Working with Your Adviser: More than Just Investments

0_0_0_0_250_250_library_989Thinking about finances and reading what is current in the financial industry, most of us could be excused for thinking that advisers are pretty much all about recommending investments for you. Whether it is talking about the DOL fiduciary rule proposal, active versus passive investing, alternative investments, or even generating income with your portfolio, everything seems pretty much focused on what your money is going to be invested in pursuant to the advice you get.

Yes, there is some mention of holistic or goals based planning, usually on websites for wealth planners and the like, but that doesn’t appear to be what’s hot and definitely doesn’t have the attention of many investors and most advisers. In fact, many advisers say that their defining ability and characteristic is picking the right investments for their clients. Why, then, aren’t we all just rolling in it? And what is it that we should expect from our adviser and why?

There is no doubt about it, an investment which produces a good return is an important aspect of your finances. After all, most of us want to grow what we have so that we can do something with that money later. This brings us to our first point – what happens when you need or want to access some part of that wonderful investment? Some investments may produce terrific growth but may not make it easy to get at the money when you want it. Think of closely held company stock, which may be subject to restrictions on realizing the money. Or your qualified retirement plan with its ten percent early withdrawal penalty on top of the regular income taxes on distributions. Even that publicly traded stock you bought years ago and which has grown dramatically in value carries with it a heavy tax burden when you sell, due to your low cost basis.

What this tells you is that it is not just about a “good investment” but more than that – an investment that fits. Which is our second point, the benefit you can derive from your adviser helping you to understand what you own and how to make sure that the mix of assets allows you some flexibility to address needs that may arise at a bad time for some types of investments. As we have seen, investments made solely on the basis of how they might perform can leave you in a bind even when they are wildly successful. So a good investment recommendation should be based on knowledge of what assets you already have and what you might intend to do with them and when.

This approach requires your adviser to know much more than how to pick a successful investment. The adviser will need to know a great deal about you and your personal situation, including your goals, family, other assets and more. The adviser will need to understand the rules and laws that apply to you and to the investments you and your adviser may be considering, as well as social security, Medicare, tax impacts and more. Only an adviser with this comprehensive type of knowledge may provide you with the confidence that a recommended investment is likely to work for you.


George Chamberlin & Mentor RIA Consulting © 2017



Succession Planning Down on the Farm

0_0_0_0_496_327_library_57856Although the issues in connection with succession planning that face farmers and ranchers mirror for the most part those questions and problems encountered by other types of businesses, there are some specific concerns which resonate for farmers and ranchers. We will take a brief look at both so you will be better prepared to meet with your advisors and make the right decision for you and your family.

First, a short list of some of the questions you will need to ask yourself and which are addressed more fully below:

  • Who might be interested in acquiring or continuing the business?
  • What is the value of the business, how determined, and may it be fully realized?
  • When would the owner wish to transition out of the business (and to what extent)?
  • Where is the business located and how may that affect your options?
  • How important to you is the deferral, reduction or avoidance of taxes?

Looking first at the “who” question, family is normally the starting point, particularly where there is someone already involved and likely interested in continuing the business. The short answer here leads us to the next questions and makes the whole process simpler. However, when the farm or ranch owner is already aware that there is no next generation to pass the business to, it makes little sense to leave the disposition of the business to the owner’s heirs. Where the owner enters into planning for the transfer of the business, the owner retains control over the planning process and saves the heirs from the need to handle that transition themselves. This amounts to a win on both counts and may lead to a better result than a hurried sale of unwanted assets upon the owner’s death.

Outside the family, the “who” will likely involve another person in the farming or ranching business, whether a large or small business, a local or distant business or even a newcomer to the business who may either be an employee of another farm or ranch or simply someone starting a new career. There are several organizations to be found online that are focused on getting buyers and sellers of farms and ranches together as well as other industry groups and associations. However, it is important not to overlook the potential for a non-farm interest, such as a developer, to show interest in the farm or ranch real property. Your intent as to the property and business may keep you from choosing such a successor and should be a consideration. In this connection, you may consider imposing restrictions on transfer of the business entity[i], including realty, so as to limit use or development or the persons who may inherit the business.

