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Envestnet’s new tools to aid compliance with DOL rule

Posted on October 6, 2016 by Editorial Staff -

Envestnet, Inc., the investment platform provider, said it has introduced “comprehensive Fiduciary Rule compliance solutions and consulting services: to help advisors and enterprises comply with the Department of Labor’s (DOL) Fiduciary Rule, which goes into effect next April.

The solutions include:

Best Interest assessment. To give advisors a ‘comprehensive understanding of a client’s financial situation and objectives’ and accelerate the on-boarding process, Envestnet will provide “integrated client-permissioned account aggregation.’ The solutions integrate with the leading financial planning providers.

Product shelf development. To help advisors develop compliant investment portfolios and programs, Investment consultants from Envestnet | PMC will provide chief investment officer (CIO) support and investment consulting services.

Account documents and disclosures. Envestnet’s new-account and proposal technology will help firms to meet new requirements for account documentation and disclosures by providing:

Best Interest Contract provisions and disclosures
Investment product and program expense analysis
Fee rationalization illustrations
New account documentation and retention

Enterprise Business Intelligence Solutions. Envestnet’s Vantage enterprise-level data aggregation solutions, along with the Envestnet Intelligence platform, will make all of the firm’s investment products easily visible. “This visibility is critical to help bring legacy assets into compliance with the fiduciary rule as well as provide ongoing monitoring and surveillance,” the release said.

Ghilarducci book calls for new breed of DC plans

Posted on October 6, 2016 by Editorial Staff -

New School economist Teresa Ghilarducci, once dubbed the “most dangerous woman in America” by conservative pundit Rush Limbaugh for her criticisms of the 401(k) industry, has published “Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans” with co-author Hamilton “Tony” James, president of private equity giant Blackstone.

The book, published by Disruption Books, outlines “a deficit-neutral proposal to ensure that all workers can save enough to retire through mandated, individually-owned, and effectively-invested Guaranteed Retirement Accounts,” according to a press release. “Left unaddressed, the authors emphasize, the strain of a newly poor population of senior citizens would devastate federal, state, and local budgets for decades to come.”

Ghilarducci and others have identified weaknesses in the existing 401(k) system. Plans typically work best for long-tenured employees at large companies that offer low-cost plans and generous matching contributions. But many small companies don’t offer them at all, and at any given time around half of the full-time work force has no access to a plan.

Those weaknesses, which include inconsistent fees and investment options, vulnerability to “leakage” during job changes, and the absence of a mechanism for converting savings to retirement income, have inspired calls for statewide or nationwide defined contribution plans that don’t rely on each employer’s willingness or unwillingness to offer a plan.

The U.S. government has proposed its own universal auto-enrolled IRA program for small business, call MyRA, and states like Washington and California have taken steps toward requiring all their employers to offer an auto-enrolled IRA or qualified plan.

Components of the Ghilarducci-James plan include:

Universal coverage. Every American worker would have a Guaranteed Retirement Account, individually owned as in a defined contribution plan but pooled and invested in professionally managed funds, as in a defined benefit pension.

Costless for families at or below median income. The plan would redistribute the current tax expenditure for retirement savings, which favors those in higher tax brackets, more evenly across the income distribution.

Deficit-neutral. The program would save money by using existing Federal payment infrastructure.

Guaranteed lifetime income. At retiring, savings would be converted to an annuity.

Bipartisan appeal. This model keeps accounts under personal control, distributing savings based on the amount invested, not based on income, and without impacting the budget or raising taxes.

The publication of the book follows the authors’ March 2016 white paper, “A Comprehensive Plan to Confront the Retirement Savings Crisis,” and their January 2016 New York Times op-ed, “A Smarter Plan to Make Retirement Savings Last.” It also coincides with the launch of a website dedicated to the plan and its promotion, rescuingretirement.org, and a social campaign driven by the hashtag #fixretirement on Twitter and Facebook.

Mercer offers new turnkey fiduciary services to plan sponsors

Posted on October 6, 2016 by Editorial Staff -

Mercer, the global benefits consultant, has launched Mercer Wise 401(k), a service that will allow employers to turn the administration, operations, investment decisions and fiduciary responsibilities of their plans over to Mercer.

At a time when plan sponsors face the potential for class-action lawsuits over activities once regarded as business-as-usual, such as revenue-sharing agreements with plan providers, Mercer evidently sees an opportunity to serve as the ERISA “plan administrator” and “named fiduciary” for employers and help ensure that they’re compliant with pension law.

“We believe that segments of the 401(k) marketplace suffer from high fees and lack of transparency, among other challenges. Against this background, plan sponsors face an increasingly difficult regulatory environment, increased litigation risk and heightened demand on their limited resources to support their 401(k),” said Tom Murphy, Senior Partner, Mercer, in a release.

“By assuming the responsibilities of named fiduciary, Mercer can reduce risks for plan sponsors, who may be challenged in meeting an ever increasing burden. We will leverage our global research and investment expertise and use our economies of scale to provide transparency, cost reductions and improved services.”

Participants in Mercer Wise 401(k) will have access to Mercer Financial Wellness, an open architecture financial wellness platform that includes access to online budgeting tools, credit-score monitoring, a robo-advice solution, student loan refinancing and other services provided through third-party providers.

Mercer Wise 401(k) offers its clients features including but not limited to:

Taking ownership of many of the fiduciary responsibilities of plan sponsors.
Offering participants access to high quality institutional investment solutions developed by Mercer’s global research team by engaging independent investment managers.
Assuming responsibility for plan administration and meeting certain regulatory requirements, such as Form 5500 filings and non-discrimination testing.

Mercer Wise 401(k) services are provided by Mercer Investment Management, Inc., which is a unit of Marsh & McLennan Companies, a global professional services firm with annual revenue of $13 billion and 60,000 employees. Other units include Marsh, an insurance broking and risk management firm; Guy Carpenter, a provider of risk and reinsurance intermediary services; and Oliver Wyman, a management consulting firm.

Women need advice on claiming Social Security: Nationwide

Posted on October 6, 2016 by Editorial Staff -

A survey sponsored by Nationwide Retirement Institute and conducted by Harris Poll shows that older women need help maximizing their Social Security Benefits. Nationwide’s “Social Security 360” service enables advisors to provide that help, according to a release from the Columbus, Ohio-based insurer.

Nationwide’s survey, conducted last February, covered 909 U.S. adults aged 50 or older who were retired or planned to retire within 10 years. The sample included 465 women, of whom 301 were currently retired. The results showed that:

Retired women spend 70% of their Social Security benefit on health care, on average.
Retired women depend on Social Security for 56% of their expenses in retirement, on average.
80% of retired women currently collecting Social Security benefits took their benefits early.
Only 5% of women currently collecting Social Security claimed at age 70 or later.
24% of retired women said that health care expenses keep them from enjoying “the retirement they desired.”
17% of women currently drawing Social Security wish they could change their claiming decision and file later.
Of those who would not change their filing decision, 39% say an unforeseen life event compelled them to take it early, including unplanned health problems (17%).
30% of women currently drawing Social Security say their payment is smaller than they expected.
Although women who don’t yet collect Social Security expect to receive an average of $1,527 in monthly benefits, current recipients collecting only $1,153 on average and those claim Social Security early receive $1,084 on average.
Only 13% of women say they received advice on Social Security from a financial advisor.
86% of women who worked with an advisor said their Social Security payment was as large or larger than they expected.
61% of women surveyed said that they would switch financial advisor if theirs couldn’t show them how to maximize their Social Security benefit.

Besides helping advisors find their clients’ optimal Social Security filing options, the Social Security 360 program’s software can compare election strategies available to married couples, single people, divorced people, widows, and government employees, the Nationwide release said.

One Step Ahead of a Rolling Boulder

Posted on September 29, 2016 by Kerry Pechter -

Pressured by the approaching activation of the Department of Labor’s fiduciary rule in April 2017, the retirement industry—product manufacturers, distributors, and hundreds of thousands of financial advisors—finds itself in a state of uncertainty, convulsion and frantic activity.

