For the last two years, my industry has been on edge for the coming regulations that will affect how we do business. In fact, it has turned the industry on its ear.

The Department of Labor has authority over all ERISA (Employee Retirement Income Security Act) retirement plans and accounts. ERISA was the law created in 1974. A part of this legislation gave birth to the 401k profit sharing plans that we are all so familiar with today. Now the DOL not only wants to govern your company retirement plans, but also your IRA’s of all descriptions, SIMPLE and SEP-IRA’s, and Health Savings Accounts (HSA).

Basically, the DOL, through the United States Congress and Senate passed a law in 2006 that you cannot be charged a commission in an IRA account. Probably no big deal to you, but this will be a real problem as to how a securities broker, insurance agent and a bank brokers can establish and assist an IRA holder. More particularly a small IRA account holder.

For the duration of this blog and simplicity’s sake, I will refer to all institutions as BD (Broker Dealer) and broker as Advisor.

Small accounts will be determined by the BD that holds or services the account. And the BD holding the account will ultimately have to weigh the risk vs. the reward (compensation) for servicing the retirement account. For some firms this may be accounts valued below $50,000. Others may be $100,000 or less and so on.

The Department of Labor has mandated that retirement accounts are not to be charge a variable rate commission nor, in the case of variable annuities, extraordinarily high commissions. The DOL also demands transparency of any and all fees and commissions.

There are exemptions to this rule and it will be up to the BD and the Advisor servicing the account with agreement of the client to determine if it is in the client’s best interest to stay in a commissionable investment account. Once this is determined, the client will be asked to sign with the Advisor a BICE agreement. (Best Interest Contract Exemption)

Most BD’s will convert their accounts to fee only if they have not already done so.

You may have already been approached by your Advisor to make these changes. Many of the larger BDs will be changing your account from a commission to a fee and no longer establish commissioned based accounts. And these larger BDs will not give you a choice!

Small investor’s retirement accounts may be cast aside or relegated to be serviced by the custodian and will only be able to gain assistance through a call center or robo-advisor. Which means the small investor will not be able to obtain the advice and assistance they need. Therefore, in all of the DOL’s efforts to protect you the investor, you may be worse off than you were before.

You may also be forced to invest in investments contrary to what you currently own or want to own. Our regulators think only in simple terms, “inside the box.” They will want everyone to invest in a certain mix of mutual funds or sub accounts and the mix will be determined by your age, wealth and risk tolerance.

The Advisor will no longer be able to use Conservative, Moderate or Aggressive as a determination of risk tolerance. We will now need to create a risk tolerance questionnaire that with the questions involved and points assigned to each answer come up with a number to assign to your risk tolerance. This reminds of the song by Bob Seger, “Feel like a number!”

Thus, if you invest in stocks, or if you have a large position of company stock that you wish to continue to hold, you may ultimately be told to liquidate and invest in a mix of funds. Or the BD and your Advisor may not be able to hold your account with the stock.

I have a number of customers who own company stock in their IRAs they rolled over years ago. In their case, I do not charge a fee. There are no or very few transactions, therefore a commission from time to time is in their best interest rather than I charge an annual fee on stock that will not be sold and that is not managed to any degree.

Yet, the large BDs are forcing their customers all to move to a fee model. Where they were not charged a fee on their stock in the past, in the near future they most probably will be. Did our regulators think that one through? Did that help any investor by creating an additional expense to them?

Our regulators, in their methodical simplistic world with thoughts of protecting the investor, for many, will do more harm by having the small investor cast aside and make the system cost prohibitive and too litigious for BDs to assist and service.

Please do not get me wrong, I am all for transparency and working in the best interest of the client. But we have too much regulation as it is and more cumbersome and expensive legislation will not solve the problem.

In closing, for our customers, you will not be cast aside. We will continue to service you as we always have. If you are already in a commissionable account and it is in your best interest to stay in one, we will not force you to make a change.

And for those of you that fine yourselves orphaned or suddenly charged fees you had not encountered before, we welcome you to our firm. We are willing to assist you.

Corey N. Callaway

Investment Advisor Representative

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top