The next issue – the “what” or valuation discussion – is perhaps the most important to the owner considering a sale of the farm or ranch business. Understanding the real value of the business is important to obtaining a quality sale as well as essential to funding the retirement and perhaps estate goals of the owner. The services of a professional appraiser are well worth the time and cost to an owner since the results will permit setting a reasonable and attainable price on the property as well as informing the owner’s expectations for their future finances based on the sale price.

The approach to financing the sale is an important aspect of how best to realize the valuation of the farm or ranch. A lump sum payment is a good way to terminate your interest in the property but may be more burdensome in terms of taxes on that sale while a series of installment payments may not only spread out the taxes but will provide a stream of retirement income which may include interest on those installments. Extending financing to a potential buyer keeps the seller involved – which may or may not be a good thing – and may also allow a broader selection of buyers.

Although important to a lesser extent, the “when” question often provides great flexibility to the owner, particularly when it is not easy to let go and the owner does not feel pressure to hurry. This is a point where the owner usually has the most control unless circumstances are such that the owner needs to exit quickly, as where there is a disability or other need for immediate liquidity. The more flexibility we have on timing, the easier it is to negotiate a favorable transition that fits our schedule and goals.

There may be a lot more to the “when” factor than you might think since you will want to consider not only retirement timing but also your health, your financial resources apart from the business, the nature or identity of the buyer and how that might mean potentially having some participation in the continuing business, and the goals of your immediate family such as your spouse and children, if any. All of these factors, and more, affect the decision as to when a transition will be appropriate for you.

The location – the “where” – of the farm or ranch business is also an important factor since not every such business is located near a number of similar businesses. This may reduce the opportunities for a sale of an ongoing business and increase the desirability of working with a non-farm purchaser. However, in most cases there will be other local farm and ranch businesses which will help facilitate the sale of the farm or ranch as an ongoing business. Furthermore, if a family member or other individual interested in the business is presently residing at some distance from the farm or ranch, that factor may affect their ability or interest in acquiring the business.

In planning for the succession of the business, we sure do not want to overlook the impact of taxes on the decisions we make. Of course, just “how” important those taxes are to us is a useful starting point in evaluating how we might want to proceed. The large lifetime exemptions for estate and gift taxes will mean that those taxes hold less importance for many of us, particularly where the total value of the farm or ranch business is less than $11 million or so, which is the amount a married couple can pass to future generations without federal estate or gift tax. Of course, the “where” question comes back in play at this point since state taxation of estates and gifts varies greatly and depending on where you live and operate your farm or ranch business may affect your approach.

Income taxes on the transfer of the farm or ranch are another burden entirely, also varying from state to state but consistent on the federal level. Installment sales permit spreading out that tax burden and may allow lower brackets and rates to save some money. Interestingly, gifts of business interests may also save on income tax relative to the interests gifted away. One development in the area of taxes and succession planning for farms and ranches involves the use of a charitable giving tool – the conservation easement. This approach can protect the land used for farming from future development or non-sustainable uses while at the same time providing the present owner with some control as well as tax breaks.

At this point in the discussion, you can see that whatever your goals for the farm or ranch you will want to involve not only your financial planner but also your accountant and estate planning attorney in this process to make sure you achieve your goals with the plan you put into place. The questions above should help start the conversation and may open up a variety of options for you to consider in making the most effective succession plan for your farm or ranch business.

[i] This would apply where the business was established as a limited liability company or corporation as opposed to a sole proprietorship and the entity was made subject to the desired restrictions.