At the Insured Retirement Institute meeting this week in Colorado Springs, preparation for compliance with the rule was a common concern, according to one person who attended:

“The tone of the meeting was one of collaboration—like, ‘How will we all get through this together? But it’s weird. The insurance carriers are waiting to hear back from the broker-dealers about what they should do about the rule. But the broker-dealers and the IMOs still don’t know what they’re going to do,” he told RIJ.

“Tactically, people seem comfortable that they will be able to issue the required disclosures and ‘Best Interest Contracts’ by next April. But they haven’t solved the problem that people can start getting sued after that for violating their fiduciary duties. The big question is: How can we limit liability? They’re hearing that class-action lawyers are already creating billboard ads” to attract potential plaintiffs.

“The overall answer to that seemed to be: if you, as an advisor, intend to sell annuities, or even mutual funds, you’ll need a full financial plan. The product-pushing days are over. You’ll have to look at the client’s whole situation. If you sell annuities, you may not be able to push them alone. If you’re an RIA, you might have to start considering annuities.”

The DOL rule was intended to, and will, dampen retirement industry profits. The rule is expected to reduce and standardize, though not eliminate, the non-transparent fees, such as commissions and so-called 12b-1 marketing fees, that mutual fund and annuity manufacturers pay to distributors (broker-dealers and their advisors) for marketing and selling their products.

“Intentional or not, the DOL fiduciary rule will change the landscape of the retirement market for decades,” said a LIMRA researcher this week.

It’s as if, with respect to tax-deferred accounts, the government had told powerful people, with equally powerful secret lovers—in this case, broker-dealers and makers of mutual funds and annuities—to go back to their legal spouses.

For monogamous people, as it were, not much will change. For Vanguard, or fee-only planners, or elite wealth managers at Morgan Stanley, business will go on largely as usual. But thousands of lives, and livelihoods, will be rearranged as the lovers either break up, agree to remain friends, or try to carry on their mutually enriching relationships despite the rule.

Darkness at noon

Broker-dealers, especially the smaller ones without economies of scale, are experiencing the most disruption. The conflicts of interest that the DOL rule targeted are endemic to them and their registered reps. Broker-dealers who’ve relied on manufacturer-paid commissions to compensate advisors may have to switch them to salaries or fees as a percent of client assets. Many broker-dealers expect some of their advisors to retire. (See related story in today’s issue of RIJ.)

“Smaller broker-dealers who can’t keep up with the new technology that BIC demands will be threatened,” David Macchia of Wealth2k, who is trying to position his proprietary web-based advisor marketing and income planning software as the right tool for advisors in the fiduciary era.

An August 2016 report from consultant A.T. Kearney now estimates that by 2020 independent broker-dealers will have $350 billion (11%) fewer assets under management and $4 billion (11%) lower revenue. Such firms should think about merging with larger firms, the report said.

Wholesalers of annuities, especially indexed annuities, will also be hurt, Macchia said. “Career-type field forces that have relied on proprietary product sales will face a big disruption. Standardization will become a much bigger problem. The idea of the ‘rep as portfolio manager’ doesn’t have legs. Most or many advisors will end up as salaried employees delivering packaged solutions. Everybody will be impacted,” he told RIJ.

Several factors make the annuity business vulnerable. The DOL rule won’t hurt fixed deferred or immediate income annuities, but those aren’t the top sellers. Instead, it puts a new regulatory hurdle, the so-called BICE, in the path of indexed and variable annuities, which sell in much higher volumes. LIMRA predicts lower sales for both product types in 2017.

Annuity manufacturers are responding to the DOL rule’s scrutiny of commission-driven sales by rolling out no-commission products. Jackson National recently introduced a fee-based variable annuity with a lifetime income option, and Great American introduced the first fixed indexed annuity. Yesterday, Nationwide announced its purchase of Jefferson National, a provider of low-cost investment-only variable annuities for clients of registered investment advisors who are seeking a tax-deferred trading vehicle.

But annuity sales have long relied on commissions to drive sales, and after the Great Financial Crisis advisors showed little interest in the no-commission or low-commission products that came on the market. If advisors choose to sell annuities, it’s not clear if they would charge the same or much less than their usual asset management wrap fee on unmanaged annuity assets, or if removal of commissions would translate into higher product value for customers.

The DOL rule is also expected to stifle efforts to solicit rollovers by separated employees from defined contribution plans to retail IRAs, and that could reduce the broker-dealer assets. But their loss would presumably help 401(k) plan providers.

“There will probably be fewer rollovers than there are today, but it’s hard to know how much the volume will change or how long it will take to see a difference,” said Srinivas Reddy, senior vice president, Full Service Investments, Prudential Retirement.

“On the other hand, while we strive to provide the best institutional solutions, we recognize that one size doesn’t fit everybody for their entire lifetimes. On the positive side, we’re seeing more interest among plan sponsors in lifetime income solutions than we’ve seen in several years. More sponsors are saying that their retirees are looking for those solutions.”

The four wirehouses, Morgan Stanley, UBS, Wells Fargo and Bank of America—are expected to weather the storm more easily, in part because the final DOL rule allows their advisors to go on recommending “proprietary” products—investments underwritten by other parts of the company. Even so, the wirehouses will lose $300 billion in assets (5%) and $4 billion in revenue because of the DOL rule by 2020, according to A.T. Kearney.

Sunshine at midnight

“It’s not all doom,” said Wealth2k’s Macchia. “If there’s a saving grace, it’s about retirement income planning. Getting expertise in that area is the obvious way for an advisor to move up the value chain and avoid commoditization.”

Macchia is describing the narrow shaft through which the retirement income industry—the sect of the retirement industry whose members believe that annuities and investment products, in the context of the “household balance sheet,” work best for retirees—might escape its dilemma.

In a webinar on Wednesday, Macchia gave his version of an argument that the income industry keeps repeating in hopes that it will come true: That no advisor can claim to act truly in the best interest of an older client without a) assessing the client’s longevity risk, b) considering an annuity product to mitigate that risk, c) incorporating guaranteed income into the financial plan, and d) using software to document the process.

“If there’s a saving grace to the DOL rule, it’s about retirement income planning. Getting expertise in that area is the obvious way for an advisor to move up the value chain and avoid commoditization,” Macchia said.

The major technology providers, like Fidelity’s eMoney, also see opportunity in providing planning tools and documentation tools for advisors and broker-dealers who want to protect themselves from lawsuits. Its website says: “See how eMoney is bridging the gap between planning tools and compliance software to help fiduciary-focused advisors in a post-DoL world.”

Other software providers are getting legal opinions that their product will help advisors do that. One is Manish Malhotra, founder of Income Discovery, who obtained a letter from Wagner Law Group, an ERISA specialist, asserting that “in our view the use of Income Discovery’s retirement planning software, coupled with a Rep’s comprehensive data collection process, and the software’s ability to compare investment or annuity products, would assist an RIA in satisfying its duty to act with the care, skill, prudence and diligence of a prudent person under ERISA’s Prudent Man Standard of Care.”

The letter continues, “For this reason, even if an RIA is not subject to the BICE or the BICE’s Best Interest Standard of Care, the RIA may still wish to consider utilizing the Income Discovery retirement planning software when advising any retirement clients that are subject to Title I of ERISA.”

Malhotra hopes that all advisors will feel compelled to consider annuities for retirement clients in the future. “As a fiduciary you are responsible for developing multiple options. But if you’re an RIA who gets paid a percent of AUM [assets under management], you have a built-in resistance to recommending an immediate or deferred income annuity, even though those products might be good for your client. So you need at least some process in place to explain why you’re excluding that product. RIAs will be in a bind. I don’t know if they realize it,” he said.

“We are making the point that this software can be used to justify the advisors’ decisions and improve the clients’ outcomes,” Malhotra told RIJ. “The letter says that if you used Income Discovery that, in the attorney’s opinion, you would have demonstrated a high standard of care. The bigger advisory firms may have their own legal departments, but the smaller firms can go by this opinion.”

Independent, self-employed advisors, for whom being fiduciaries is nothing new, assume however that their own integrity matters more than any software they use or an attorney’s opinion of it.

“A tool is just a tool,” said Mike Lonier, an Osprey, Florida, advisor who uses his own proprietary planning tool, the R-MAP. “Any financial tool, and any legal opinion of it notwithstanding, can be used by a non-fiduciary agent acting in an irresponsible way contrary to a client’s best interest. The fiduciary responsible lies with the advisor, regardless of the tools the advisor uses.

