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Can Advise(o)rs Disclose Away Their Fiduciary Obligations?

Disclosure and its role in the advisory relationship became a major focus of panelists at a recent New York Society of Security Analysts/CFA Institute forum on “Wall Street’s Excesses: Bad Behavior and Over-Regulation.”  The topic surfaced in the first panel on enforcement, when the question was raised, “Can an advisor ‘disclose away’ her or his fiduciary obligations simply by surfacing all conflicts and fees?”

Blaine Aikin, chief executive officer of fi360 and a CFP board member, took up the question on our panel on the fiduciary standard: “The answer to the question can you disclose away a fiduciary obligation is that the devil is in the ‘can you?’  You could probably escape punishment, but is it acceptable under the fiduciary standard to ‘disclose away’ a fiduciary duty.  The answer is clearly ‘no.’”

“Disclosure is not a substitute for fulfillment of the duties of loyalty and care.  We have gaping holes in the way that the law is enforced today. [That’s why upholding professional standards] becomes a critical function for organizations like the CFA Institute and the CFB Board.”

“With the CFP Board, you have a disciplinary process that brings [certificate holders] before professionals in the field. If you have people who are well informed in terms of the obligations that are involved – which you do in the disciplinary process of the CFP board – then you apply those standards in a way that understands that you can’t ‘disclose away’ professional liability.”

For my part, I noted studies by such leading academics as Prof. Daylian Cain at Yale School of Management, which indicate that disclosures can have a perverse effect.

According to Prof. Cain’s research, when an advise/or makes a disclosure to an investor – even a well-meaning advise/or – the investor feels more confident that the advise/or is being forthright and is thus less likely to question that advice.  Moreover, the advise/or is more likely to give more aggressive advice that may tilt more to the advisor’s interests than those of the investor.

Bottom line: Disclosure and transparency are important but certainly no substitute for holding all advise/ors – registered reps, insurance agents and RIAs – to a strong fiduciary standard of care.

Kate McBride, AIFA®, founder of FiduciaryPath, LLC is an Accredited Investment Fiduciary Analyst®; a CEFEX analyst with the Centre for Fiduciary Excellence, auditing fiduciary firms’ investment fiduciary practices for certification; and a consultant on fiduciary matters. Ms. McBride serves as chair of The Committee for the Fiduciary Standardkmcbride@fiduciarypath.com.

About Face: AOL’s 401(k) Match Mistake

Tim Armstrong’s recent decision to defer AOL’s 401(k) employer match contributions until year-end was alarming enough. Blaming that change on the expense of healthcare costs to treat employees’ seriously ill babies demonstrated stunning lapses in judgment and serious flaws in leadership. One wonders who is advising AOL’s CEO and what led to these blunders.

The good news is that public outcry apparently led AOL to reverse its decision to defer match contributions until year-end. AOL’s company match contributions will be made as they had been, at each payroll.  Here we visit the 401(k) match deferral and the problems caused by a downgrade of benefits – for that’s what deferring the match would be.  

Research shows that the way companies structure their 401(k) plans makes a material difference in employee savings rates, and can enhance or detract from retirement participant outcomes. The goal, of course, is having enough money to retire.

Employers can influence employees to save more for retirement by optimizing how they match employee contributions; using automatic enrollment and escalation of savings rates over time; and ensuring that fees paid by the plan and its participants are reasonable, according to research from National Bureau of Economic Research, Harvard, AON Hewitt, Employee Benefit Research Institute, the Society for Human Resource Management and the Department of Labor. 

Sponsoring a 401(k) plan and the company match for a 401(k) plan is voluntary. For many companies a defined contribution 401(k) plan is also a way to relieve the company of the pension liability burden they held when defined benefit pension plans were the norm, and guaranteed an income for life for retired employees. At that time, ERISA 401(k) plans were a supplemental savings vehicle, for employees who wanted to save more for retirement.  Now, defined contribution 401(k) plans are the primary retirement savings vehicle.  As such, they shift retirement risk away from the company, to the employee. 

AOL’s effort to change to its employee matching contribution to year-end is a way to slash benefits that would rob employees of important retirement savings advantages: the compounding effect of the match being contributed regularly throughout the year, the advantage of dollar-cost-averaging, and the beneficial behavioral effects of the periodic company match boosting employee contributions.  There’s also the issue of whether the match would be paid at all if an employee left before year-end.

Most companies, “about 71%, match each payroll,” while about 12% “match monthly or quarterly,” according to San Francisco Chronicle columnist Kathleen Pender, in an article entitled “401(k) match at year-end can undermine benefit.