George Chamberlin & Mentor RIA Consulting © 2017

Choosing Among Assets for Funding Specific Goals

0_0_0_0_250_250_library_1000There are times in most everyone’s financial planning where their current income is insufficient to cover all of their current goals. This requires a determination regarding which investment assets should be drawn down to fulfill the goal or whether it is preferable to borrow. Although the difficulty of making such a decision is obvious during retirement for clients without a large pension or other similar cash inflows, such a decision may well be troubling at times before retirement as well. Typically, the wealthier person has more than one alternative for funding additional goals and will need to make their decision in light of the potential tax liability, the impact of the decision on future spending options and even the end of life estate goal where there is one.

While You Are Still Working

In the years prior to retirement, it can be difficult to fund goals that exceed current income. The first item to consider tapping would be your rainy day or emergency fund with the second item being savings for a different future goal that you may be able to make up later. These are existing funds likely to be found in a taxable account such as a certificate of deposit, brokerage account, or even a traditional savings account.

Just about the last item to consider using for such goals is money in your qualified retirement savings account(s) since most withdrawals are subject to the ten percent early withdrawal penalty as well as regular income tax. That can reduce the funds quickly while at the same time putting a dent in your retirement nest egg.

Another option might be borrowing the money but that requires servicing the loan, including payments of principal and interest that may burden your future income and reduce the ability to save for retirement and other future goals. The burden may be somewhat less where one is able to borrow from a family member who may offer somewhat better terms than are available from traditional sources.

If the need to fund the desired goal is not immediate, there is sometimes an option for funding the goal with anticipated proceeds of the sale of property or perhaps an inheritance or proceeds of successful litigation. As a few folks have found out to their discomfort, reliance on winning a lottery is not usually a reasonable plan.

During Early Retirement

Once you have retired and before you reach the age (70 ½) when minimum distributions are finally required from your qualified retirement plans or the age (70) when you can begin taking the maximum Social Security benefit, your approach to choosing the accounts to fund your goals may be focused on what will happen at those ages. For example, if you plan to defer taking Social Security until age 70, that cash flow simply will not be available to fund goals prior to that time. However, that might be a time to take some penalty-free withdrawals from qualified retirement plan accounts not just to fund current goals but also to reduce the amount that you will be required to withdraw once you attain age 70 ½. Those with very large IRA or 401(k) accounts may be well advised to utilize this approach.

Another factor to consider will be additional cash flows available to you once retired. Some folks will have access to a pension plan that can offer recurring payments that will be important to funding the ongoing retirement goals. Others may resort to an immediate annuity or annuitize an existing annuity to provide a cash flow. The role of a deferred annuity will be impacted by the lead time and the chosen annuitization date/age, since it may not be cost effective to begin distributions during the early stages of retirement.

Where income tax is a concern, the focus may be on funding goals from taxable accounts, particularly those with a higher cost basis and so lower potential tax burden upon taking withdrawals. The flip side here is where there is low income an opportunity exists for converting IRA funds to Roth IRA, with the accompanying payment of income taxes on the funds converted. This can allow for greater flexibility later in retirement when income may be higher on including required minimum distributions and Social Security benefits.

Later in retirement, once Social Security is coming in and required minimum distributions as well, most of us will focus on the established cash flows from these and any other sources for funding most if not all of our goals. If we have sufficient assets saved for retirement, we can be confident of funding our needs in most situations and will often have the luxury of engaging in estate planning for future generations, including children and grandchildren, as well as charitable and other goals.

As you can see in this discussion, there may be a number of considerations to address when funding goals that exceed current cash inflow. It can make a real difference to you and your future if you make the right choices in funding those goals. Your adviser should be able to help you understand your choices and help you implement them as well.