“Nothing about a tool assures that the advisor is acting according to the fiduciary standard. Further, the responsibility to act as fiduciary remains rooted in the advisor’s behavior, and cannot be transferred or waived away by the use of a tool. No magic bullet makes you a fiduciary. That’s my view.”

President ‘Id’ or President ‘Super-Ego’?

Posted on September 29, 2016 by Kerry Pechter -

Ideally, I’d like to hear the voice of a healthy adult ego from a presidential candidate—a succinct, pragmatic, circumspect voice of reason, confident but self-effacing. During Monday night’s debate we heard the voice of an unfettered id on the one hand and the voice of an ultra-disciplined superego on the other.

Neither struck the desired tone, but of those extremes—id or superego—only one is suited to assume the transcendent POTUS position. I predict that a majority of voters would rather see a parental figure in the White House than a temperamental child. Or maybe not. We’ll know by November 9.

Freudian analogies aside, the candidates’ comments about money absorbed all of my attention. Trump, the Houdini of debt, had much more to say about debt, income, trade deficits and taxes than Clinton. My favorite of his zingers: A twofer suggestion that the stock market will crash if the Fed raises rates and the Fed chair isn’t raising rates for political reasons. Here’s the quote:

Trump: Look, we have the worst revival of an economy since the Great Depression. And believe me: We’re in a bubble right now. And the only thing that looks good is the stock market, but if you raise interest rates even a little bit, that’s going to come crashing down. We are in a big, fat, ugly bubble. And we better be awfully careful. And we have a Fed that’s doing political things. This Janet Yellen of the Fed. The Fed is doing political — by keeping the interest rates at this level.

He’s accusing Yellen of conspiracy to suppress interest rates so that the economy looks good for Democrats during the pre-election period. That’s old hat. More interesting to me was the prediction that the stock market will crash if rates go up “even a little bit.” Trump scores a point for voicing what many fear (but are afraid to say in public). He loses a point for not saying what as president he might do about it—other than seize the opportunity to buy blue chip stocks at steep discounts. If Trump is right, and Boomers really are within a quarter-point of losing a big chunk of their retirement savings, maybe we should start taking profits off the table? Maybe we should lock those profits into annuities.

The next eyebrow raiser: Trump’s income and his taxes. According to him, he earned $694 million last year. That’s more than four times what Taylor Swift earned, according to Forbes, and almost nine times what LeBron James earned. Impressive. As for him being “smart” for paying no federal taxes when he applied for a state casino license, I wonder if he means to lead by example.

Trump: The income is filed at $694 million for this past year; $694 million. If you would have told me I was going to make that 15 or 20 years ago, I would have been very surprised.

Clinton: He had to turn [his tax returns] over to state authorities when he was trying to get a casino license, and they showed he didn’t pay any federal income tax.

Trump: That makes me smart.

The U.S. became a net debtor nation for the first time about 35 years ago, and I applaud Trump for calling attention to our trade deficit. Here’s what he said:

Trump: We have a trade deficit with all of the countries that we do business with, of almost $800 billion a year.

But the chronic trade deficit is a complex topic, not material for a snappy one-liner. Trump sees the trade deficit as a sign that other countries are beating us. It’s more complicated than that.

The U.S. dollar is the world’s reserve currency. Decades ago we struck a bargain with the rest of the free world: We’ll buy your products if you’ll take our dollars. In purchasing power, this gives us a so-called “exorbitant privilege.” It also promotes capitalism, democracy and, in combination with our military power, stability abroad. So Trump should take a history lesson or two before making provocative statements like the following.

Trump: the 28 countries of NATO, many of them aren’t paying their fair share. Number two—and that bothers me, because we should be asking—we’re defending them, and they should at least be paying us what they’re supposed to be paying by treaty and contract.

Trump: we pay approximately 73% of the cost of NATO. It’s a lot of money to protect other people.

On the equally complex subject of the national debt, a president needs to understand that U.S. sovereign debt isn’t like personal debt. Trump said outside the debate that he’d consider resolving the debt by buying back U.S. Treasuries from our creditors (of whom I am one). But this shows that he doesn’t understand sovereign debt. Last Monday night he said:

Trump: When we have $20 trillion in debt, and our country’s a mess, you know, it’s one thing to have $20 trillion in debt and our roads are good and our bridges are good and everything’s in great shape, our airports. Our airports are like from a third world country.

Trump: We owe $20 trillion, and we’re a mess. We haven’t even started. And we’ve spent $6 trillion in the Middle East, according to a report that I just saw. Whether it’s $6 or $5, but it looks like it’s $6, $6 trillion in the Middle East, we could have rebuilt our country twice.

Trump: We’re a debtor nation. We’re a serious debtor nation. And we have a country that needs new roads, new tunnels, new bridges, new airports, new schools, new hospitals.

Trump: Our country is losing so much in terms of energy, in terms of paying off our debt. You can’t do what you’re looking to do with $20 trillion in debt.

Trump: Look, we owe $20 trillion. We cannot do it any longer, Lester.

But our $20 trillion in debt doesn’t mean that the U.S. is broke. (The U.S. “can’t run out of money,” it’s been said, “any more than a scoreboard can run out of points.”) Owners of U.S. Treasuries regard them, obviously, as assets—as “cash equivalents.” They are fully liquid, selling at par or even above par, if you factor inflation in. Banks and sovereign countries hold them as reserves, in lieu of gold. A “deal” to buy back the debt would be appropriate only if it were illiquid and the price were depressed. Neither is true today, and shows no sign of being true tomorrow.

Trump’s willingness to raise sensitive topics like the national debt, the trade deficit, Fed policy, interest rates, profit repatriation and the cost of NATO is refreshing and welcome. In doing so, he addresses legitimate middle-class anxieties. These topics are too often missing from policy debates. That audacity helps explain his popularity. But audacity isn’t enough. It’s irresponsible for a prospective president to stoke anxieties, to inflate them like toy balloons and leave them hanging in the air, without demonstrating a grasp of the underlying problems, or offering specific solutions to them.

Don’t Let Commoditization Sneak Up on You

Posted on September 29, 2016 by David Macchia -

In May 2010 I traveled to Vietnam with a group of fellow MBA candidates in order to learn about a variety of NGOs [non-government organizations] and commercial companies. Our trip began in Hanoi. We traveled south by bus and airplane, making numerous visits along the way. The Vietnamese people I encountered were warm, friendly and entrepreneurial.

A daylong visit to a sneaker factory outside Ho Chi Minh City was truly memorable. The single-story factory, owned by a Korean conglomerate, HWASEUNG, encompassed 1.6 million square feet, or the equivalent of about 33 football fields, and housed 16,000 workers. The building was spotless. Every worker was neatly dressed in the same-style of short-sleeve shirt, in one of several colors. The shirts reminded me of doctors’ scrubs at a hospital.

In a far corner, a group of workers, four thousand strong, all wore blue. Another group wore yellow. Still another wore red. Each of these teams performed a different function in the sneaker manufacturing process, together turning out 1.4 million pairs of sneakers per month.

At noon a horn blew. With great precision, half of the workers filed out of the building to be handed a tray holding a nutritionally balanced lunch. Thirty minutes later, this group returned to the factory and the other 8,000 people went outside to eat their lunches. The entire process was carried out with clockwork precision.

That was the day I learned the meaning of globalization. And commoditization.

The Vietnamese workers struck me as some of the happiest people I had ever met. Later, in 2012, I wasn’t at all surprised to learn from the Happy Planet Index (HPI) that among 151 countries surveyed, the people in Vietnam are the second happiest, after Costa Ricans.

Those Vietnamese factor workers I met were paid just $5 per day. Yet they were happy. Why? Because two years earlier, they had been earning only $2 per day. Happiness, I realized, varies according to one’s relative economic circumstances, especially when those circumstances have recently changed.

The United States, a much wealthier country than Vietnam, ranks 104th on the Happy Planet list. We rank behind Zambia, Saudi Arabia, Malawi, Serbia, Paraguay, Nepal and Turkey. The relative unhappiness of American workers, I believe, is due to commoditization.

