The Department of Labor's New Fiduciary Rule

The Department of Labor revealed its long-awaited new fiduciary rule for investment advisors Wednesday morning.

The rule is designed to guarantee that investment advisors are putting their clients’ interest  first in regards to both fees and investment choices – that is to say that they are acting in a fiduciary capacity. Liz Davidson, the author of What Your Financial Advisor Isn’t Telling You, gives some insight into the details of this new rule in an interview with USA Today.

What does the rule mean?

Liz Davidson: Under the Department of Labor’s fiduciary rule, financial advisers providing investment advice for retirement accounts (including employer-sponsored retirement accounts, Individual Retirement Accounts and even many Health Savings Accounts) will now be subject to a fiduciary standard, which requires them to put the client’s interest first.

A fiduciary standard…requires the adviser and the company to act with the care, skill, prudence and diligence that a prudent person would exercise based on the current circumstances.  Both the firm and the adviser must avoid misleading statements about fees and avoid conflicts of interest.  This is great news for consumers. The end result is that the new rule will now align the interests of both the investor and the adviser and put them on equal footing when it comes to all the information they both need to make the best decisions.

How do I know if my investment adviser is a fiduciary?

LD: Ask to see a fiduciary agreement in writing.  If your adviser is compensated even partly from commissions from investments they sell you, they’re probably not acting as a fiduciary.  The DOL offers this guide for consumers on how to tell if your adviser is a fiduciary.  Some examples of personal financial advisers that are already acting as a fiduciary whose status can be verified online are Registered Investment Advisors (RIA) and “Fee-Only” professionals who are members of NAPFA (the National Association of Personal Financial Advisors).  Some retirement plan advisers who offer employee benefits already act as fiduciaries, as do CFP professionals when offering financial planning advice.  However, many CFPs work for brokerage firms who follow the looser “suitability” standard when it comes to investment advice.

What will be the effect on fees?

LD: The expectation is that advisers required to act as fiduciaries will recommend lower-fee investments to their clients. The DOL has estimated that this will save investors up to $40 billion in fees over the next 10 years.  The practical implication of the fiduciary standard is that when choosing between two otherwise very similar investments, a fiduciary would choose the one with the lower costs. This is very helpful as the structure of much of the financial services industry is full of inherent conflicts of interest that don’t always favor consumers.

How will it affect the average investor?

LD: The fiduciary rule will have a positive effect on the average investor because it now places that investor and the adviser on the same side of the table.  Investors should see their costs go down over time and their trust in advisers go up as they experience more transparency in fee and compensation disclosure, and know that the adviser is held to a recognized legal standard to uphold the investor’s interest over their own.  Investors who don’t meet the minimum account standards for traditional advisers still have many great, low-cost options. Those investors may want to consider working with a financial adviser that charges a flat hourly, monthly, or annual fee instead of an asset-based fee... Investors who have unbiased financial wellness programs as an employee benefit can also get free financial education and guidance to help them make their own investment decisions.

If you have any further questions about the Department of Labor's new rule, don't hesitate to contact us.

**This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. Prepared by Broadridge Communication Solutions Inc. Copyright 2015

Have a Long Term goal? Financial Planning can Help You get you there

After several years of wallowing in financial upheaval caused by a severe recession and financial crisis, Americans are, once again, looking to the future.

 A renewed confidence has many people setting their sights on long term goals that, just a few years ago, may have seemed out of reach. However, as too many people have painfully learned, simply having a long-term goal, whether it’s an early retirement or a college education for your children, is not enough to realize your ambition.

A financial goal is a life destination which requires a map and a way to get there; and, assuming you have finite resources with which to successfully make the trek, they need to be used wisely or you are likely to come up short. If you have a long term goal, financial planning can help you get there.

What exactly is

Financial Planning

All of us have certain things in life we want to accomplish and many of them require financial resources. These are called financial goals. Living a secure and enjoyable retirement is a goal shared by most people. In addition to that, parents want to be able to provide a college education for their children, buy a bigger house, or expand their business, and while working towards all of those, they want to ensure the financial security of their loved ones. These all become intricately linked pieces of your financial puzzle.

A financial plan is about carefully forging those pieces and fitting them in their proper place so that they work effectively together towards your vision. If a piece is missing or doesn’t fit quite right, it could skew all of the other pieces. As you become financially successful, more pieces are needed to complete the financial puzzle, such as risk management, tax strategies, and estate planning. Because of their impact on the total financial puzzle, it is critical to have a well-conceived, integrated plan.

The financial planning process enables you to focus clearly on your specific goals while addressing all of your concerns so they are no longer obstacles. And, having a well-conceived, comprehensive financial plan enables you to shutout the constant drone of doom and gloom, because, in the long-term, your plan is all that matters. 