George Chamberlin & Mentor RIA Consulting © 2015-2017

Charitable Gifting as a Retirement Planning Strategy

One of the main purposes of financial planning, at least for most of us, is to attempt to provide for our eventual retirement in a meaningful way. Central to this retirement planning is the notion of providing for ongoing income during retirement to ensure that spending goals are met. There are numerous approaches to obtaining the desired income and financial advisers, insurance agents, brokers and others all have a plan on how you can attain that goal with their help. Today we will look at some offerings more often thought of in connection with estate planning but which provide a different way to establish recurring income during retirement. dreamstime_m_19200253

Among the recurring sources of retirement income you may be familiar with are those coming from the government – Social Security, some former employers – pensions, insurance companies – annuities, our qualified retirement plans – required minimum distributions and the like. Another source of recurring retirement income, not the first we may think of, is charitable organizations. There are several well-established and effective methods to combine a gift to charity with a flow of income back to the donor

A common estate planning technique is the charitable remainder annuity trust (CRAT) which is funded with a gift from the donor client. However, the charity does not immediately benefit since the trust pays an annuity to the client, to the client and spouse, or to some other designated person for the term of the trust. The trust term may be for a term of years or for the life or lives of the income beneficiaries. In retirement planning, you can see the benefit of having a dependable annuity for life. At the end of the trust term, most often the donor’s death, the charity receives the remainder of the trust assets.

It is important to understand that this type of annuity likely will not be as favorable in its terms as a commercial annuity purchased from an insurance company. This is because the rules governing the trusts require that the charity receive some benefit. However, the donor receives not only the annuity but an immediate income tax deduction for the present value of the gift to the charity. In addition, the charitable gift benefits charitable goals of the donor and will not be taxable in the donor’s estate at death.

A variation of the CRAT is the charitable remainder unitrust (CRUT) which differs from the CRAT primarily in the determination of the payout to the donor. The CRUT payouts are based on a percentage of the value of the assets in the trust each year instead of on a fixed annual dollar amount. Thus we lose some certainty in our planning for retirement spending that the annuity with its fixed payment provides.

Another technique available to the donor seeking income is the charitable gift annuity. As its name implies this gift is made to the charity in return for which the charity promises to pay an annuity for the life of the donor (or donor and spouse). Again, this payout is less favorable than that offered by commercial annuities since the charity must receive some benefit, the gift.

All of these techniques result in recurring payments, usually to the donor, and a portion of those payments will be taxable as income when received.  The flow of income provided during retirement is often preferred by clients used to budgeting based on their pre-retirement income flows. This fits in well with the plans of many clients and may work alongside with pensions, annuities, and RMD distributions from qualified retirement plan accounts to fund the anticipated spending needs.

It is important to understand that using a charitable gift approach to providing a retirement income flow requires a client who either has no other heirs (children, grandchildren, nieces and nephews) or has already made provision for them through other means. The charitable gift means that nothing will remain for those potential heirs once the client donor passes away.

Further, it is necessary for the client to wish to benefit one or more charities through gifting as the end game for these transfers, after the annuity payments are made, is the payment to charities of the remaining funds. Careful selection of the desired charities, together with the potential in some cases to name alternative charitable takers, will help make this technique a success for the client as well as the charity, though not so much, perhaps, for the taxing authorities.


George Chamberlin & Mentor RIA Consulting © 2017

Does Your Insurance and Estate Planning Work with Your Financial Plan?

A common problem area for many folks lies in the not uncommon disconnect existingsample-rc-plan between the insurance and estate planning they have in place and a separately created and maintained financial plan. In many cases, different professionals – attorneys, accountants, financial planners and advisers, insurance agents – have worked up a plan or offering in their area of expertise for the client at a different time and without cooperation with other professionals working for the same client. A disconnect between the efforts of these professionals may arise due to a lack of understanding by the client of what their various plans and products do and/or may result from a lack of communication among and between the client and the professionals involved in the different types of plans.

Why would you care about this potential issue? When a client has expectations and planning in place for their lifetime and also on and after death, they probably would not appreciate the impact of a failure of that planning due to conflicts and problems between their various plans and with the realities of their personal financial situation. Such problems always cost the client, and the client’s family, money, time and likely emotional damage, and in the worst case may cause their plans to fail them or, more often, their loved ones, entirely.


