Wealth Management
(New York)
Vanguard is a pretty tough firm to beat in the mutual fund space. Their sterling reputation is hard to top, and no one seems to outdo them in the asset class. However, there may be a viable competitor: boutique manager Dodge & Cox. In fact, the fund manager just got ranked first out of 150 mutual fund companies by Morningstar. The rankings are based “on a variety of factors, including analyst fund ratings, expense ratios, and corporate stewardship”. Perhaps most importantly for investors, almost all Dodge & Cox mutual funds beat their category averages over the last decade.
FINSUM: Dodge & Cox has outperformed Vanguard in many ways, though obviously Vanguard can offer lower costs than anyone else. In many cases, though, performance has been good enough to more than account for the difference in fees.
(Washington)
Anyone who has been following the DOL/SEC-fiduciary rule/best interest saga is probably sick of the word “harmonization”. The term is a catch-all for the idea that the two agencies will synchronize their rule-making so there won’t be any grey area or uncertainty for advisors. We doubt that will happen (or even can, given the law of unintended consequences). Yet, a top industry law firm has just weighed on the specific points where harmonization may happen. The first big area to consider is rollovers, as both agencies have in the past claimed it as their own territory. That will likely be an area where harmonization is necessary because of previous guidance issued by both. Electronic disclosures will be another priority area. Additionally, the rules governing defined benefit versus defined contribution plans will also need to be harmonized.
FINSUM: We are slightly doubtful their will be some great harmonization between the DOL and the SEC. So, expect some uncertainty, grey areas, and more business for lawyers.
(New York)
Rollovers are one of the most important and hotly contested areas of forthcoming regulation. The mostly defunct DOL rule stated that advisors need to act in the best interest of clients when dealing with rollovers only if the firm was a fiduciary. However, the big forthcoming change is that the SEC Best Interest rule essentially states that advisors AND brokers need to act in the best interest of clients all the time, but allows that disclosure of material conflicts can be sufficient to overcome any hurdles. According to Drinker Biddle & Reath, a leading wealth management law firm, “Reg BI standard of care obligation requires that a broker-dealer have a reasonable basis to believe that taking the assets out of the plan and rolling them over to an IRA is in the best interest of the participant at the time of the recommendation”.
FINSUM: So the DOL rule was very strict but fairly narrow in application, while the SEC rule is broader (encompassing brokers and fiduciaries) but less strict.
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(Washington)
In what comes as a surprise, the new iteration of the DOL rule may in fact be multiple rules bundled into a package. A lawyer from well-respected industry law firm Drinker Biddle & Reath says they have credible rumors that there will be multiple new rules, and that they will be friendly for those in the industry. The firm says that the new rules will likely be based on the old 1975 five-part test, and that the Best Interest Contract Exemption will be replaced. The new DOL package is also supposed to harmonize well with the SEC’s new Best Interest rule, which was approved in June.
FINSUM: It is good news that this rule is supposed to be more friendly to those in the industry, but it is worrying that there may be multiple rules. The more components there are to the rule, the more likely it will be that it is unclear.
(New York)
Is it a huge deal or not? No one seems to be able to decide. The issue at hand is that the new SEC Best Interest rule explicitly requires brokers to consider costs when recommending products to clients. That is potentially a very big change. However, some say brokers have already been doing this as part of suitability rules, so it may not change practices much. It is important to note that brokers do not need to recommend the cheapest product to clients, but they must take cost into consideration.
FINSUM: Considered in a vacuum, taking cost into consideration has long been a no-brainer. The bigger question is how the SEC decides to enforce this standard. Hindsight will always be 20-20 in an investigation and this could be a big disadvantage to brokers.
(New York)
Annuities have come a long way in the last few years, with industry standards and selling behavior becoming much cleaner. However, annuities sales are still a challenge because it is often hard to get an individual to trade a large, liquid lump sum for payments that can often be far in the future. With that said, TIAA has an annuity it debuted last year that might prove quite helpful. The provider’s Income Test Drive program allows buyers of annuities to opt out of their income agreements within two years without any penalty. The program is part of a wider trend in annuities, according a product manager in the space, saying “They used to have one product try to be everything to everybody, and the costs outweighed the benefits. Now there are more streamlined options”.
FINSUM: This TIAA option seems like a very good way to help investors bridge their anxiety about trading a lump sum for future income.