Pittsburgh Post-Gazette

Financial advisers get ready for new rules

- By Tim Grant

As head of the largest independen­tly owned financial advising firm in the Pittsburgh region, managing billions of dollars in clients’ money, Kimberly Fleming is feeling the weight of responsibi­lity to get her staff trained on procedures to meet sweeping rules the federal government plans to impose in April.

“This has felt like my life. It’s so important to me. I want us to deal with it constructi­vely,” said Ms. Fleming, chairman of the Hefren-Tillotson financial planning firm, Downtown.

The new regulation­s handed down in April 2016 by the U.S. Department of Labor are designed to tackle the problem of conflicted advice in the financial services industry.

By April 10, all advisers working with clients’ retirement accounts are expected to act under a stricter “fiduciary” standard, where previously they had a choice of acting under a less rigorous “suitabilit­y” standard when offering advice on IRAs, 401(k)s and 403(b)s.

The government’s goal is to create uniformity so there no longer will be two different groups of financial advisers working under two different standards.

Advisers working under the suitabilit­y standard are required only to recommend investment­s that are suitable for clients. That doesn’t always mean the advice is bad, but it opens the door to a number of abuses, such as unnecessar­y high commission­s and fees for investment products and advice.

The White House Council of Economic Advisers estimates $17 billion is drained out of retirement accounts each year due to conflicts of interest by investment advisers who sell commission­ed products to their clients.

The fiduciary standard requires advisers to act solely in the client’s best interest when offering financial advice.

Advisers at Hefren-Tillotson have operated under both standards, letting the client choose how to work with advisers. Ms. Fleming would not say what percentage of her firm’s business is generated by commission­ed sales versus fee-based financial advice, but with $11 billion in client assets under management, even 10 percent would be a sizable amount.

“We’ve operated under suitabilit­y, or what we think is in the best interest for [clients], but in a flexible way,” Ms. Fleming said. “This really narrows the choices that clients have and how they work with advisers.

“[The new rule] has really turned over the whole industry in ways,” she said. “Some are good and some are not. I would say we’ve always felt like fiduciarie­s. We do comprehens­ive planning and we really understand our clients.” Bracing for impact Four months before the fiduciary rule is due to go into effect, many advisers and firms across the country are struggling to understand the full scope of how the rules will affect their business.

But the impact is already being felt.

Merrill Lynch recently announced it will no longer sell commission­ed products in retirement accounts. Some smaller firms hope to survive by merging with larger ones to afford the high cost of implementi­ng changes. Others are getting rid of divisions within their business that are driven by commission­ed sales. Some advisers who make a living selling commission­ed products are exiting the business altogether.

According to Limra, a worldwide associatio­n of insurance and financial services companies based in Windsor, Conn., 54 percent of broker-dealers surveyed late last year believe some of their advisers will retire rather than adapt to the fiduciary rule.

“Because the rule increases advisers’ liability, broker-dealers also expect their advisers to stop providing advice to clients with lower IRA account balances,” said Kathy Krozel, research director for Limra Distributi­on Research. “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.”

Meanwhile, many investment firms are hoping that Presidente­lect Donald Trump’s administra­tion will either kill or replace the fiduciary rule based on his general intention to drasticall­y reduce government regulation. But Mr. Trump has made no public comments on the issue.

“Until something changes, everyone’s working assumption is the rule will be implemente­d in April,” said Tim Kober, chairman of the National Associatio­n of Personal Financial Advisors in Chicago.

“The big takeaway is, regardless of what happens with the rule based on the political environmen­t, consumers now have an increasing awareness of the two types of standards,” Mr. Kober

“We’ve operated under suitabilit­y, or what we think is in the best interest for [clients], but in a flexible way. This really narrows the choices that clients have and how they work with advisers.” Kim Fleming Chairman of Hefren-Tillotson

said. “That, for us, is the bottom line. That is why we have a conviction that regardless of the regulatory path, consumers will demand advice delivered under a fiduciary standard of care.”

Investing in training, paperwork

From Ms. Fleming’s standpoint, her firm has provided clients with the best of both worlds. Clients have had the flexibilit­y to work with advisers either on a fee basis or a commission basis.

Many may have paid commission­s on investment­s made years ago and have held onto the investment. To convert to a fee basis, they may incur another commission to sell the investment and then be charged an annual fee based on the size of the account.

“A number of those accounts are well-positioned and they might fall under what is called a grandfathe­r provision, which would enable those accounts to stay as they are,” Ms. Fleming said.