Life Insurance is a tool that is often sold to address a variety of possibilities revolving around the death of a client or spouse. The insurance may be a part of an estate plan or may just be something a client wants or believes they need to have in place. Where might a disconnect between one or more insurance policies and a client’s financial plan arise?

  • Insufficient coverage in the event of a premature death of one of a couple would leave the survivor without adequate funds to maintain lifestyle and goals the couple desires under their financial plan.
  • A client owns coverage previously purchased but not currently needed for any reason. For example, insurance purchased early in marriage to cover the cost of raising minor children in the event of an early death may not be useful when the children are grown and have left home. Such insurance would not be funded or a necessary part of the financial plan.
  • Where loans are outstanding against an insurance policy and the proceeds have been expended, the client would face interest costs on top of premiums due and the death benefit would be reduced while the loan was outstanding. These costs and potential benefit reduction could negatively impact the financial and estate plans if the loans and impact of smaller death benefit were not addressed therein.
  • Existing insurance coverage intended to benefit heirs may have been insufficiently funded in the past and will now or in the future require the payment of significant additional premium to keep the policy in force as the insured ages. Longevity might result in premium costs greater than the anticipated death benefit or beyond the resources of the owner(s). A lapse of a policy means no death benefit for the intended beneficiaries.
  • Group life insurance obtained through employment may have been terminated when the client left that employment – was that insurance replaced with similar insurance with regard to death benefit and cost? That insurance should have been considered in any comprehensive financial or estate plan created before the job change and if no longer available or changed then the plans should be adjusted to reflect the changes.
  • An estate plan might incorporate life insurance as a means of providing liquidity or a source of funds for payment of taxes at the death of an insured. Such insurance should be sufficient to cover the anticipated need and should be within the client’s budget as well. The financial plan must be considered before new insurance is acquired for the estate plan.

Other insurance products are often implicated in a client’s financial plan and will need to fit in with the client’s goals to ensure their effectiveness. For example, disability insurance is an essential part of many financial plans so that the unlikely event of a serious disability will not completely derail the financial plan and client’s ability to attain desired goals. Similarly, the use of long term care coverage may be hugely helpful in some cases but also a drain on resources the client might prefer to use elsewhere. The client and financial planner need to determine how to work with existing insurance or the need for new or added insurance depending on the situation.

Bottom line here: understand the need for insurance as well as its impact on the financial plan and other goals, weigh the options, and make an informed decision. Otherwise a client may find themselves without coverage they need or saddled with coverage they don’t or cannot afford.

Estate Plan

An estate plan often involves a complex arrangement of tools and techniques intended to help the client reach goals upon death, including an orderly transition of assets and the smooth handling of the obligations of the client’s estate. Focused primarily on a client’s future death, such a plan often runs the risk of ignoring lifetime issues and the changes that will occur in most families and situations before the client’s death. Some of the issues may be addressed by pursuing a regular review and update of the estate plan to remain current with changes such as marriage, divorce, addition or death of potential beneficiaries and/or trustees as well as changes in the law. However, sometimes the estate plan fails to tie in with the client’s actual situation, a disconnect that may result in a variety of problems.