Steps in the Financial Planning Process

The financial planning process involves four essential steps that, if followed diligently, will increase the likelihood of achieving your long-term goals; however it does require discipline, patience and adherence to basic financial principles.

Establish Clearly Defined Goals

Very rarely does anything of financial importance happen accidently. In reality, absent a clearly defined, quantifiable goal that’s set along a realistic time horizon, chances are it won’t happen. Your goals need to be both realistic and inspiring enough to motivate you to action. It’s not enough to know what it is you want to achieve, you need to have a deep sense of why it’s important, and how it would make you feel when it’s achieved.  To set a realistic goal, envision it, quantify it (what you need to save), and make sure you have the resources to fund it.

Assess Your Current Financial Situation

Financial planning is a continuous process of assessing where you are currently in relation to your goals. This enables you to make the adjustments in your strategies necessary to keep you on track. Your financial picture is comprised of a balance sheet (assets and liabilities) and a cash flow statement (budget and savings). Your objective is to constantly improve your financial picture – reduce debt, increase cash flow/savings, grow your assets - which could enable you to achieve your goal early, or enable you to target additional goals.

Create an Actionable Plan

A financial plan is typically comprised of several strategies, each designed to address a different piece of your financial puzzle. Developing a systematic savings and investment strategy for accumulating the funds needed for your goal is obviously a key part of your financial plan.  But, life happens, and your financial plan should also include strategies for dealing with life’s contingencies, such as an accident or illness, or even a premature death in the family that could derail the plan.

Priorities have to be established in order to shore up all aspects of the plan. Before allocating all of your resources towards your financial goal you need to create an emergency fund to cover at least six months of living expenses, and an insurance plan to protect your finances in the case of a disability or death of a family member. Each priority should have an actionable plan to achieve it.

Monitor and Measure Your Plan

The biggest mistake many people make is to create a financial plan and then put it on the shelf. A financial plan is a living, working document that needs to reflect your current circumstances as well as the impact of a changing environment. It becomes a benchmark against which your progress to your goals is measured.

As your personal circumstances change and evolve, your plan needs to be updated, and, very likely, strategies will need to be updated or added (i.e. increases in insurance amounts, a change in your asset allocation, a new tax reduction strategy). The more frequently you assess your situation and measure your progress, the more minor any adjustments to your strategies will be.

Seek Professional Guidance

Although financial planning is not rocket science – there are plenty of resources available to develop your own – it can become more daunting than the average person is able or willing to tolerate. The body of knowledge required to navigate multiple disciplines (i.e., investments, insurance, taxes, retirement planning, estate planning, etc) is beyond the capacity of most people. In addition, most people lack the discipline and patience to strictly adhere to a plan, especially when their emotions get the upper hand.

A competent financial advisor can more efficiently guide you through the process of planning your future, designing your strategies and navigating the complex universe of investments and financial products. Of equal importance, he or she can also be your financial coach, holding you accountable to your plan while coaching you through your emotions and encouraging you to the finish line.  

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

What do the Apple Watch and TIAA-CREF have in common? If you’re a TIAA-CREF client, you need to know.

Friday, April 24th was a big day for two behemoth companies.

One, the dominant world leader in personal computers and mobile devices and the largest publicly traded corporation in the world by market capitalization. The other, one of the world’s largest financial services organizations, serving the academic, research, medical and cultural fields.

On April 24th, Apple began shipments of the long awaited Apple Watch. Apple Watch is a smartwatch that integrates with the iOS operating system and the iPhone, proprietary to Apple. Early estimates have the initial orders already in excess 1.7M units with an average price over $700 per watch. This has been national and international news, hitting every major news outlet.

Friday, April 24th, was also the day that College Retirement Equities Fund (“CREF”), the companion organization of Teachers Insurance and Annuity Association of America (“TIAA”), rolled out new multi-share class versions of their eight investment portfolios. Like the Apple Watch, CREF funds are only available to clients on TIAA’s proprietary platform. The CREF portfolios are actually not mutual funds, but sub accounts within a variable annuity contract. Not only was this not considered newsworthy on a national basis, I struggle to find any mention of it other than the obligatory shareholder notice filings,FAQ notices, and employer flyers (image below)on their own website.

The new class designation is based on an institution’s total assets in CREF Accounts across all plans. Smaller plans, with total CREF assets (not TIAA-CREF plan assets, just assets in CREF funds) less than $20M, will bear the brunt of the expense change. Assignment to the new CREF classes will be determined as follows:

Total CREF Assets

  • Less than $20 million
  • $20 million up to $400 million
  • $400 million or more

CREF Class

  • R1
  • R2
  • R3

The table below reflects the current and new the expense ratio for the three new share classes,R1-R3:

Individual clients with IRA or Keogh accounts are now in the RI share class, the highest share class. Annuitants, receiving annuity income payment will default to the least expensive share class, R3.

