Financial advisers facing changes in how they do business

By Michael Osteen

With the end of the year just around the corner, most folks are thinking about Christmas, family get-togethers or office parties, while others may be trying to figure out why they are paying high fees on 401(k) or IRA statements.

In April, the Labor Department passed a new law, referred to as the “Conflict of Interest,” that is aimed at stopping what the government claims are exorbitant financial adviser fees estimated to total $17 billion per year.

Yes, you read that correctly: That is $17 billion each year in exorbitant fees.

The intent of the new law is to stop financial advisers from putting their own interest of earning high commissions and fees over their clients’ interest in obtaining the best investments at the lowest prices.

The law now requires all financial advisers to recommend what is in the best interest of the clients when it comes to 401(k)s, IRAs or other qualified monies saved for retirement. This essentially removes the conflict of interest concern that exists in some aspects in the industry.

In a recent survey, about 46 percent of Americans mistakenly thought that all financial advisers were already required to place their client’s interests first when it comes to retirement advice.

The law is scheduled to be fully implemented in January 2018.

This is sure to impact how many financial advisers are paid. The law does not prohibit charging commissions or revenue sharing. However, it is more than likely to put a major dent in the commission side of the business.

For example, the sales of high commission variable annuities and indexed annuities products in qualified accounts will be impacted along with other high-fee products.

Mutual fund companies have already begun to move away from mutual funds with loads and higher-fund expenses. Expect more accounts moving into ETFs whether they are actively managed or passive automated advisers.

Advisers and brokers may see that their cash cows have essentially been taken away under this new law.

The thousands of brokerage, advisory and insurance firms that provide advice will have to adjust their operations to comply with the new law that deals with the $25 trillion retirements services market.

With this change, more clients will be pushed toward fee-based accounts.

But for some advisers, fee-based accounts won’t make economic sense for lower balance accounts, and some are expected to drop undersized retirement accounts going forward.

Don’t be surprised to see advisers suggest that some clients find more “suitable” options or increase the minimum size of client accounts.

Small businesses offering their employees retirement plans will most likely have to pay higher fees and restrict product offerings to deal with the additional cost of compliance, which in turn may fuel the move to push retirement participants into automated advice plans.

Some believe over time larger institutions will consolidate and the model for investment advice for the bottom 90 percent will end up with a 1-800 number with a voice recognition menu that doesn’t work to a person overseas with minimum training and experience and a website with fill-in-the-blanks software much similar to some present-day company business models.

Many believe the push to lower costs may cause much damage and not benefit the bottom 90 percent. Instead, the masses will over time be relegated to the automated solutions that will provide a “one solution for all” approach.

History has shown a one solution for all is not the best solution. This may result in the greater concentration of wealth.

At Port Wren Capital, they will continue to conduct investment research the old-fashioned and proven way following Ben Graham’s value investment strategies going back over 80 years.

Using value methods work, as an example, they found an undervalued financial services sector company about 16 months ago and sold it for an 84.74 percent gain.

Remember this saying: “If it ain’t broke, don’t fix it.”

Michael Osteen, MBA, is chief investment strategist with Port Wren Capital LLC, serving the greater Beaufort County area.  Email him at michael@portwrencapital.com. Port Wren Capital LLC is a boutique value investment security research company that specializes in uncovering undervalued companies with strong long-term potential for people who want to maximize their investment profits. For additional information, visit www.portwrencapital.com. 

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