Pender mentions that though only 17% of firms match only at year-end, “Charles Schwab – one of the top 401(k) plan administrators - Morgan Stanley, JPMorgan Chase and Deutsche Bank all have this policy.” 

AOL’s decision to reinstate the match with every paycheck is in the best interest of AOL employees who participate in the 401(k).  It is a better choice.  We hope the dialogue will inspire other companies to step up to the every-payroll company match and look at the research that indicates what other steps companies can take to help employees maximize their retirement savings. — Kathleen M. McBride

For more, please see the research and resources below:

National Bureau of Economic Research –  EMPLOYER MATCHING AND 401(K) SAVING: EVIDENCE FROM THE HEALTH AND RETIREMENT STUDY – Gary V. Engelhardt, Anil Kumar  http://www.nber.org/papers/w12447.pdf 

Harvard University – Saving For Retirement on the Path of Least Resistance — James J. Choi, Harvard University; David Laibson, Harvard University and NBER; Brigitte C. Madrian, University of Chicago and NBER; Andrew Metrick, University of Pennsylvania and NBER  http://www.nber.org/programs/ag/rrc/04-08LaibsonFinal.pdf 

AON Hewitt – 2013 Trends & Experience in Defined Contribution Plans – An Evolving Retirement Landscape  http://www.aon.com/attachments/human-capital-consulting/2013_report_Trends-Experience-DC-Plans_Highlights.pdf

Department of Labor – A look at 401(k) Plan Fees  http://www.dol.gov/ebsa/publications/401k_employee.html 

Employee Benefit Research Institute  http://www.ebri.org/research/retirement-research-centers/

Society for Human Resource Management  http://www.shrm.org/hrdisciplines/benefits/articles/pages/match-thresholds.aspx

Fiduciary Weekend Round Up 1.25.14

Fiduciary Weekend Round Up

Does SIFMA Seek to Protect Model Where Client Serves the Broker, Not Fiduciary Model Where Broker Protects the Client?

Fiduciary News’s exclusive interview with Kate McBride, by Chris Carosa



Wall Street’s Whipping Boy and a World Without a Fiduciary Standard

Fiduciary News’s Fiduciary Crystal Ball 2014 – with Fiduciary Ron Rhoades and more



Worth Reading: “Keynes’s Way to Wealth” by John Wasik

Many think of John Maynard Keynes as the father of macroeconomics. What may surprise is Keynes’s success as in investor for himself, family and friends, and institutions.



Nobel Laureate Robert Shiller talks with Kate McBride –Podcast Replay

Interviewed amidst the economic crisis, Prof. Shiller discusses Keynes’s “Animal Spirits” and more. His words and forecast hold up, with much still playing out.



Brokers as Fiduciaries?

This white paper by Andrew Clipper raises interesting challenges for fiduciaries and those who want to be.


Worthwhile Reading: “Keynes’s Way to Wealth”

Many think of John Maynard Keynes as the father of macroeconomics. What may surprise, is Keynes’s success as in investor for himself, family and friends, and institutions.

A new book by journalist and author John F. Wasik, Keynes’s Way to Wealth, Timeless Investment Lessons from the Great Economist, describes the events that led to Keynes the investor.

Keynes’s economic and investment theories have influenced many well-known economists and investors, including: Warren Buffett, George Soros, Yale’s David Swensen, Benjamin Graham, Jeremy Grantham; winner of the 2013 Nobel Prize in Economics Robert Shiller, and Jack Bogle, Founder and former Chair of Vanguard – who penned the book’s forward.

The book is a romp, describing the evolution of Keynes’s work and theories of investing, all playing out in the laboratory of the markets after World War I until his death in 1946.  Keynes “loved to gamble, speculate, try out theories and probabilities in the market,” Wasik told the crowd at a lecture about the book recently. Keynes was a proponent of “open, transparent, regulated markets.” Through decades of investment trial and error, Keynes arrived at theories similar to the theories of Graham & Dodd, valuing companies as enterprises, looking for value. Keynes coined the phrase “Animal Spirits” describing behavior in economics and investing.

Keynes worked hard, but he was definitely not all work and no play — Keynes believed, Wasik said, that “the object of investing is to ensure prosperity, not to become obsessed with making money.” An art collector, Keynes loved music and books, and he was a member of the Bloomsbury Group. Near the end of his life, asked if he had any regrets, Keynes is said to have wished he had enjoyed life more, and drunk more Champagne!

Worthwhile reading. – Kate McBride, 1/23/14

The $14 Trillion Question: Why Aren’t There More Bidding Wars for Service Providers to 401(k) Plans?

