Obama DOL finalizes new ‘Fiduciary Rule.’ Consumers to suffer

Obama DOL finalizes new ‘Fiduciary Rule.’ Consumers to suffer

Another unneeded rule will add cost and complexity for financial advisors, and cost will be passed on to consumers. Plus a note on GTC trailing stop orders.

Institutional trader in action. (Public domain image via Wikipedia entry on investing)

WASHINGTON, June 7, 2016 – As of the noon hour Tuesday, we’re in the midst of another one of 2016’s Nothingburger markets. Stocks thus far are generally up modestly, following yesterday’s positive trend, which, in turn, was largely based on Janet Yellen’s seemingly positive remarks about holding back on the Fed’s next interest rate increase. That long-feared event seems to be morphing into the monetary edition of “Waiting for Godot.”

In the meantime, we learn that the Obama administration’s Department of Labor (DOL) has casually added yet another burden to already overburdened American consumer/taxpayers by finalizing its vaunted new “Fiduciary Rule.” The new rule is yet another unwanted regulatory deadweight that will allegedly protect investors—particularly those preparing for retirement—from the predations of evil financial advisers, all of whom, apparently, are out to gouge their hapless customers.

While we have little doubt that a certain percentage of these advisers do precisely that, most of them perform an important and valuable service for those with funds to invest or 401(k) proceeds to roll over into IRAs. The best of these advisers have customarily charged fees for their services, usually based on a small percentage of each customer’s account, valued annually.

In self-directed accounts, like self-directed IRAs, as well as regular accounts the adviser manages, trades are generally executed via a regular or discount brokerage house, which, of course, charges commissions in and out. Alternatively, advisers can place funds in a basket of mutual funds, which may or may not charge a commission.

So, aside from inadvisably dumping your funds into a regular bank account, which today pays virtually zero interest, one is generally paying at least commissions and, if using an advisory, a fee as well.

The rule effectively abolishes commission-only financial “advising,” which is probably not a bad thing, as broker-advisers working on commission are incentivized to trade, which is not always the best investment strategy when it comes to retirement accounts, for example. But the new rule first effectively removes this choice. (After all, the customer can establish some good conservative positions and just hold them, incurring zero commissions after that point.)

Second… well, second is a little harder to describe, although CNBC does a pretty decent job via commentary by Douglas Holtz-Eakin, president of the American Action Forum. Notes Holtz-Eakin:

Most, 86.2 percent, of the $7.3 trillion in retirement assets is in commission-based accounts. That means that instead of paying high fees directly to the adviser for his or her advice, the adviser is taking a smaller fee that is a portion of the gains in the account. When DOL’s fiduciary rule is enacted, each of those accounts – totaling $6.3 trillion – will be moved to a fee-based account. Even with a fee of just 1.2 percent that’s $75.6 billion in duplicative fees on American retirement accounts, or about $1,500 per household. This cost is an unneeded tax on people saving for retirement who should not be forced into fee-based accounts that they don’t want.

As it turns out, these may be the lucky ‘winners.’ A majority (51 percent) of retirement accounts have balances less than $25,000, and, for small funds, it will simply make no sense to pay the fees. These retirement savers will be cut off entirely from retirement saving advice.

In other words, many investment accounts will end up, effectively, with extra fees now being imposed on their accounts. This in itself may force a great deal of switching to other financial advisers or firms simply to dodge the negative effects of the rule and save the unnecessary costs.

This is another example of the way this continually vindictive administration cuts taxpayers’ noses off to spite their faces, “protecting” consumers by taking even more of their investment money away from them in the form of mandatory fees while, at the same time, subjecting the class of investment advisers to the kind of malpractice suit action under which doctors have long labored. The Obama administration probably figures, as it did once before, that “if you like your financial adviser, you can keep him.” But maybe now you can’t afford to.

The Maven finessed this issue years ago by rolling over all his 401(k)s into self-directed IRAs held at a discount brokerage house (Schwab) that doesn’t charge a fee for any of these accounts. The Maven’s fairly regular trading activities do indeed incur commission charges, though not at full service rates. But the Maven also has the singular advantage of getting advice from the best investment adviser in the universe: himself. And it’s free!

One way to avoid (or evade) this new Fiduciary Rule nonsense is to fire up a self-directed IRA—funded from the rollover of your 401(k)—at a discount house like Schwab or Fidelity and use one of their free or nearly-free robo-adviser services. These algorithmically based robo-advisers are generally programmed to use generally commission-free ETFs, rebalanced quarterly, to follow the indexes, which, in the post-2007-2010 marketplace will tend to give investors a reasonable rate of return at minimum cost. That’s because so many people, machines and robots ride index funds now that stock-picking for fun and profit often can’t beat the averages. (So why bother?)

What’s not clear to the Maven, however, is this: will the new Fiduciary Rule require the currently fee-free robo-advisers at given firms to charge a fee? In other words, will the only change here be that you’ll pay fees not to a human being but to a robot? There’s an existential investment concept to ponder for the balance of 2016.

Meanwhile, in case you were wondering, there are now only 227 more days of this administration’s predations to endure.

Trading diary

We are, frankly, at loose ends here. We’re down to about 25 percent cash in our portfolios and don’t much feel like spending the rest of it in a market environment that can (and does) turn on a dime.

If the current modest rally continues for another day or two, getting most of our positions into clear profit territory, we’re inclined to stand pat and start placing good-‘til-canceled (GTC) trailing stops underneath the majority of our more volatile positions. (More on this in a moment.)

The reason is simple. This June rally has been kind of nice thus far. We’ve actually begun to exceed the losses we took at the beginning of the year during the January and February market trashing. But since it took a considerable amount of effort to recalibrate and straighten this mess out, we don’t want to let the HFTs take gains away from us a second time in six months; plus, July and August can be very treacherous and negative months historically.

This mid-to-late summer volatility tradition is what has us a bit worried, particularly now that we fully expect a pair of very nasty riots to occur this July during both the Republican National Convention in Cleveland and the Democratic National Convention in Philadelphia. The Commies in this country—and that’s still who they are, so no snarking, please—seem to be in a nostalgic mood and are spoiling to re-create the fun they caused for the Democrats in Chicago back in 1968… except that this time, they want to screw both parties.

In actuality, since neither party actually represents real Americans any more, that’s a politically sound emotional reaction. But that said, the elements that will be inspiring and/or causing the expected violence clearly favor someone like Putin, Maduro or Raul Castro for president, and that’s what will make this nasty.

Everything today is, alas, political. So, we reason, this almost certain twin howitzer of violence and destruction will have a nasty effect on summer trading during July and August, which, as we’ve already noted, tend to end up on the nasty side anyway. As investors, we absolutely fear this, so taking precautions now will, at the very least, make us feel better about our money if this violence comes to pass. And if the violence doesn’t happen… we won’t have lost a dime anyway. That’s why we plan to start adding trailing stops to positions we’re already comfortably ahead in.

Since we’re getting a little long here, we’ll spell out this quite elementary but conservative strategy in a separate article we’ll post later today or this evening. Stay tuned. And be careful out there in the meantime.

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Terry Ponick
Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17