Beware of tricky jargon
New 401(k), IRA rule a bit confusing,
Despite claims otherwise, the new much ballyhooed Labor Department fiduciary rule won’t protect you from financial advisers who put themselves first. But you can, easier than you think.
Introduced last year, this wellintended law went live Friday. Maybe someday they’ll fix its fatal flaws. I doubt it. “Me-first” brokers are everywhere in financial “advice.” In theory, with your 401(k), 403( b), IRA or IRA rollover, this rule forces the adviser, who usually was a product peddler, onto your side of the table. But its loophole is called BICE, the Best Interest Contract Exemption. Think BICE — like lice not noticed initially, but creepy and pesky to purge.
The sales rep slips BICE to you for your IRA rollover or to your employer in a fat, convoluted, rough to read contract — saying it’s boilerplate. Sign here, initial there, and they’re on your side. But BICE lets them loot and pillage fairly freely.
When I started in the investment business there were stock brokers, insurance reps, bankers and investment advisers. Many fine folks; and some scumbags, too. Forty-five years later I’m sure I underestimated the unscrupulous quotient.
They morphed to confuse you via tricky jargon. Once, only those regulated under the Investment Advisers Act of 1940 (IA1940) could call themselves “adviser.” Brokers started tilting those laws in 1999’s roaring bull market— usually calling themselves “advisor” with an “o” instead of “e.” Now everyone is some variant.
Many use phrases like “feebased” instead of “fee-only” to charge a fee and double-dip you with commissions without you noticing.
Stock brokers were regulated by the National Association of Securities Dealers, which was what it sounded like, them policing themselves — worth precious little. You got that. So, in the next bull market, it wiggled some, morphing its name to the Financial Industry Regulatory Authority, aka FINRA. It sounds like Uncle Sam overseeing all finance. But it’s still just them policing themselves, re-labeled. Now they lobbied BICE into the Labor Department’s fiduciary rule so you think they’re actually “fiduciaries.”
Abuses not caught are legendary. The several hundred thousand advisers it oversees have no mandatory disclosure requirements. There are thousands of arbitrations annually against FINRA-overseen advisers. You can see the results yourself at FINRA’s website: More than 80,000 of them in the last 15 years — and that only counts the cases filed.
Conversely, IA1940 advisers long labored under a strict fidu- ciary standard putting your interests first — so they couldn’t mislead, selling you toxic junk you don’t need, with nosebleedlevel commissions.
By signing the BICE clause, salespeople get you to agree to let them push products that benefit them more than you while posing as “fiduciaries.” But that’s not all. The rule includes zero governmental enforcement. Your only remedy after being wang dang doodled is finding a qualified retirement plan claimants lawyer and suing or arbitrating. That’s it.
The fix? If doing an IRA rollover (switching from your employer’s plan into your own traditional IRA) demand a simple letter from them saying nothing but: “I, as a side-letter to any contract we may have for advice on your IRA, agree to operate strictly under the fiduciary standard as defined under the Investment Advisers Act of 1940, as amended.” If the adviser won’t, run.
If you get the letter signed and are subsequently diddled, gather your account statements, contract, side-letter and Google PIABA (Public Investors Arbitration Bar Association). PIABA has attorneys that know just how to handle this.
If working at a small- to medium-sized employer with a retirement plan, take my column to your HR department and beg your plan’s administrator to get a side-letter if they haven’t already fixed it in their vendor contract (few have). Then you have the DOL protections initially intended.