In America, people and jobs are continuously being commoditized. It’s not an inspiring experience. The American sneaker factory worker became commoditized long ago. As a result, American sneaker manufacturing jobs, which paid little in the U.S., migrated to other places, like Vietnam, where they paid relatively much more and raised the standard of living of thousands of workers.

Economists sometimes advise American workers to sidestep commoditization by moving up the “value chain.” Workers who offer greater value to customers, it is said, are more likely to experience bright economic futures. This is easier said than done. Most workers can’t independently shift to higher value jobs. Instead, they often end up in lower-paying jobs that result in lower living standards.

The impact on advisors

As I think about the likely impact of the Department of Labor’s fiduciary rule on financial advisors, I think about commoditization. Each day, financial advice is becoming more commoditized. The robo-advisor that provides accumulation-focused investment advice at a cost 80% below the amount charged by a human advisor is like the Vietnamese factory that slashes the cost of manufacturing sneakers by 90%.

The DOL rule aims to reduce costs. It also makes almost all advisors fiduciaries. To be sure, I believe that all clients deserve unconflicted advice. But when assisting clients with retirement income distribution, a fiduciary must do more than simply lower his or her fees. Low investment fees alone won’t stop a client from going broke in retirement. When working with retirees, advisors also need to choose an appropriate income-generation method, or integrate “flooring” and other insurance elements into clients’ portfolios, or segment assets over time through a “bucket” method.

To avoid commoditization and achieve long-term success, advisors should move up the value chain by acquiring a broader range of income planning skills. Even better, to maintain job security, they should consider specializing in micro-niches such as “outcome-focused” income planning, or income planning for “constrained” investors, to make even more valuable contributions to investors’ lives. Such advisors aren’t likely to see robots take their jobs, or see their jobs outsourced to Asia.

Nationwide to acquire Jefferson National, provider of IO-VAs to RIAs

Posted on September 29, 2016 by Editorial Staff -

Nationwide, the privately-held Columbus, Ohio-based insurance giant, has agreed to acquire Jefferson National, the Louisville, Kentucky-based insurer that pioneered the marketing of no-frills variable annuities to registered investment advisors and their clients who wanted a vehicle for tax-deferred investing without expensive insurance features.

Jefferson National serves nearly 4,000 RIAs and fee-based advisors with its product Monument Advisor, an investment-only variable annuity with a flat monthly fee rather than an expense ratio. As of June 30, 2016, Jefferson National reported $4.7 billion in GAAP assets.

Jefferson National is a portfolio company of Napier Park Financial Partners, Napier Park Global Capital’s private equity group.

Nationwide Life Insurance Company will purchase all of the stock of Jefferson National, which will become a wholly-owned subsidiary of Nationwide. Terms of the purchase agreement between Nationwide Life Insurance Company and Jefferson National are not being disclosed. Both parties, which are privately held, expect the transaction to close early in 2017, pending approvals by state and federal regulators.

Deloitte Corporate Finance LLC and Sutherland Asbill & Brennan LLP served as the financial and legal advisors for Nationwide in connection with the transaction. Raymond James & Associates and Sidley Austin LLP served as the financial and legal advisors for Jefferson National.

Broker-dealers expect DOL rule to prompt exodus of advisors: LIMRA

Posted on September 29, 2016 by Editorial Staff -

If advisors retire, who will advise retirees?

Broker-dealers expect at least some of their advisors to retire instead of change their business practices in response to the Department of Labor’s fiduciary rule, according to a survey of broker-dealers by the LIMRA Secure Retirement Institute.

More than half (54%) of the broker-dealers surveyed by LIMRA believe some of their advisors will retire. The DOL rule, among other things, prohibits advisors from selling commissioned products to IRA clients unless the advisors pledges to act in the clients’ best interest and disregard their own or their firms’ financial interest.

“This is a transformational event in the financial services market,” said Kathy Krozel, research director, LIMRA Distribution Research, in a press release.

Broker-dealers also expect advisors—the broker-dealers surveyed didn’t specify whether they were referring only to registered reps of broker-dealers or to other types of intermediaries—to serve fewer middle-class retirement clients in the future, because the account balances are likely to be too small to generate enough revenue on a percentage-of-assets basis. Critics of the DOL rule have long predicted this outcome.

“Because the rule increases advisors’ liability, B-Ds also expect their advisors to stop providing advice to clients with lower IRA account balances,” the release said. “At a time when more Americans need access to advice, it appears that the new DOL rule may actually reduce access for middle income consumers.”

Supporters of the DOL rule have countered that middle-income consumers were never well-served by the broker-dealer industry, or that they often received conflicted sales recommendations in lieu of unconflicted advice, and that online “robo” advice providers like Vanguard, Financial Engines or Betterment will serve them just as well and at lower cost.

The Institute found that eight in 10 broker-dealers plan to employ both the PT 84-24 or the Best Interest Contract exemptions allowed under the new rule. PT 84-24 allows advisors to continuing selling fixed deferred and fixed income annuities as usual, without having to satisfy the BIC exemption. Under the BIC exemption, which allows properly licensed advisors to sell variable or indexed annuities, advisors must pledge to act only in the client’s interest.

Nearly three quarters of broker-dealers told LIMRA they will use so-called fee leveling/fee offset to avoid the variable compensation methods prohibited by the rule. Overall, firms said they will employ multiple strategies in order to ensure compliance.

Two thirds of broker-dealers expect consumers to bear the increased cost of compliance and nine in 10 believe that the rule will spur consolidation of the brokerage industry.

“Smaller firms may be unable to afford the high cost of implementing the changes needed to comply with the rule and some may opt to merge with their larger counterparts” that can leverage their economies of scale, Krozel said.

Most broker-dealers expect their risk of litigation to be exacerbated by the DOL rule and expect the rule to force changes in advisor compensation practices and structures. The cost of compliance will require changes in business practices and reporting, they agreed.

“The feedback we received from the B-Ds is aligned with responses from carriers and advisors,” Krozel observed. “Intentional or not, the DOL fiduciary rule will change the landscape of the retirement market for decades.”

Unexpected taxes can hurt seniors who work longer: Kotlikoff

Posted on September 29, 2016 by Editorial Staff -

People who have earned income and take Social Security benefits can face unexpectedly high tax rates on their earnings, according to Boston University economist, software maker and presidential candidate Larry Kotlikoff.

“Senior workers earning an average income can easily lose more than half of their earnings to higher taxes and reduced government benefits,” said Kotlikoff, in a press release. “In some cases, workers can lose 95 cents out of each dollar they earn.”

Kotlikoff, a senior fellow at the Goodman Institute, studied the tax impact of working in one’s 60s with University of California at Berkeley economist Alan Auerbach and two co-authors. The Sloan Foundation funded the study.

The economist analyzed penalties for working that can arise from some 30 major federal and state tax and transfer programs. The economists also consider how the additional earnings could affect future taxes and transfers. They summarize the financial impact in what they call the worker’s “lifetime marginal net tax rate.”

“We are all made worse off when [elderly citizens] are pushed out of the labor market by policies that encourage them to retire,” Kotlikoff said.

The study shows how the Social Security System penalizes working:

Beyond a certain income level, early retirees from age 62 to the year they turn 66 lose 50 cents of Social Security benefits for each dollar they earn—a 50% tax rate.
From Jan. 1st in the year in which they turn 66 until their 66th birthday, they lose 33 cents of benefits for each dollar of wages—a 33% tax rate. These taxes are in addition to income, payroll and other taxes.

Though government begins adding the benefit reduction back once the worker reaches the normal retirement age, many seniors don’t realize that or don’t understand it, so the reductions may discourage them from working.

“If we abolished these ‘earning penalties’ the government would probably be a net winner. Seniors would work more and earn more and the other taxes they pay would more than make up for any short term revenue loss,” said Kotlikoff.

Another impediment to work is the Social Security benefits tax, he said:

Beyond a certain threshold, seniors must pay income taxes on 50 cents of Social Security benefits for each dollar they earn – increasing their marginal tax rate by 50%. After a certain point, they must pay income taxes on 85 cents of Social Security benefits for each dollar they earn – increasing their marginal tax rate by 85%.