 By Kathleen M. McBride, Sept 5, 2013

This may be the questions more employers who sponsor 401(k) pension plans ask in the coming months after some 6,000 of them received letters advising them that the plans they sponsor appear to have higher-than-average costs. Higher costs can drag down the amount of savings that is left for the investor after fees are paid.

Over a lifetime of retirement savings, higher costs can deduct hundreds of thousands of dollars from the investor and put them in the pocket of individuals and firms that provide services to the plan.

Alarming? Sure. Important? You bet. The hope for a dignified retirement for millions of Americans hangs in the balance.

Recently, Yale Law Prof. Ian Ayres sent letters to 6,000 pension plans, alerting them that their plan’s fees and expenses register higher than average in a study.  University of Virginia School of Law Prof Quinn Curtis, and Prof Ayers conducted the study, entitled “Measuring Fiduciary and Investor Losses in 401 k Plans.

The study measures what the professors call “fiduciary losses” and “investor losses.”

Fiduciary losses relate to the plan’s expenses, and the limited menu of investments that employees who participate in the 401(k) can choose from (often a selection of mutual funds). These are under the control of the employer who sponsors the plan (the fiduciary).

Investor losses relate to how plan participants – investors – choose the investments from the limited menu that is offered in the plan.

Many investor advocates are concerned about high fees in 401(k)s, which started as a way of subsidizing traditional pensions, and now have become the centerpiece of American’s retirement system.

The firms, brokers and advisors who provide services to 401(k) plans say the higher fees are justified because of the services that are provided.

But why do some plans have costs that are many times higher than others? Are services that different?

Lack of Transparency

Until recently there it was nearly impossible to get a clear, detailed understanding of the costs 401(k) plans and participating investors pay for investments, recordkeeping, administration and other services. The Department of Labor has been changing that, with new requirements that mandate disclosure of fees to plan sponsors – and participants in the plans.

Plan sponsors are fiduciaries and must “act prudently and loyally to participants,” says Jeffrey Turner, Deputy Director, Regulations and Interpretations, EBSA, Department of Labor.

On a call to discuss “401K Fees And Expenses And Plan Sponsor Fiduciary Duties,” hosted by the Institute for the Fiduciary Standard, Turner noted that plan sponsors must act solely in the best interest of plan participants when selecting investment options, service providers and monitoring their choices regularly – and documenting the choices they make and how they arrived at those choices, as fiduciaries.

ERISA “forbids overpayments from plan assets,” Turner says.  Plan fiduciaries should pay “not more than reasonable fees” to the service providers they select. They must also obtain “information sufficient to enable informed decisions,” including information on costs.

But how do plan sponsors know whether the fees they pay are “reasonable?” Is there a way for participants to compare 401(k) plan costs?  

John Rekenthaler, Vice President of Research at Morningstar says, “It took years for investors to change their buying habits for mutual funds,” once they started to see information on costs and performance from data gathered by Morningstar. It’s more complex to gather the fee information from 401(k) plans, he But he’s optimistic – “it’s going to be done – it’s difficult to get all the information from the outside” of the plans. 

Benchmarking 401(k) Plans


Benchmarking is one resource that’s widely used and has an important role, but it can be tricky. Edward Lynch, Founder & CEO of Fiduciary Plan Governance, LLC, works with pension plan sponsors and notes that for some clients they will “use three benchmarking services and get three different results,” because each benchmarking firms may use different data sets. Sometimes clients “need more than benchmarking.” When that’s the case, putting the plan’s service providers – and advisor(s) – out for competitive bid may be the best way to see what fees are reasonable.

This is done with a “Request for Information” or “Request for Proposal” which basically puts the different services – advisory, administration, record keeping, custody of assets, investment managers and perhaps more, on notice to sharpen their pencils and provide their best bid to get the job providing the services. The RFIs go to many potential providers and the process, like a reverse auction, introduces the plan sponsor to new providers who outline the services to be provided and the costs for the services. Current providers may also bid. Lynch says that this is “so impactful” that he has seen plan costs drop by two-thirds in some cases.  That leaves more in plan investor participant’s retirement accounts.

The light that is shining on 401(k) plans, the prudence with which they are managed, their costs to investors, has been bubbling up for some time, but came to a high boil with the release of the Ayers letters.  Time reporter Christopher Matthews says in an article entitled America Can’t Afford Wall Street’s Terrible Investment Advice: “With a retirement-savings gap that’s been estimated to be as much as $14 trillion, and Washington fighting over how much we need to cut Social Security, the American retirement system simply can’t afford to support an investment industry that makes billions from deliberately confusing its clients and steering them toward expensive products that shrink retirement accounts over time. The fact that the industry admits that it would have to drop the business of lower-income folks if forced to act in their best interest should tell you all you need to know about the value of its advice.”

