chuck Grassley, US Senator from Iowa, has jut written a very informative piece about this particular tax idea and its damaging legacy in the US heartland. Find that here.