Wealth Management
(Washington)
The SEC’s Reg BI and the DOL’s return of the Fiduciary Rule are set to shake up the industry in several ways (though to a much smaller degree than the 2017 version). However, one of the lesser appreciated areas of disruption created by the rules is in advisor recruiting. Big independent broker-dealers think that the regulatory strain that the rules will put on smaller firms means there will be an exodus of brokers. The logic is that many brokers will feel their small firms do not have the resources, and are therefore not offering the infrastructure to adequately support broker compliance. Accordingly, many big shops like LPL, Ameriprise, and Stifel are planning efforts to seize on this recruiting window.
FINSUM: This makes good sense and it does appear that it will be an ideal time to poach brokers from smaller firms.
(Washington)
More focus has been put on what Elizabeth Warren has said about wealth management, but the reality is that Bernie seems much likelier to win the bid, and his opinions are more poorly understood. With the Iowa caucus starting today, it seems the right time to start thinking about it. Bernie seems likely to take a very hard line on wealth management, likely replacing all the top management of the relevant agencies and taking a new line on Reg BI and the Fiduciary Rule. It is hard to imagine he would be comfortable with existing regulation and given how the Democratic party views the role of agency power, it seems like big changes might be made.
FINSUM: Given Bernie’s views, the changes to the industry might not just be limited to regulations, but also to mergers and acquisitions of wealth managers, and of course, huge tax changes.
(New York)
No matter how many times you tell them that renting a vacation home is a better financial idea, many clients get the “I want to buy a vacation home bug” and can’t get it out of their system. When that happens, here is a few things of which to remind them. Firstly, their vacation home will not have the same capital gains tax exemption as their primary residence. Additionally, costs associated with the property, including insurance, property taxes, and possibly fees associated with renting the property, can all rise faster than their incomes, especially if they are on a fixed income in retirement. Vacation homes can also be complicated from an inheritance perspective, as some heirs may want to keep the property while others may want to sell it.
FINSUM: All good arguments. Hopefully some clients will listen!
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(Washington)
Rollovers are one of the key areas of focus for advisors within the new SEC Best Interest rule (“Reg BI”). This is not just because of their importance for advisors generally, but because there was still a good degree of uncertainty over how the new rule would be applied to the area. Recent edits to the rule clarify its application, and the results are likely to seem a little unfavorable, as they are more strict than previously. In the past, rollovers were only subject to Rule 2111 if securities were to be bought or sold in the plan. This left a bit of wiggle room. However, the new Reg BI has been modified and Rule 2111 now applies to any situation, regardless of whether securities are involved. Thus, rollover recommendations by broker-dealers are now completely governed by the best interest standard in all scenarios.
FINSUM: Not unexpected, but many were hoping for more flexibility. At least there is now confirmation.
(Los Angeles)
Regulators might be about to really shake up the all important annuities market. The National Association of Insurance Commissioners, which is comprised of state level regulators, has just proposed a new suitability standard for annuities transactions. The new rule would require insurance brokers to act in the best interest of clients when recommending products. The specific wording used says that the insurance salesperson must act “without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interest” and that they must “without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interest”. Speaking about the rule, the NAIC says “It’s in harmony with what the SEC did but goes a little further in providing clarity as to what the conduct standard actually is”.
FINSUM: The annuities market has had some bad behavior so a clean up to give peace of mind to all involved is warranted, but this will likely mean big changes if it comes to pass.
New York)
Yesterday we ran a piece explaining the level of AUM advisors need to successfully breakaway (cheat sheet: $50m-$100m). Today, we wanted to hit on another key topic: what percentage of clients typically come with an advisor when they break away? Now, this obviously varies a great deal based on particular circumstances, but according to Kestra, the typical rate is 80% in their experience.
FINSUM: This is useful, but only to a point because many advisors will have a great deal of their assets concentrated in a small group of clients, meaning it is a fairly tight number of make or break accounts.