Posted on: February 8, 2010
By: Bennett Aikin
Assistant Labor Secretary Phyllis Borzi indicated earlier this week that the new proposed rules governing advice to 401(k) participants should be released by the Labor Department by the end of the month. The comment period is expected to last approximately 60 days before the rules are finalized. In the absence of an advice regulation to date, most advisors have been taking a "wait and see" approach before deciding whether to step into the "fiduciary adviser" role as defined by the Pension Protection Act (PPA).
But advisors are starting to get antsy. At a retirement plan symposium in New York City earlier this week, several speakers, including me, were asked questions about providing advice to participants. Many of these questions were ones we typically receive and related to whether an advisor is crossing the fiduciary line based on the level of service (advice?) being provided, or centered around computer-driven advice models and the concept of level compensation. However, some questions were a little different, such as:
- Should I step into the fiduciary adviser role now (I've waited long enough for the advice regulation), or wait until the regulation is finalized?
- Is it a prohibited transaction if I manage a participants rollover IRA after they have cashed out of the 401(k) plan?
Whether one chooses to assume a fiduciary adviser role before the advice regulation is finalized is a business decision. There is minimal risk if one is making reasonable efforts to follow what guidance is available. The self-assessment questionnaire that we have prepared does not provide total clarity because the PPA does not get as specific as the associated regulation will. But, our expectation is that the final regulation will be less stringent.
If you intend to pursue fiduciary adviser arrangements with plan sponsors based on the premise that the relationships will be profitable because of access to rollover IRAs, we suggest you wait. To our knowledge, there is no clear ... Read full post
Posted on: February 5, 2010
By: Rich Lynch
Last month’s Fund Analysis blog post, Three fundamental questions every advisor should be prepared to answer, focused on the Prospectus Net Expense Ratio and its revenue sharing components, including the 12b-1 fee. This month, we're taking a look at two other common ratios, the Prospectus Gross Expense Ratio and Audited Net Expense Ratio, and how they compare and contrast to the Prospectus Net Expense Ratio.
So, what’s the difference between the Prospectus Net and Audited Net? And, what’s the difference between the Prospectus Gross and Prospectus Net? Sometimes the numbers can be exactly the same, and sometimes they could be radically different.
Prospectus Net Expense Ratio vs. Audited Net Expense Ratio
The difference between Prospectus Net and Audited Net can be explained by a difference in time periods. The Audited Net is the audited fee charged during the previous fiscal year for the fund. It can be considered a “backward-looking” number. The Prospectus Net is a “forward-looking” number and is the anticipated expense the fund company plans to charge for the upcoming fiscal year. If the numbers are different, a comparison of the two can be conducted to see if the fund company anticipates an increase or decrease in fees charged. Both numbers include the 12b-1 fee and other management fee or administrative costs for the fund. They do not include any sales or transaction charges.
For fund of funds, the Audited Net and Prospectus Net will be different because two different numbers are being reported. The Audited Net will only report the wrap fee at the fund of fund level. The Prospectus Net will report the wrap fee and the weighted average of the underlying fund expense ratios.
Both numbers are net of any conditional waivers or temporary deductions in the expense ratios and this leads us to the second comparison.
Prospectus Net Expense Ratio vs. Prospectus Gross Expense Ratio
The difference between the two Prospectus ratios,... Read full post
Posted on: February 2, 2010
By: Mike Limbacher
In her opinion piece from last week, Deena Katz looks at the five core principles of The Committee for the Fiduciary Standard and asks, "who could argue against them?"
The financial advice industry is still young compared to the classic professions of medicine, law, clergy, etc. Growing pains are a part of the confusion as to who is a fiduciary and what that means in this context. But they are not an excuse to point fingers or to look for loopholes. Through a look back at her experience growing up the industry, Ms. Katz urges advisors to look past their differences and pull together in support of a stronger profession based on principles.
Now on to the rest of the best links from the last week.
In the news/commentary:
Posted on: February 1, 2010
By: Bennett Aikin
The fundamental duty of an investment fiduciary is to manage investment decisions for the exclusive benefit of another party. In the second Practice for stewards and advisors, the objective is to identify and document all of the fiduciaries associated with a portfolio. The third Practice is making sure that those fiduciaries are clear of conflicts of interest.
In a December '09 Report to Plan Sponsors, Fred Reish and Joe Faucher wrote that conflicts fall into two broad categories, those where the plan sponsor has a conflict and those involving service providers. An example of the former would be where the fiduciary gains a personal advantage via their position to direct assets, such as by self-dealing. An example of the latter would be if the advisor is in a position to receive greater compensation by choosing one investment over another. While some conflicts are strictly prohibited, many others are not. Nonetheless, conflicts have the potential to negatively impact a portfolio and its investors/beneficiaries. For that reason and to help limit fiduciary liability, every fiduciary should have a stated conflicts policy that focuses on the disclosure and management of all material conflicts.
Let's take a look at Practice 1.3 and the associated criteria:
In forming a policy, you will want to... Read full post
Posted on: January 29, 2010
By: Bennett Aikin
With political momentum shifting on the heels of Scott Brown's victory in Massachusetts last week, the future of financial regulatory reform and how quickly it can get done is becoming a bigger question mark with each passing day. While many hoped the Senate Banking Committee would be ready to tackle financial reform issues by late January or early February, recent reports indicate that it likely will be spring by the time the the committee has a bill ready. Committee Chair Christopher Dodd is still working through several issues with Committee Ranking Member Richard Shelby in hopes of gaining the bipartisan support that will be needed for financial reform to pass in the Senate. However, reports from the Hill are that no final decisions have been reached on key provisions in a proposed Senate bill.