In an article about the Ayers letters in Forbes, 401(k) Letters Could Expose The Worst Retirement Plans, John Wasik quotes Morningstar’s Rekenthaler: “It’s understandable that the 401(k) marketplace dislikes the letter’s implicit threat. However, such annoyances are part of the deal. The 401(k) plan has given fund companies nearly $3 trillion in incremental assets–$15 billion in annual revenues, assuming an average fund expense ratio of 0.50%. It has permitted corporations to shed the burden of guaranteeing pensions. Those benefits for fund companies and plan sponsors don’t come for nothing. They come with a spotlight. Get used to the glare, people. It will only get brighter.”


Emerging Issue for Investors – What Advisor Titles Mean: Why it’s Critically Important

For investors across all wealth categories, confusion over broker/advisor titles is rampant and material. Why? Because marketing titles like “wealth manager” or “financial advisor” don’t tell investors whether they are dealing with a salesperson or an investment advisor –who always must put the investor’s interests first.

See “Picking the Best Wealth Advisors From the Rest


The potential harm for investors is a political issue, as the SEC and Department of Labor continue work on fiduciary requirements for brokers that are like the fiduciary requirements already in place for investment.  Big bank brokers back Congressional representatives that vote to starve the SEC of funding it already earns, which doesn’t cost taxpayers a dime (but Congress, apportioning the SEC budget, keeps hundreds of millions of dollars the SEC takes in via fees for listing and trading), hoping keep the status quo aka no fiduciary rules for brokers.

What’s the Harm?

If investors, saving for retirement, get advice that is in their broker’s interest, they may pay substantially more in fees and be sold more risky securities, materially harming their chance retirement resources.  A “1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent,” according to the Dep’t of Labor.

If Congress wants to be able to hold down costs for Social Security, it should overwhelmingly back fiduciary duty for advice to investors, giving investors a better shot at achieving their retirement goals.

Here’s the Most Surprising Finding: 

Most brokers, investment advisors and dually registered advisors (87%) in the field agreed in a recent survey there should be clearer differentiation between product providers and advice providers.

A majority (71%+) say the titles “advisor,” “consultant,” and “planner,” imply that a fiduciary relationship exists.” But that’s frequently not the case.

See Survey Report: Trustworthy Advice: Is the Fiduciary Standard the New Normal for Financial Advisors?


–Kathleen M. McBride

Longing for Days When Banks Were Banks and Brokers Were Brokers

Is anyone else longing for the days when banks were banks — and you could even have a savings account that would pay you a decent yield on your money — which was (up to a certain amount) — government (FDIC) insured?  When and broker-dealers were broker-dealers and it was clear that they were selling something to the customers that dealt with them? When private banks had to act in their client’s best interest? And when insurance companies sold life insurance and didn’t pretend to be advisors, laying high-cost annuities on anyone who is naive enough to buy them?

This story in The FInancial TImes on surprise losses from trading at JPMorganjust reminded me how much I miss those days before the repeal of Glass-Steagall, the depression-era law that separated banks from broker-dealers. I think Paul Volcker is correct, that bringing back Glass-Steagall and separating banks, brokers and insurance companies would be in the best interest of most Americans. Short term, banks would feel some pain from being separated from the high-fee high-revenue broker-dealers that they are merged with now, but longer term they could do very well by adopting a fiduciary culture once more and putting their clients needs first, lending directly for mortgages and businesses, and helping people save.

Remember that?

Taxes and the 2012 Opportunity You Shouldn’t Refuse

Just as President Obama’s budget proposal has gotten everyone to talk about taxes, there are opportunities to make gift and estate arrangements that everyone should be aware of. Wealthy individuals and families still have an opportunity to use higher gift and estate tax exemptions to pass assets to their heirs if they act before these exemptions expire at the end of 2012.

Though, of course, none of us can predict when we will die, we can control how and when we make gifts. Individuals and couples with the foresight to make gifts in 2012 can take advantage of gift tax and estate tax exemptions that are scheduled to expire at year-end, so it would be wise to discuss these with your estate or tax strategist – and sooner rather than later in the year. There may be a rush to do this at year-end. The bottom line is, waiting to do this will result in your paying more taxes if, as scheduled, these temporary provisions sunset on December 31, 2012.