When the Social Security benefits tax is added to the earnings penalty, the tax rate on moderate-income seniors can reach 95%, Kotlikoff said in a release. For someone in the 15% bracket for ordinary income, the Social Security benefits tax can increase the tax rate on pension income and IRA withdrawals to 27.75%, and raise the tax on capital gains and dividend income from zero to 12.75%. Even tax-exempt income can be taxed at a rate of 12.75%.

“These high marginal tax rates only hit in the middle of the income ladder. They don’t affect the work incentives of the rich or the poor,” said Kotlikoff. “However, the loss of the Earned Income Tax Credit and the potential loss of Medicaid and other entitlement benefits create high marginal tax rates for low income workers in other ways.”

Asset location tool could boost savings by 15% over 30 years: Betterment

Posted on September 29, 2016 by Editorial Staff -

Betterment, the largest independent online “robo-advisor,” now offers “Tax Coordinated Portfolio,” a feature that aims to boost investors’ cumulative after-tax returns by increasing the tax efficiency of their portfolios. In a release this week, Betterment said no other robo-advisor offers this service.

“Americans wind up saving for retirement in three account types: taxable, tax-deferred, and tax-exempt. Each type of account has different tax treatment, and certain investments fit one account type better than another. Choosing wisely can significantly improve the after-tax value of their savings, when more than one account is in the mix,” the release said.

According to one Betterment hypothetical example, saving in all three types of accounts showed an estimated annualized after-tax benefit of 0.48%, which can raise accumulations by 15% over 30 years.

The release did not say if the service might move existing tax-deferred IRA assets, for instance, to taxable accounts, or if such a move might trigger a taxable event for the investor. The release didn’t say if the service only considered new contributions to Betterment accounts.

“Asset location is the closest thing there is to a free lunch in wealth creation,” Boris Khentov, vice president of operations and a tax attorney at Betterment. “Customers saving for retirement in more than one type of account should be using it to increase their after-tax returns. However, doing it properly is a complex, mathematically rigorous, and continuous process. Betterment’s Tax-Coordinated Portfolio automates this sophisticated strategy every step of the way, helping our customers make the most of their investments.”

Tax-Coordinated Portfolio is one of Betterment’s suite of tax-efficient features, which include Tax Loss Harvesting+ and Tax Impact Preview. Betterment, launched in 2010, now manages some $5.6 billion in assets for more than 185,000 customers in globally diversified portfolios of exchange-traded funds (ETFs) “with personalized advice in a goal-based investing framework.” Customers can open and customize regular investment accounts, traditional/SEP/Roth IRAs, trust accounts, and accounts for retirement income.

Russell and Envestnet roll out managed account option for DC plans

Posted on September 29, 2016 by Editorial Staff -

Russell Investments said this week that it will make its customized managed account option available as a qualified default investment alternative (QDIA) to retirement plan participants through Envestnet | Retirement Solutions’ Qualified Individualized Life Target Solutions (ERS QuILTS) technology.

The Russell QDIA is called Adaptive Retirement Accounts, and ERS QuILTS delivers participant investment advice. It gives each participant a customized glide path or lifetime asset allocation evolution for each participant. Plan sponsors and advisors will be able to begin offering it in the first half of 2017, a Russell release said.

According to the release:

The solution automatically captures a participant’s personal information from a DC plan sponsor’s record keeper and human resources system without requiring a participant’s direct involvement or feedback. ERS’ QuILTS technology facilitates a seamless connection with the record keeper.
Personal information—age, gender, salary, current account holdings and contribution rate—is combined with Russell Investments’ asset allocation model to construct a portfolio of the DC plan’s existing investment options which is customized to each individual participant.
Through a participant user interface developed by ERS, participants have the ability to add in outside assets and incorporate personal preferences regarding savings rate, retirement age, income needs and risk tolerance.
Each participant’s customized asset allocation is assessed quarterly and adjusted as needed based on progress toward his or her targeted retirement income goal.
The open-architecture framework empowers advisors to select and monitor a plan’s investments from a broad range of investment products, including passive and active options.
The solution is designed to provide plan sponsors co-fiduciary support through Russell Investments’ asset allocation model advice and an advisor’s guidance regarding plan investments.

Helicopter Money Is in the Air

Posted on September 22, 2016 by Robert Skidelsky -

Fiscal policy is edging back into fashion, after years, if not decades, in purdah. The reason is simple: the incomplete recovery from the global crash of 2008.

Europe is the worst off in this regard: its GDP has hardly grown in the last four years, and GDP per capita is still less than it was in 2007. Moreover, growth forecasts are gloomy. In July, the European Central Bank published a report suggesting that the negative output gap in the eurozone was 6%, four percentage points higher than previously thought. “A possible implication of this finding,” the ECB concluded, “is that policies aimed at stimulating aggregate demand (including fiscal and monetary policies) should play an even more important role in the economic policy mix.” Strong words from a central bank.

Fiscal policy has been effectively disabled since 2010, as the slump saddled governments with unprecedented postwar deficits and steeply rising debt-to-GDP ratios. Austerity became the only game in town.

This left monetary policy the only available stimulus tool. The Bank of England and the US Federal Reserve injected huge amounts of cash into their economies through “quantitative easing” (QE) – massive purchases of long-term government and corporate securities. In 2015, the ECB also started an asset-buying program, which ECB President Mario Draghi promised to continue “until we see a sustained adjustment in the path of inflation.”

QE has not been a magic bullet. While it helped stop the slide into another Great Depression, successive injections of money have yielded diminishing returns. The ECB’s announcement of its policy narrowed the gap in bond yields between Europe’s core and periphery. But a study by Thomas Fazi of the Institute for New Economic Thinking emphasizes QE’s lack of influence on bank lending, the increase in non-performing loans, and the dire output and inflation figures themselves. Moreover, QE has undesirable distributional consequences, because it gives money to those who have already have it, and whose current spending is little influenced by having more.

Policymakers should have been alert to the likelihood of this mediocre outcome. When central banks try to reduce inflation by pumping liquidity out of the system, their policy is subverted by commercial banks’ ability to pump it back in by making loans. In today’s deflationary environment, the reverse has happened. Central banks’ attempt to pump in liquidity to stimulate activity is subverted by commercial banks’ ability to pump liquidity out by augmenting reserves and refusing to lend.

That leaves fiscal policy. The logic of current economic conditions implies that governments should be taking advantage of ultra-low interest rates to invest in infrastructure projects, which would both stimulate demand and improve the structure of the economy. The problem is the climate of expectations. As the Oxford economist John Muellbauer says, treasuries and central banks have been “hammering into the consciousness of the private sector the importance of reducing gross government debt relative to GDP.”

This orthodoxy arises from the idea that borrowing is simply “deferred taxation.” If the private sector believes that taxes will have to rise to pay for government borrowing, according to this view, people will increase their savings to pay the higher taxes, thus destroying any stimulative effect. The orthodoxy mistakenly assumes that government spending cannot generate any extra income; but so long as it prevails, debt-financed fiscal policy is ruled out as a means to revive economic growth.

As a result, analysts and policymakers have started mooting ideas for unconventional fiscal policy to supplement unconventional monetary policy. In particular, they are debating variations of so-called helicopter money, following a famous thought experiment by Milton Friedman in 1969, in which “one day a helicopter… drops an additional $1,000 in bills from the sky.” Former Federal Reserve Chairman Ben Bernanke, among others, has offered influential support for “helicopter drops” to revive flagging economies.

Helicopter money comes in two forms, which could (and should) be dropped together. The first is to put purchasing power directly into the hands of consumers – for example, by issuing each voter or citizen with smart cards worth $1,000 each. The Swiss economist Silvio Gesell, who originally proposed a scheme of “stamped money” at the start of the last century, added a stipulation that balances unspent after a month should be taxed, to discourage hoarding.

Alternatively, helicopter money could be used to finance infrastructure spending. The advantage of such “monetary financing” is that such spending, while adding to the deficit and leading to a permanent increase in the money supply, would not increase the national debt, because the government would “owe” the money only to its own banker. This would eliminate the offsetting negative expectation of higher taxes.

