On Advice

Plenty of advisers eager to scoop up 'orphaned' accounts

A central argument against the DOL fiduciary rule is that investors with smaller accounts will be abandoned. But many advisers stand ready to serve them.

Aug 17, 2017 @ 1:05 pm

By Bruce Kelly

The financial services industry would like to kill the Department of Labor's fiduciary standard. It's expensive to put into place, and the industry's grave fear is that it leaves brokers open to substantial legal risk.

As part of its effort to shut down the fiduciary standard, the industry is making dire warnings about tens of thousands of so-called "orphaned accounts" resulting from the DOL's new rule. Accounts without a home will be a catastrophe, the industry warns.

"The number of accounts that have been orphaned (i.e., accounts no longer serviced by an adviser, leaving investors on their own) has increased significantly due to the rule," according to the Insured Retirement Institute, a trade association that represents insurance companies, asset managers, broker-dealers and 150,000 financial professionals. "In a July 2017 survey of IRI members, a number of IRI distributor members reported that approximately 155,000 of their clients have already been orphaned, with far more accounts expected to be impacted as implementation of the rule proceeds."

Soon, the country will be filled with sad little brokerage accounts, desperate for a home, bereft of financial advice and lost in the shadows, according to the industry's story line. This prediction makes me think of a doe-eyed Oliver Twist looking up to a row of stern Wall Street brokers, clutching a financial plan to his chest and begging, "Please, sir, I want some more ... financial advice?"

Wall Street banks, the wirehouses, have been cutting service to smaller accounts for years to reduce costs. Where was the financial advice industry's outrage then?

And the thing is, plenty of advisers will work with those small accounts.

Young reps and advisers starting out in the business would be desperate to pick up these orphans and provide them a home. And a robo-adviser like Betterment would be a logical place to park a small orphan of $5,000 to $10,000.

To my knowledge, there has been no hue and cry from the public that supports the financial advice industry's position.

After InvestmentNews published an article earlier this month with the headline "Financial trade groups to DOL: Advisers dumping small accounts," I was immediately contacted by two advisers eager to begin working with the orphans.

"Great read on the 'orphaned' investment accounts," one broker wrote in an email. "I think someone like me could help them find a home here at E*TRADE. I would appreciate anyone you could suggest I talk to, including folks at the Insured Retirement Institute."

Another adviser chimed in, writing in an email: "Amazing article. This lovely industry of mine is so full of sh#$. Any idea how we get the names of these 'tens of thousands' of accounts? My firm will take them all, charge them less than what they were previously being charged, do what is in their best interest, diversify them and still be profitable."

That adviser, John Nowicki, later wrote me that he reached out to the IRI but was only frustrated with the organization's response.

"The advisers are not fiduciaries," Mr. Nowicki told me in a conversation last week. "All the people the IRI polled are brokers and insurance companies.

"When I asked the IRI how do we get the list of the people, because we want to call them all, I was told there was no list of people," said Mr. Nowicki, whose firm, LCM Capital Management, oversees roughly $250 million in client assets.

(More: The latest news and resources on the DOL fiduciary rule)

"Those brokers will lose accounts because they will have to disclose fees and conflicts and clients won't be able to stomach all this stuff, like the fees for an annuity that takes 15 years to break even," he said. "LCM stands for low cost management. Our whole mantra is that people are grossly overcharged to have their money managed."

A spokesman for the IRI, John Jennings, said the survey was confidential and asked participants how many accounts had been orphaned due to changes their firm made as a result of the DOL fiduciary rule. "There was no reason to ask for names," he said. "People need advisers — that's one thing our research has shown time and time again."

Julia Carlson, an adviser who is finding a home for orphaned accounts, said the wirehouses have been cutting loose clients with less than $100,000 in assets and she has brought in five such new accounts in the past month.

"I've been running around saying, you don't waste a crisis," Ms. Carlson said. "The DOL rule is change and you want to look at the opportunity it creates. It's a chance to help people the bigger firms are not interested in helping."


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