Why is TIAA’s news significant? Fund companies modify their expense ratios all the time? This time it’s different. As of December 31, 2013, CREF’s net assets were approximately $227 billion. The average participant in a retirement plan that has less than $20M in CREF assets are now paying 50-60% more for the same CREF funds they owned before April 24th. TIAA, as the administrator of these “smaller” plans, has also increased what they receive internally by 45%. Within the expense ratio of the fund is a plan services expense, also referred to in the industry as "revenue share". From TIAA’s site, “The plan services expense, also known as the recordkeeping offset, is the portion of the expense ratio paid to TIAA that is used to offset the cost of recordkeeping and other administrative services.” The plan services expense is changing from a current .24% to .35% for the R1 funds. Thisis a component of the administrative expenses, not an additional amount.

Many of TIAA’s clients are retirement plans that are exempt from ERISA (Employee Retirement Income Security Act) since many plans, such as church plans and many retirement accounts in the grades K-12 education market, are not subject to ERISA. All 401k plan’s and most 403b’s plans, found in the non-profit, private school and higher education’s markets are subject to ERISA. ERISA’s standard of care for a plan fiduciary, as it relates to the cost of administering a retirement plan, is a test of “reasonableness.” Under ERISA’s prohibited transaction rules, the responsible plan fiduciary is prohibited from permitting a plan to enter into an arrangement with a service provider unless the arrangement is “reasonable”. The marketplace usually determines what the “reasonable” cost of delivering administrative services for a retirement plan, not the revenue sharing that may or may not exist within the funds offered in a plan. It is also unusual that a vendor providing recordkeeping services mandate what the revenue requirements are for all plans based solely on asset size in a proprietary fund offering?

The new class structure will affect only the Administrative & Distribution expenses, which will result in a different overall expense ratio for each class. The new CREF classes will impact CREF assets held in retirement plans at current and previous employers, as well as any individual plans/products employees may have. To TIAA’s credit, they have historically delivered lower cost investment options than comparable annuities and mutual funds. Cost is one of several criteria when selecting appropriate funds. Bottom line, get educated to how this may affect you or your plan.

So April 24th may have come and gone, and your Apple Watch is likelystill be on backorder. If you have a TIAA-CREF account, or you are an employer offering TIAA-CREF to your employees, especially if your plan has less than $20M in CREF assets, maybe you can use your new Apple Watch to see what these changes are costing you?

Kent Fitzpatrick, Accredited Investment Fiduciary Analyst(AIFA), Accredited Retirement Plan Consultant(ARPC) and Global Financial Steward (GFS) is the Managing Director of Asset Strategy Advisors, LLC, a Registered Investment Advisory firm. He can be contacted at,@assetstrategy,or 781-235-4426.

Fee Benchmarking

Scire est mensurare

A retirement plan fiduciary must act to defray “reasonable expenses of administering the plan”. In addition they may contract a party in interest for services “if no more than reasonable compensation is paid therefor”. (Title 29 §1104(a)(1)(A)(ii))

These duties have been law since the enactment of ERISA in 1974. Due to both the lack of clarity on the definition of “reasonable” and the difficulty in obtaining appropriate information, most plan fiduciaries have swept this responsibility under the rug. The good news is that beginning April 1, 2011, all parties receiving compensation from retirement plan assets must report that compensation to the applicable plan fiduciary.

The bad news…the plan fiduciary must act on that information or suffer dire consequences.

Hence the latin phrase: Scire est mensurare or in English “To know is to measure”

In order to determine what is reasonable, there must be a reference point from which to compare. Some suggest that a formal Request for Proposal (RFP) be initiated. Although this can be useful for comparison purposes, it also has some drawbacks:

  • The process is time consuming and expensive
  • If an existing adviser leads the process, the results may be skewed
  • The word gets out causing an inundation of solicitations

A better solution may be plan benchmarking of current fees and services against plans of similar size and demographics. If benchmarking is determined to be the best solution, make sure the report is prepared with the following:

  • A separation where possible of all components of plan administration including, recordkeeping, custody, compliance, revenue sharing, adviser compensation, broker/dealer overrides , trading costs and proprietary product profit margins.
  • A knowledgeable retirement plan specialist involved in the data collection and input process to uncover hidden costs
  • A conflict of interest free process by insisting that the collector of information is prohibited from soliciting business that is being benchmarked.

Asset Strategy Consultants provides a complete benchmarking report that can include the following measures:

  • Plan Fees
  • Investment Expenses
  • Adviser Expenses
  • Plan Design features
  • Participant retirement success measurements