Surely, issuing debt that never has to be repaid is too good to be true, right? There is indeed the obvious danger that governments might easily become addicted to monetary finance to pay for private and public spending, which is why it is unlikely to be tried openly unless economic conditions worsen significantly. But the political risk of doing nothing if we stumble into another recession (as seems quite likely) is worse. Like it or not, unconventional fiscal policy could well be the next game in town.

Anecdotal Evidence

Posted on September 22, 2016 by Kerry Pechter -

Expect the DOL rule to apply to taxable accounts

At the Financial Planning Association’s annual conference in Baltimore last week, RIJ asked ERISA attorney Marcia Wagner, who is a kind of defensive coordinator for firms wishing to ward off potential class action lawsuits under the DOL fiduciary rule, if she thought the ethical standard established by the rule would eventually apply to taxable accounts as well as IRAs and 401(k) plans.

Yes, she said, she believes it will, regardless of what the SEC does or doesn’t do. Others have noted that it will be difficult or impractical for advisors to apply a suitability standard to the taxable part of a client’s portfolio and the fiduciary standard to the tax-deferred part. That may be true. But multiple standards will continue to exist. The protections that apply to hedge fund customers, for instance will presumably continue to be different from the protections for less wealthy investors.

If the DOL rule applies to all advisors and all types of accounts, we can expect to see an even faster and more extreme shift among advisors to AUM compensation models and to the use of robo-advice for younger investors and smaller accounts.

Put guardrails around your four percent withdrawal: Vanguard

For planners and advisors who like to tell their clients to spend about four percent of their assets in retirement—as opposed to those who prefer “bucketing” or partial annuitization as their income-generation tools—Vanguard has created a new formula for calculating a safe rate of withdrawal from savings.

In a white paper published this month, “From assets to income: A goals-based approach to retirement spending,” a Vanguard team recommends a compromise between two versions of the 4% rule: one (“A”) that calls for spending an inflation-adjusted 4% of the original balance and another (“B”) that calls for spending 4% of the current real balance.

Each of those alternatives has a drawback. The first is too rigid, the second too flexible, in the face of market volatility to provide sufficiently predictable and sustainable income. Splitting the difference, Vanguard’s decumulation experts call for using the second alternative but putting upper and lower limits on annual spending.

Supposed, to use the classic example, that a new retiree has $1 million in savings and, conveniently, a need to spend $40,000 in the first year of retirement. He takes Vanguard’s advice and, in the following years, promises not to give himself a raise of more 5% or to tighten his belt by more than 2.5%.

Here’s how the hypothetical numbers play out. At the start of the second year, after earning a 10% return and spending $40,000, the retiree has $1.06 million. Under version B of the 4% rule he could spend $42,400 (.04 x $10.6 million). But since his upper limit is $42,000, that’s all he spends. Conversely, if the market gone down that year, he would have spent no less than $39,000 ($40,000 – ($40,000 x .025)).

Since retirees often disregard their recommended spending limits, this might seem like a labor-intensive exercise in false precision. It gets even more complicated when you factor in variables like asset allocation and portfolio choices, and even more so when you try to obey the rules of tax-efficient decumulation.

Still, Vanguard’s method adds nuance to the 4% rule. Advisors can also point to research like this to show that they did their homework before recommending a withdrawal rate.

Bad day at Wells Fargo, good day at BlackRock

One of America’s great financial services brands was sullied this week when Wells Fargo’s over-zealous sales practices, which reportedly included the creation of false accounts by more than 5,000 employees who hoped to reach or were compelled to reach big, hairy aggressive sales goals, became front page news.

“A brand is a promise kept over and over and over,” a consultant once told me. That’s a variation on the truism that it takes a long time to achieve trust but a short time to lose it. Wells Fargo may yet emerge whole from this episode. Consumers have short memories. And, just as many voters hate Congress but admire their own district’s representative, the ubiquitous bank’s retail relationships will probably survive.

But the incident indicates the pressure at publicly held companies to stoke earnings and please shareholders—even if it means throwing customers under the bus. That may sound harsh, but this fundamental conflict of interest tinges every public company’s product design, compensation, sales practices and even the wording of its advertising and communications. In the extreme, it results in incidents like those at Wells Fargo.

By contrast, BlackRock and its CEO, Laurence D. Fink, received almost unalloyed praise from the New York Times last weekend. BlackRock, formerly Blackstone, has grown dramatically through acquisition (absorbing Merrill Lynch’s funds in 2006 and Barclays Global Investors in 2009) and its share price has soared.

In the retirement income market, its primary product entry seems to be CoRI target-date bond funds. These are long-term bond funds that track the proprietary CoRI Index, which reflects the fluctuating price of $1 of lifetime income on your retirement date, as determined by prevailing immediate annuity prices, which also follow long-term bond returns.

The concept relies on asset-liability matching. The CoRI Index and the value of CoRI funds, like immediate annuity prices, move in the opposite direction of long-term interest rates. As rates rise, your fund will lose value, but immediate annuity prices will fall too, so that your CoRI fund will always buy the same income (in proportion, of course, to your investment in the fund).

But if you never intend to buy an annuity, the long maturities of the CoRI funds entail a lot of interest rate risk. And the funds aren’t cheap. According to page 3 of the CoRI 2017 prospectus, there’s a front-end Investor A share load of 4% for purchases under $1 million, and an annual fund expense ratio of 83 basis points (58 basis points for institutional shares requiring an investment of $1 million or more).

The cost could potentially be much higher. The prospectus explains that the annual operating cost is 2.06%, of which BlackRock has waived 1.23%. A footnote adds, “the Fund may have to repay some of these waivers and/or reimbursements to BlackRock in the following two years.” Such ambiguity makes the value of the CoRI funds proposition hard to assess.

Jackson offers no-load VA for fiduciary era

Posted on September 22, 2016 by Editorial Staff -

As rumored at the FPA annual conference last week, Jackson National Life has launched a fee-based variable annuity. Called Perspective Advisory, it offers the same investments and optional benefits, for an additional charge, as Perspective II, Jackson’s flagship commission-based variable annuity, the company said in a release today.

The launch is directly linked to the Department of Labor’s so-called fiduciary rule, which will makes the sale of a variable annuity to an IRA owner a “prohibited transaction” unless the seller signs a contract promising to act in the client’s best interest.

“The company’s entrance into the fee-based space is designed to meet increased market demand for products compatible with fee-based accounts and platforms as a result of the U.S. Department of Labor (DOL) fiduciary rules, released in April 2016,” according to a release from Greg Cicotte, Jackson’s executive vice president and chief distribution officer.

“In today’s heightened regulatory environment, many of our distribution partners are choosing this type of product to serve their clients who are seeking strategies for retirement planning,” the release said. “The legal and compliance costs, as well as additional disclosure requirements related to managing a commission-based platform under the DOL mandates, have set the stage for utilizing fee-based variable annuities.”

Perspective Advisory also gives Jackson a product for advisory distribution channels where insurance products historically have not been widely utilized, such as the Registered Investment Advisor market.

Perspective Advisory’s key features include:

Compensation structure: Advisor compensation is fee-based, rather than commission-based.
Minimum initial premium: $25,000.
Product cost: 0.30% annually for mortality, expense and administration costs.
Surrender period: Three-year withdrawal charge schedule of 2%, 2%, 1% and zero.
Investment options: More than 90, ranging from 56 to 219 basis points in annual fees.
Additional options: AutoGuard and LifeGuard Freedom living benefits, ranging from 80 to 160 basis points in annual fees, and death benefits ranging from 30 to 100 basis points in annual fees.

With eye on DOL, IRI hires Milliman to survey annuity comp

Posted on September 22, 2016 by Editorial Staff -

To help financial services firms and financial professionals comply with the reasonable compensation standard under the Department of Labor’s fiduciary rule, the Insured Retirement Institute will survey current compensation practices regarding sales of annuities and other investment products, IRI announced.

Milliman, Inc., the global consulting firm, will conduct the survey for IRI. Financial firms have until the end of 2017 to fully comply with the rule, which was issued last April.

The survey aims to help firms demonstrate their existing reasonable practices, rather than to reveal non-compliant practices, according to IRI CEO Cathy Weatherford.

