Bond shop may have to drop clients due to DOL rule

'One-size-fits-all does not benefit investors'

Apr 1, 2016 @ 1:16 pm

By Jeff Benjamin

With the Labor Department expected to release the final version of the new fiduciary rule next week, some investors are already being put on notice that they may have to go elsewhere for their financial service needs.

Ronald Bernardi, president and chief executive of fixed-income broker-dealer Bernardi Securities, said the rule changes will likely result in dramatically higher fees for many of his smaller clients.

“Different investors want different options, and the rule as it was originally proposed, will limit the options,” he said.

Of the more than $1 billion worth of bond portfolios managed by Bernardi Securities, about $60 million is represented by smaller retirement accounts, which are currently paying what amounts to a commission for the management of multi-year bond ladders.

A bond ladder is a generally static portfolio made up of bonds maturing on staggered intervals, and are typically used to generate predictable income. Because the bonds are held to maturity, the only transaction costs occur when a bond matures and is replaced with a new one.

But under the proposed guidelines of the fiduciary rule, those kinds of transaction fees for maintaining the bond-ladder portfolio inside a qualified retirement account would be prohibitive.

This leaves Mr. Bernardi, and many of his clients in qualified accounts, with limited options.

The simple solution could be to transfer those retirement accounts to Bernardi Asset Management, the RIA subsidiary of Bernardi Securities, where clients would be charged an asset-based fee. But, as Mr. Bernardi has already explained to his clients, it will be a lot more expensive.

The other option would be severing the relationship with those clients, but that creates an awkward situation because many of those smaller accounts represent children and relatives of larger clients.

As Mr. Bernardi breaks it down, the difference in fee structures between what clients are paying through the broker-dealer and what they would be paying at the RIA is significant.

Consider, for example, a client setting up a bond-ladder portfolio through the broker-dealer with a $500,000 initial investment.

Mr. Bernardi estimates the initial “mark-up” cost to set up a basic 10- or 20-year bond ladder would be between $2,500 and $5,000.

After that, the annual fees for replacing maturing bond-ladder rungs would be around $250 for the life of the ladder.

But if that same $500,000 was used to build an identical bond ladder on the RIA side, which would meet the requirements of the fiduciary rule, the 25-basis-point asset-based fee would be at least $1,250 annually.

“The small investors will be hurt, and there are certain accounts on the broker-dealer side that we will not be able to serve,” Mr. Bernardi said. “Our broker-dealer is not a fiduciary, but we're transparent about our fees and we're giving investors a choice. The new rule is removing that choice for investors. One-size-fits-all does not benefit investors.”

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