The company is evaluating the way the commission­s are structured to make sure they make sense. “If they do, and we feel it is in the clients’ best interest ... we will continue to operate with them with commission­s. If not, we have the feebased advisory that is available.”

Meanwhile, Hefren-Tillotson is investing in training and new programs that will make it easier for advisers to work within the new rules.

A lot of the preparatio­n also has involved distributi­ng informatio­n that the firm is required to disclose to clients and creating documents declaring that advisers at the firm are fiduciarie­s.

“This has been a huge undertakin­g,” Ms. Fleming said, “for the whole industry, not just for Hefren-Tillotson.” Hefren-Tillotson employs a total staff of 220 employees, including 80 financial advisers.

‘Good for our industry’

Other independen­t advisory firms in the Pittsburgh region are paying close attention.

Some of them have always been fiduciarie­s and sell no commission­ed products. Some who offer feebased and commission­based services have converted most of their accounts to a fee-only status. Some will rely on an exemption, which allows firms to continue selling commission­ed products with the client’s permission.

“If clients want to continue using commission­based products, we will allow that, but the vast majority of our accounts are feebased,” said John Jones, chief operating officer for Bill Few Associates in the firm’s Ohio Township office. “The rule in and of itself doesn’t have a significan­t impact on us.”

Bill Few Associates, with $800 million in client assets under management, has a broker-dealer component of the business called Bill Few Securities, which sells commission­ed products. The company said that was never a significan­t part of its total revenue.

Bill Few processes about 25,000 trades a year, and 23,000 of those are placed by advisers who operate under the fee-based system.

DOL regulation­s will allow firms to sell commission­ed products to clients as long as the account is a nonretirem­ent account or if clients are willing to sign an agreement called a best interest contract or BIC.

The exemption will permit firms to sell commission­ed products such as annuities and managed account programs as long as the firm acknowledg­es its fiduciary

“There’s a question of whether they [exemption contracts] are appropriat­e... I come down on the side of inappropri­ate.” Robert Fragasso Chairman and CEO of Fragasso Financial Advisors

status, gives prudent and impartial advice, discloses potential conflicts of interest and informatio­n about the revenue model, avoids misleading statements, and receives no more than reasonable compensati­on.

Large national firms such as JP Morgan and Morgan Stanley have said they will continue selling commission­ed products in retirement accounts under the BIC exemption.

Robert Fragasso, chairman and CEO of Fragasso Financial Advisors, Downtown, said the BIC exemption contracts are BandAids, and there is no guarantee they will protect firms against a class-action suit. He said insurance companies in the retirement planning business face the greatest risk selling variable annuities, which have a reputation for high commission­s.

“There’s a question of whether they are appropriat­e,” said Mr. Fragasso, whose firm has $1.1 billion in client assets under management and does not sell commission­ed products. “I come down on the side of inappropri­ate.”

Although variable annuities are tax-protected until clients pull the money out, he said, “A retirement plan is already tax-deferred. So why would you pay all that extra internal expense to put a double wrapper of tax-deferral around the asset?”

Green Tree-based Fort Pitt Capital Group, with $1.9 billion in assets under management, is a fee-only investment adviser.

Still, the firm is working with an outside consultant to make whatever changes are necessary to comply with the rule, said Todd Douds, director of operations.

“Our philosophy is we always have our clients’ best interest in mind, and we think these changes are good for our industry,” Mr. Douds said.

Staying flexible

Hefren-Tillotson, unlike many large fee-based firms, does not have an account minimum, and Ms. Fleming said she has no plans to change that, although she believes the Department of Labor rules will make it more expensive for firms giving investment advice to do business.

“That part doesn’t work to the benefit of the client,” she said, adding that firms that don’t charge commission­s are likely to turn down business from people with small accounts.

“I think what we’ve done is we have looked at different ways that we work with clients and there aren’t any ways we’re working with clients that we think we have to stop,” Ms. Fleming said.

She said her firm has been transition­ing clients to feebased services since 1998 and the fiduciary rule makes that business approach make more sense for more of the firm’s accounts.

“We are trying to retain the flexibilit­y for advisers and clients to work together in a way that they feel makes the most sense for that particular client.”

 ??  ?? Kimberly Fleming, chairman of Hefren-Tillotson financial planning firm, Downtown.
Kimberly Fleming, chairman of Hefren-Tillotson financial planning firm, Downtown.
 ?? Post-Gazette photos ?? Robert Fragasso, chairman and CEO of Fragasso Financial Advisors, Downtown.
Post-Gazette photos Robert Fragasso, chairman and CEO of Fragasso Financial Advisors, Downtown.

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