Hosting an industry conference? Ask us about including it in this ticker?
What do you think of our site upgrade?

Industry Fights Hard to Exclude IRAs from Fiduciary Standard

September 07
00:35 2011

What started as a political dust-up this summer (see “Momentum Builds to Place IRAs Under Fiduciary Umbrella,” Fiduciary News, July 5, 2011) turned into a public relations free-for-all with a controversial Wall Street Journal op-ed. 1328860_67443166_volubilis_ruins_stock_xchng_royalty_free_300Fiduciary experts have since lambasted the Journal’s piece (see “Shifty rhetoric and the fiduciary debate,” BenefitsPro, September 1, 2011), but the industry talking points remain well publicized.

Claims have been made, as a result of industry sponsored research, suggesting upwards to 7 million IRA holders will find themselves without an adviser should the DOL’s proposed new fiduciary rule be extended to cover IRAs. The Wall Street Journal editorial even goes so far as to state “Brokers would have to weigh the cost of higher regulatory compliance against staying in the business.”

Factually, this is an incorrect statement. The DOL has repeatedly said brokers can continue to provide brokerage services to IRA holders (and ERISA plans in general) without changing their existing business model even after the new fiduciary rule is adopted. What brokers can’t do, according to the DOL’s proposal, is offer investment advice under the current model. Presently, the SEC allows brokers to offer “incidental” investment advice without requiring them to register under the 1940 Investment Advisers Act (“40 Act”). The DOL cannot require brokers to register (that’s the SEC’s job), but it can enforce the fiduciary standard by defining broker adviser services under the same umbrella as it does RIA adviser services.

At the heart of this issue lies the “conflict-of-interest” dilemma. Under trust law, fiduciaries are prohibited from taking an economic interest in transactions executed on behalf of a beneficiary. This means, normally, an RIA would not be permitted to collect a commission (or 12b-1 fee) from a mutual fund company it invests a client’s money into. Oddly, while the 40 Act does indeed prohibit self-dealing transactions, the DOL has issued at least two opinions that exempt fiduciaries from this prohibition if the fiduciary discloses such a conflict-of-interest exists and the client signs off on it and the fiduciary uses those commissions (or 12b-1 fees) only to offset their normal fee. The DOL has not said anything to indicate this exemption would be removed under the proposed new definition of fiduciary. (This matter, by the way, has disturbed many fiduciary advocates.)

What, then, has prompted the brokerage industry to aggressively pursue a line of reasoning that appears to be moot? Can’t they simply convert their commission and 12b-1 fees – which are usually expressed as a percentage of assets – into asset based fees and be done with it? It’s not that simple. Speaking on the condition of anonymity, one broker told Fiduciary News that his platform provider, while allowing him to offer IRAs for free as a broker, will charge him – or the IRA – a set annual fee if he serviced that same client as an RIA. This will have the effect of increasing the cost of service for the IRA holder, just as opponents fear.

But, in speaking with other industry practitioners, such fee increases are limited to specific platform providers and, should the DOL go ahead and extend the Fiduciary Rule to IRA’s, existing competitive pressures may place those broker/RIAs on high fee platforms at a disadvantage compared to RIAs on other platforms.

Michael Kothakota, CEO of WolfBridge Financial, a traditional RIA, generally doesn’t accept portfolios of less than $100,000. His firm would accept smaller portfolios if they are related to larger portfolios. At this stage, the quantity of clients is not a priority for the firm, however, he says, “Given the current environment, we will be hiring advisors in the near-term, which would allow us to focus on some of those smaller IRA clients.”

Eric Dahm, an Investment Adviser at Human Investing, a fee only RIA echoes Kothakota when he says, “The size of a client’s IRA is not a factor in who we target. We look at the entire client relationship when determining who is a good fit for our firm.” Virginia Dhondt, CFP® , a Staff Planner at Keats, Connelly and Associates, a fee-only financial planning firm, says her firm doesn’t have any minimum account size. “We use IRAs as appropriate for our clients,” she says.

Clearly, RIAs can operate under the fiduciary standard and accept many of these 7 million “small” IRAs the industry, Congress, and, apparently, the Wall Street Journal are afraid will be abandoned under the new Fiduciary Rule. More interestingly, however, is the comment from this broker. Joseph Graves is CEO at Joseph Graves Capital Management. His broker/dealer, Commonwealth Financial Network, sets their minimum at $25,000  but, he says “there are no additional fees for switching from commission to asset based fee.” He further states, “Advisers will not stop servicing smaller accounts. Someone will come up with a model that will allow them to be profitable serving smaller investors. This is simply a diversion by firms trying to avoid accountability for their actions and those of their advisers.”

This last comment leaves one to wonder. Perhaps it’s not the “7 million small IRAs” that are “at risk” after all. Maybe what’s at risk is the outdated business model of a handful of very large businesses within a small segment of an expansive industry.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Jim Watkins
    Jim Watkins September 15, 14:59


    Not sure if it is still available, but FSI recently published a letter on Twitter re similar propaganda, requesting that their members send the letter to their clients. Hopefully, such measures will simply strengthen DOL’s resolve to implement the new, much needed, long overdue fiduciary rules to protect the public.

Only registered users can comment. Login is sponsored by…

Vote in our Poll


The materials at this web site are maintained for the sole purpose of providing general information about fiduciary law, tax accounting and investments and do not under any circumstances constitute legal, accounting or investment advice. You should not act or refrain from acting based on these materials without first obtaining the advice of an appropriate professional. Please carefully read the terms and conditions for using this site. This website contains links to third-party websites. We are not responsible for, and make no representations or endorsements with respect to, third-party websites, or with respect to any information, products or services that may be provided by or through such websites.