“While we believe our members’ have always strived to design their compensation practices in an appropriate and reasonable manner,” she said in a press release, “demonstrating compliance with this new legal requirement is another matter.”

The new rule’s Best Interest Contract (BIC) Exemption or amended Prohibited Transaction Exemption (PTE) 84-24 allows firms to recommend variable or fixed indexed annuities and accept commissions or variable third-party compensation on the sale only if the compensation is reasonable.

According to the IRI release, the survey is necessary to establish industry compensation benchmarks because the DOL didn’t define “reasonable,” or offer examples or so-called safe harbor suggestions, except to say that compensation should follow “a market based standard.”

MassMutual, Envestnet enhance fiduciary services

Posted on September 22, 2016 by Editorial Staff -

MassMutual and Envestnet Retirement Services (ERS) are expanding their Fiduciary Assure program, through which ERS helps Mass Mutual institutional retirement clients maintain compliance with their ERISA fiduciary obligations, the insurer announced this week.

“Our new services are complemented by our new Fiduciary Support Analyzer, which can help retirement plan sponsors determine their relative risk and need for fiduciary support, and our new tracking guide,” said Tina Wilson, senior vice president, Investment Solutions Innovation, in a news release.

Earlier this year, MassMutual and ERS, a registered investment advisor, added “3(21)” service to their Fiduciary Assure program. Now, as an expansion of the program, MassMutual and ERS are offering a “3(38) service.

Both the 3(38) and 3(21) services are available at no additional cost to retirement plans with less than $5 million in recordkeeping assets, according to Wilson. Larger plans pay a fee of two basis points for either service, she said.

Under the 3(38) service, sponsors can allocate certain fiduciary investment responsibilities to ERS. ERS or the plan sponsor develops the investment lineup from a pre-approved list of investment options. ERS monitors the investment performance and directs MassMutual to adjust the investment lineup as needed in order to meet core asset class requirements.

With the 3(21) service, sponsors share their fiduciary investment responsibility with ERS. Sponsors retain the ultimate decision-making authority provided their investment lineup includes at least one investment option in each of four core asset classes (cash equivalent, domestic bond, domestic equity and foreign equity) from a pre-selected list provided by ERS.

Or, sponsors can opt for a pre-selected investment lineup. Sponsors are responsible for making ongoing investment line-up changes in order to maintain the core asset class requirements.

As part of the enhancements, Fiduciary Assure provides sponsors and advisors digital access to critical reporting information, MassMutual said. Separate websites enable sponsors and advisors to monitor fiduciary compliance by providing “fingertip access” to reporting that is specific to each retirement plan. Sponsors’ fiduciary investment reports are housed within an online data vault.

MassMutual is introducing a digital fiduciary planning guide and calendar that helps advisors and sponsors track key fiduciary filing dates for both defined contribution and defined benefit plans. The guide contains key dates that plan fiduciaries should be aware of related to plan filings, notices, distributions, testing and reporting requirements.

Advisors to retirees shouldn’t neglect the ‘household balance sheet’

Posted on September 22, 2016 by Editorial Staff -

For advisers active in recommending rollovers from defined-contribution plans to IRAs, the DOL’s new fiduciary rule might appear at first to have little impact. That’s because clients may roll over only a couple of times in their careers, and because many advisors are already fiduciaries.

But, across the advice industry, the impact of the rule could be much greater than might first appear, according to the MacroMonitor, a publication of Strategic Business Insights (SBI).

For one thing, the fiduciary standards will shift tens of billions of dollars into the pockets of IRA owners. Second, advisors are at risk of underestimate how much broader their fiduciary responsibilities will be to clients who have entered retirement.

On the first point, the fiduciary standards could save IRA owners over $40 billion in ten years, SBI research shows. “Even narrowly applied, the impact could affect about seven million households and nearly $600 billion that rolls over into IRAs annually—the numbers are rising,” this week’s issue of the MacroMonitor said.

On the second point, fiduciary standard of advice to a retiree may mean a shift in the focus of advice from the narrow field of investment management to the more comprehensive management of each client’s “household balance sheet.”

The household balance sheet includes the sum total of the household’s assets and debts, and includes the interests, if applicable, of a spouse, children and perhaps other stakeholders, MacroMonitor said.

“A complete understanding of the household’s requirements and resources is necessary to apply a fiduciary standard effectively in both the accumulation and disbursement phases” because “the purpose of advice is to create and maintain a secure income (such as cash flow) during retirement.”

Expertise in mutual funds alone will not be sufficient for the fiduciary retirement advisor. “Providing good retirement advice requires knowledge about all retirement resources, retail investments, debts, and all forms of protection held; most households have a variety of them all,” the report said.

“Recent-rollover households more likely than all households to own all types of retirement accounts—IRAs (Roths, Simples, Traditional), 401k’s, 403b’s, 457’s, and individual annuities—and at least one household head is also more likely than all household heads to have a defined-benefit pension plan.”

Other demographic and financial characteristics of recent-rollover households make the task of providing good advice complicated and difficult. Near-retirement household hold more debt than all other households combined.

The report noted, however, that rollover clients are receptive clients. “The good news is that rollover households frequently secure advice before making major investment decisions,” the MacroMonitor said. “They are more likely than all households to use most types of financial institutions and intermediaries, and they tend to trust these firms and professionals. Many already have a written financial plan and wills in place.”

Flight from active equity funds continues: Morningstar

Posted on September 22, 2016 by Editorial Staff -

Investors continued to exit actively managed U.S. equity funds in August, according to Morningstar’s monthly report on U.S. mutual fund and exchange-traded (ETFs) asset flows. Active U.S. equity funds lost a net $25.4 billion in August, compared with a negative $32.9 billion in July.

Passive U.S.-equity funds persisted in attracting investor money, with an estimated inflow of $16.4 billion in August, about half of July’s $33.8 billion intake. (Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund and net flow for ETFs by computing the change in shares outstanding.)

Highlights from Morningstar’s report about U.S. asset flows in August:

Total international-equity asset flows for August consisted of an estimated $7.3 billion outflow from developed markets and a $6.2 billion inflow to emerging markets.
Taxable and municipal bond funds accumulated flows, reflecting investors’ preference for a steady income stream: $27.8 billion and $7.4 billion, respectively. Commodity funds saw a trend reversal in August with a$1.0 billion outflow from passive funds.
The diversified emerging-markets category has consistently been on the top-flowing list for the past few months; in August, total flows were $5.5 billion. Factors such as stronger currencies, diminishing worries about China, and young populations driving more potential for growth going forward, are top contributors.

The top Morningstar category remains unchanged from July: intermediate-term bond. The bottom five categories were also little changed from last month, with large growth, world allocation, and Europe stock sustaining the largest outflows. WisdomTree Europe Hedged Equity and its Deutsche counterpart, Deutsche X-trackers MSCI Europe Hedged, continued to suffer outflows.

Of the top 10 U.S. fund families, only Vanguard, State Street and T. Rowe Price saw positive flows into active strategies in August. American Funds continued to suffer for the third consecutive month, seeing $1.5 billion in outflows in August.

Vanguard continued to lead the way for passive inflows, gathering $20.7 billion in August. The highest inflow to a passive fund went to Vanguard Total Stock Market Index Fund, which took in an estimated $4.6 billion last month.

PIMCO saw two of its funds on the top-flowing list in August. PIMCO Income Fund, which has a Morningstar Analyst Rating of Silver, led flows into active funds with an estimated $1.4 billion.

Could You Be Sued Under the New DOL Rule?

Posted on September 21, 2016 by Kerry Pechter -

Will tort lawyers use the Best Interest Contract of the new Department of Labor fiduciary rule to turn financial advice into the next asbestos-related, or tobacco-related, or defined contribution fee-related federal class action legal bonanza?

Are small-scale independent advisors at risk of getting sued by disgruntled clients? Are employee-advisors at risk if their deep-pocketed broker-dealer employers get sued? Will clients sue insurance marketing organizations for ethical lapses by the agents they run?

These questions were on the minds of the Certified Financial Planners—many of whom are also licensed to sell securities and insurance products to IRA owners and some of whom are advisors to 401(k) plans—in Baltimore’s Inner Harbor last week at the Financial Planning Association’s annual conference.