Despite the slow progress in the Senate and increased lobbying by the insurance industry, remarks made by Goldman Sachs CEO Lloyd Blankfein and Bank of America's Sallie Krawcheck last week make it clear that support for applying a fiduciary standard to all professionals who provide investment advice is widespread. What remains unclear, however, is whether these industry leaders support extending the existing fiduciary standard recognized by groups such as the IAA, Financial Planning Coalition, and the Committee for the Fiduciary Standard, or whether their views fall in line with SIFMA's call for a new federal fiduciary standard.
And even if a new fiduciary standard is what is being... Read full post
Posted on: January 26, 2010
By: Kristina Fausti
When John Bogle speaks, we all should listen. In an opinion column last week in the Wall Street Journal, Bogle said, "the faith of investors has been betrayed." Betrayed by an industry that has failed to act as good stewards to the investors they serve and has placed short term returns over long-term value. To restore this faith, he calls for the legislation of fiduciary principles and policies to reward longer term investing.
Mr. Bogle's logic is so typically well reasoned and principled that it is hard to believe anyone could argue with him. But another spin around the headlines continues to show just how much of a role lobbying, politics and posturing is playing in financial regulatory reform.
Now on to the rest of the best links from the last week.
In the news/commentary:
Posted on: January 25, 2010
By: Bennett Aikin
The House-passed financial regulatory reform bill (The Wall Street Reform and Consumer Protection Act) calls upon the SEC to “…examine and, where appropriate, promulgate rules prohibiting or restricting certain sales practices, conflicts of interest, and compensation schemes for brokers, dealers, and investment advisers that the Commission deems contrary to the public interest and the protection of investors.” While the Senate is still deliberating its version of the bill and enactment of a new law is not yet imminent, it is worth noting that the SEC already has considerable rule-making authority in this regard. For example, SEC Chairman Mary Schapiro recently announced that the Commission will be undertaking a review of 12b-1 fees to determine if they are appropriate.
In my Fiduciary Corner column that appeared in Investment News this week, I expressed the view that 12b-1 fee plans should be eliminated in favor of more straight forward disclosure of fees in a few key categories. These fees are confusing to investors, they create conflicts for advisors and fund company directors, and they complicate the comparison and control of costs across funds. In short, they are “contrary to the public interest and the protection of investors.”
The most compelling reason to keep 12b-1 fees is that they are pervasive and change isn’t easy. Roughly 70% of mutual funds have adopted 12b-1 fee plans and investors pay these funds about estimated $13 billion annually from 12b-1 fees.
Elimination of 12b-1 fee plans won’t automatically save investors billions in costs and wipe-out a comparable amount of annual fund company revenue. The point is, funds should show their costs in a few cost categories (such as investment management, administration, and sales compensation) so investors, and fiduciaries serving investors, can more clearly... Read full post
Posted on: January 21, 2010
By: Blaine Aikin
Thus far in our look at the different types of investment fiduciaries, we have been primarily concerned with those fiduciaries who manage investment decisions for investors. Now we will take a look at those who manage money or make investment decisions, the investment managers. And, yes, they too owe a duty to the end investor.
We define investment managers as "those responsible for buying and selling individual securities for an investment portfolio." This would include money managers who are responsible for separate accounts, mutual and exchange-traded funds, commingled trusts and unit trusts. Their defining characteristic is they are prudent experts who have investment discretion of assets. And, of course, anyone who is able to act with discretion is clearly a fiduciary.
It is not technically required to use managers for making individual stock and bond selections to implement the investment strategy. However, it would be foolish not to. The stewards and advisors who manage the investment process are held to a "prudent expert" standard if under ERISA or a "prudent investor" standard if under UPIA or UPMIFA, basically meaning they would be expected to implement the strategy with the same competence as a professional money manager. If they are unable to meet that standard, then they become the managers of the managers, if you will, and are instead charged with the prudent selection and monitoring of professionals who can.
The fiduciary practices for investment managers are mostly qualitative and may not be as apparent nor as standardized as is the case with other fiduciaries. So instead of trying to make a qualitative-based selection of a manger, it is better to look at quantitative due diligence screens that reflect adherence to fiduciary standards. The... Read full post
Posted on: January 20, 2010
By: Bennett Aikin
Last Monday, the Financial Planning Coalition, Consumer Federation of America, North American Securities
Administrators Association, Fund Democracy, and Investment Adviser
Association wrote a letter in support of the Senate Banking Committee's regulatory reform bill, which would hold anyone who gives advice to a fiduciary standard by closing loopholes to the Investment Advisers Act.
Along with their role in the letter of support, the Consumer Federation of America also released a must read myth-fact sheet on the reform bill, addressing misconceptions that a fiduciary standard would end the brokerage business model, would limit product availability, and more. It is a great look at how the bill is designed to ensure advice is given under a fiduciary standard.
Also last week, both the CEO of Goldman Sachs, Lloyd Blankfein, and SEC Chairman Mary Schapiro threw their support behind the fiduciary standard in testimony to the Financial Crisis Inquiry Committe, with Blankfein saying, "The advice-giving functions of brokers who work with investors have
become similar to that of investment advisors. But, investors may not
understand that the person they are getting advice from may be
regulated under different rules and regulations"
Now on to the rest of the best links from the last week.
In the news/commentary:
Posted on: January 17, 2010
By: Bennett Aikin
All content in the From the Fiduciary blog was created by third-party author who is solely responsible for the content contained therein. Posts in the From the FI360 blog do not necessarily reflect the opinion or approval of InvestmentNews.
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