In 2012, individuals can make gifts of $5 million or couples can gift $10 million and not owe any tax on the gift. The tax rate on a larger gift is also lower in 2012, topping out at 35% for assets gifted in excess of the exemption. With some estate and gift planning techniques, investors can make additional trust arrangements and potentially shelter even more of their gift or estate from tax, depending on their individual circumstances.

But beware, if you wait, this favorable tax treatment for estates and gifts is scheduled to expire at the end of 2012.  According to Brett Ferguson, Senior Congressional Correspondent for Bloomberg BNA Daily Tax Report, “Obama wants,” to roll the estate and gift tax rates “back to the ’09 levels,” with a gift or estate exemption of “$3.5 million each and 39% top bracket,” for 2013.

Ferguson spoke on a tax panel at the Bloomberg Portfolio Manager Mash-up in New York on February 16, with attorneys Alan Gassman, of Gassman Law Associates, Stanley Ruchelman, of the Ruchelman Law Firm. Bloomberg reporter Margaret Collins moderated.

Higher Taxes in the Proposed Budget

President Obama’s Budget proposal, released this week, contains higher personal income tax rates, higher taxes on capital gains, and much higher taxes in dividends. The budget outlines rolling taxes back to the pre-Bush-Tax-Cut era, “to 2001 tax rates, a highest income bracket of 39.6% and a tax penalty,” Ferguson said.  Individuals making an adjusted gross income (agi) of $200,000 or couples earning more than $250,000 would pay 39.6% tax rate plus a surplus rate of 3.8%.

Perhaps what would hurt even more is a big hike in the tax investors would pay on dividends. Currently taxed at a top rate of 15%, as proposed, dividends would be taxed as ordinary income, just like taxable bonds, so the top rate would be 39.6%, and for individuals/couples earning in excess of $200,000/$250,000 the 3.8% surtax would kick in, the panel noted. The top capital gains would be 20% instead of the current 15%.

There is also a provision to eliminate the Alternative Minimum Tax, which generates $ 1 trillion, and replace it with a version of the so-called Buffett tax, imposing a minimum 30% tax on individuals earning more than $1 million a year, the panel said.

There is now a “sheriff’s mentality at IRS, Ruchelman said, now, it seems, “you make money and you give the IRS a preferred return. Before, you made money and hired people to drive the tax down as much as possible.”

Is all Financial Advice Alike? An Article for Investors

Is all Financial Advice Alike?

Is your advisor in the sales or the advisory business? There are very important differences that you need to know.

For many investors, finding the right advisor for finance and investments is not an easy task. How do you know how qualified and smart an advisor is? What do you need to look – and look out – for?

  1. Does your advisor put your interests first, at all times?
  2. Do you know exactly how much you pay for their advice?
  3. Does your advisor monitor your investments and let you know when changes need to be made?

If you answered yes to all of these questions, good for you! If you answered no, or are not sure, take heart – you are not alone. Read on!

Most investors are not well prepared for the investment role that they are asked to take on, whether it is deciding which which funds to select in your 401(k) fund or IRA, what to do with the money you’ve accumulated (whether to roll it over, what to invest in if you do roll it over, when – and critically, how much – to take out so that it will last as long as you live), or how much to put into a child’s college plan.

Whether an investor has great wealth to invest and a complex tax and estate plan to manage or a more modest goal, the right advisor can be an invaluable resource – and the wrong one can be the reason for higher investing costs, lost opportunities, and even failure to fulfill your financial goals.

The playing field is not level. Investments have become so complex that there is an enormous gap in knowledge between even the savviest (but non-professional) investors, and Wall Street pros. The gap between investors and investment professionals is similar to the gap between patients and doctors or clients and lawyers. You wouldn’t do surgery on yourself or defend yourself in court, would you? You entrust your medical and legal wellbeing to the doctor or lawyer. They must act in your best interest.

The same principle applies to your financial future – as an investor you entrust your money and your financial goals – your future – to financial advisors. It is reasonable to expect that the advisor(s) act in your best interest – and most investors do believe this. And there is the rub. Some advisors are required by law to act in your best interest, while others are permitted by law to act in their own, or their firm’s interest. They look alike, sound alike and many have the same title, so how can you tell the difference?

We are out to level that playing field. Knowledge is power! This blog kicks off a series of articles intended to arm investors with more of what you need to know, including how to find an advisor, on order to achieve your investing goals.

Armed with the facts, you can make better choices of advisors, clarify goals and understand some of the conflicts of interest in play on Wall Street – and that is essential if you are to achieve all you dream of.


- – – Kathleen M. McBride