The answers, as heard during breakout sessions that hundreds of CFPs attended, ranged between the extremes of “Be afraid, be very afraid” to “Honest advisors have nothing to fear” and a number of positions in between.

At least four speakers at the conference addressed the DOL’s rules legal implications. They included Marcia Wagner, the Boston-based ERISA lawyer; Tim Hauser, the DOL attorney and lead author of the fiduciary rule; Ron Rhoades, law professor at Western Kentucky University; and Doug Lennick, a CFP and founder of think2perform.com, who preaches a gospel of mindfulness.

In the end, “Will I get sued?” may not be the most urgent question. From the financial industry, the battle over the DOL rule may be less about ethics than about pricing. The DOL appears to have focused on the provision of conflicted advice, but its real targets are high-priced products. And in trying to make products cheaper for retirement clients, it—intentionally or not—roils the delicate economies of the entire industry, from advisor to broker-dealer to fund company or insurer.

So, the more load-bearing questions may be: How will manufacturers and distributors adapt to the rule? Will they voluntarily reduce prices and cut costs (perhaps by replacing human intermediaries with robo-advice)? Will they stop taking non-transparent third-party payments? Will they conduct business as usual until someone sues them, and then fight the DOL rule in the courts? Will they assume that the DOL rule will soon apply to taxable accounts? At least until the DOL begins issuing a list of clarifying FAQs, there are more questions than answers.

The next ‘asbestos’?

Wagner, who counsels companies how to avoid ERISA violations, believes that the DOL rule is going to engender a lot of class action litigation. She compared the coming wave of lawsuits to the mesothelioma and tobacco litigation that kept plaintiff’s attorneys busy for decades, as well as to the recent wave of lawsuits against defined contribution plan sponsors and providers for violations of their fiduciary duty to seek lower costs for participants.

The potential liability is clear. The DOL rule gives retirement clients the right to participate in class action suits, without agreeing to forced arbitration, against advisors or broker-dealers who have violated the rule’s so-called “Best Interest Contract,” which requires them to recommend products or services that are in the “best interest” of the client, as opposed to the seller’s interest.

Advisors, broker-dealers and other intermediaries don’t need to sign the so-called BIC, and accept that type of accountability, unless they receive so-called “differential” or “variable” compensation—i.e., commissions or revenue sharing fees that they receive from product manufacturers—when selling to 401(k) or IRA owners.

One way to continue accepting third-party payments without becoming vulnerable to lawsuits, Wagner said, might be to charge a flat rate to product manufacturers whose products they sell. “If it’s all levelized, it stops all prohibited transactions from happening in the first place,” she said. “It’s a de facto exemption” from the rules against prohibited transactions.

Levelization, in this sense, would mean having the broker-dealer determine any source of variable compensation and embed all of those fees in a single price, so that the all-in third-party revenue for a product category would be, for instance, a flat 50 bps. “That’s what much of the industry is engaged in and that will change payout grids [substantially,” she told a gathering of perhaps 250 CFPs.

[A broker-dealer executive disputed that assessment. “Receiving a flat rate would allow us to avoid the conflicts that are created from revenue sharing and omnibus fees, but it’s only a partial solution,” the executive told RIJ.

“First of all, everyone would have to pay the same amount, which means you would have to eliminate companies like Vanguard from your platform since they don’t pay revenue sharing. Second, you would have to set the amount low enough so that every company could afford to pay it. That would mean some companies would pay more than they currently do, but most of the big firms would pay much, much less. In short, you can only replace a portion of what a firm is getting now.”]

Rollovers are slippier

Then there’s the matter of rollovers. Independent advisors who act as fiduciary advisors to 401(k) plans with assets of $50 million or more may become vulnerable to violations of the new rule when trying to convert retiring participants to new rollover clients—which is often the reason why advisors work with 401(k) plans in the first place. The DOL regards this practice, a type of so-called cross-selling, as an opportunistic way to increase revenue from those clients by moving them from an institutionally-priced plan to a retail account.

“Cross-selling practices create potential conflicts of interest, and capturing rollovers is a classic example of cross-selling,” Wagner said. “It’s easy to see the potential to sell products to the sponsors of a plan after years of developing relationships with them. It used to be that if you weren’t a fiduciary to a plan, you could cross sell, but that’s over. Now, if you want to engage a rollover client and get variable compensation, you will need the ‘full-blown’ BIC with all of the disclosures.”

For the independent planner who sometimes sells insurance and/or investment products for commission, perhaps the best way to demonstrate bona fides to clients and regulators is to avoid one-off product sales and wrap the products in the context of a carefully-considered financial plan developed in concert with clients.

“You may want to consider strategic use of financial plans. Quality financial plans force the advisor to consider the whole picture and demonstrate that the advisor’s recommendations are being done in the client’s best interest and the conflicts are being mitigated,” Wagner said.

Either way, advisors need to practice a new level of circumspection in consultations with clients, she added: “Loose lips sink ships. You need to be careful discussing matters with your clients in this brave new world.”

‘Pernicious’ conflicts of interest

The DOL’s Hauser said that the client’s right to use the courts as a remedy against violations of the DOL rule, calling it an “important incentive to compliance.” But he reiterated the DOL’s position that the rule was intended to close an old loophole in the antiquated “five-part” test of fiduciary duty required of pension advisors, not to create a new window for plaintiff’s attorneys.

As for the possibility of enforcement actions by the DOL, a grace period will probably extend well into 2018. That’s judging by Hauser’s statements during a Q&A session at the FPA conference.

“This is major reform. These are significant changes. The DOL is aware of that,” Hauser conceded. “So, in the near term, our aim is to help firms toward compliance. Between April and December, we’ll help people comply. As of April 2017, if [your actions] meet the definition of conflicted transactions, you’ll have to meet the basic exemption [from the prohibition on conflicted transactions] or refrain from those transactions. If you want revenue sharing and 12b-1 fees, you can do that.

“But in exchange you need to enter into a [best interest] contract with the retail customer and set up a website explaining what you’re doing. Starting January 1, 2018, you must begin executing the Best Interest Contracts. We’ll help people comply between April and December. If you’re trying to get things right, the department’s aim is to help you, and that will be true for some time after December 2017.

“The idea that we’re ‘creating law’ by enforcing regulations, I want to remind people, isn’t true. I also often hear that the rule is very complex. I don’t think so. The current fee structures and industry practices are complicated. Trying to hang onto those structures brings a certain amount of complexity to the compliance effort,” he said. A list of answers to “Frequently Asked Questions” about the DOL will appear this fall “on a rolling basis,” he added.

Don’t ‘complify’ matters

“I’m seeing some firms that are attacking this problem and building new advice platforms and new compensation schemes, who are getting ready for the DOL rule even before the 2017 deadlines,” said Rhoades. “Some have their heads in the sand. They’re saying, ‘This can’t be happening.’ Others are waiting. But this will transform the way firms operate. We will see the proportion of fee-based accounts move to 60% or 70% of the advisory business from 40% in a relatively short period.

“Some firms and advisors think they can continue to do what they’re doing—that is, they can live with the BIC and still sell high commission products. You have a duty to justify client expenditure of funds. I have heard people say they will use the same process for choosing investments. That’s not going to fly,” he added.

“It’s one thing to say your fees are reasonable, but now you will need to benchmark your fees. When it comes to investment policy you have the duty to select the strategy prudently. You can’t do it ad hoc. When choosing products, it’s a fight for basis points. In the 401k suits, for example, one action said the plan sponsor should have chosen a fund with two less basis points.”

Rhoades and Doug Lennick both put forward the idea that advisors who never put themselves in conflicted positions or engage in self-dealing can consider themselves safe from litigation. “When you do everything right, you don’t worry about liability,” he said. “You’re more likely to have liability when you have conflicts of interest.”

“The DOL is giving the client the opportunity to take action against advisors or firms,” said Lennick. “This may create class action suits. A lot of people in our industry ‘complify’ instead of simplify. But if you’re profoundly simple, if you practice empathy, if you prepare your clients for the ‘certainty of uncertainty,’ then you will always be in a defensible position. Your clients will not sue you. They will give you a referral.”

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