  • An estate plan may be based on assumptions regarding ownership and interests in assets that do not match the reality of the client’s situation. For example, the effectiveness of a traditional A&B trust arrangement will depend on sufficient assets being titled in the name of each of a client and spouse, which may not have been accomplished. Although the portability of the lifetime exemption reduces dependence on this approach, much flexibility may be lost if attention is not paid to the titling of assets. In other cases, the client may fail to fund an irrevocable trust or other instrument which may render that part of the plan useless when death occurs before the failure is addressed.
  • The assumptions about growth and investment allocation used in an estate plan often will bear little relation to the assumptions used in a client’s financial plan. Without a consistent approach – which may only be obtained through full disclosure and cooperation of all persons involved – the plans will diverge quickly and either one or both will not be accurate. This is critical in both the financial and estate plans as the costs, including taxes, of an estate as well as the money presumed available for retirement goals in a financial plan are driven by these growth and investment assumptions.
  • An estate plan, like a financial plan, usually considers the client’s current and projected income as a factor in the suggested course of action. Some plans may call for the transfer of assets to an irrevocable trust or other vehicle well before retirement or death in order to attain perceived benefits, primarily in tax savings. However, a significant change in a client’s situation, such as loss of an income stream or substantial asset, may result in a failed financial plan with the conveyed assets, and the client’s remaining life goals, out of reach.
  • An estate plan often will provide for the use of assorted techniques and tools that are available to clients, with the intention of providing flexibility going forward. Care must be taken, however, to ensure that a client and other family members understand when to use or not to use them and why. A financial plan where a surviving spouse is dependent on assets received from the first to die spouse, for example, will be in trouble if that survivor disclaims some portion of the inheritance intended to secure the survivor’s future. This may happen, for example, where other beneficiaries encourage the use of the disclaimer to benefit themselves and is not unheard of in estate cases.

What you can take away from these examples is the need to examine your entire spectrum of financial and estate planning, including insurance policies, trusts, wills, financial plans and more to make sure you are aware of what you have in place AND how it works – or doesn’t work – together. A periodic review, certainly at least annually or more often as needed, will be helpful in ensuring that things are working as intended and respecting your personal situation as it exists at the time of each review.

George Chamberlin & Mentor RIA Consulting © 2016-2017

Does Your Financial Plan Work for You?

Millions of clients have received some form of financial planning from their advisers. The type of plan and its effectiveness will vary across both clients and their advisers. Do you know whether your financial plan is helping you with your investment, retirement and other goals? Here are some items to consider when you think about that financial plan.

First, let’s look at you, the client, and the plan. 2

Did you participate in the planning process by way of a questionnaire, a meeting, online data entry or a combination?

If not, then how would any adviser have a clue as to what you need or might want in a financial plan? If you did, then did the process go to any depth on what your situation was and is, what you want your money to do for you, and what worries you about finances? Without pursuing this type of knowledge, an adviser cannot be expected to propose a meaningful plan.

Did you share all your relevant information – that is to say financial, emotional, health-related, family and more – with the adviser as a part of the process?

Without complete information, any plan is apt to overlook opportunities and options that may benefit you and will not address potential issues involving omitted information. In this connection, conjecture and overstating expectations will also make it difficult to plan appropriately and provide you with real confidence in the results.

Did you read over the plan by yourself or together with your spouse or partner? And did you then go back to the adviser with any questions, comments or suggestions?

The first rule for most things is that if you do not understand it, you should not buy it. This goes for financial plans just as much as it applies to investments, relationships and many other aspects of our lives. It is important to review any plan – away from distractions, including the adviser – and try to understand every item in it. Where you are not certain, then it is necessary to follow up with the adviser and get answers to your questions. At the initial presentation, folks rarely are able to fully absorb all the information which is being presented by the adviser in a way that works for the adviser but not necessarily for you. Be sure that the adviser actually answers your question – understands it and responds to it – instead of going off on a tangent.

Did you approve of the plan and/or authorize the adviser to make any transactions in your accounts?

Once the adviser has created a plan for you, based on information you have provided and some knowledge of you and your situation, you will need to review the plan and follow up with questions you may have. Then and only then is it time to approve the plan. If any steps are missed, you should not be ready to accept the plan and the adviser certainly should not simply go ahead once the plan is presented. Remember, it is your life and your money and the adviser is providing a service to YOU. It is not the adviser’s decision.

Now, let’s look at the adviser and your plan.

Is the plan tailored to each specific client or does the adviser give every client pretty much the same type of plan with the same or substantially similar investment recommendations?

Your plan should make clear that it covers what YOU wanted. It should reflect the specific goals and needs you discussed with the adviser and not some general idea about overall spending or generic names for plan goals. You should ask the adviser if the adviser recommends one of a small group of standard portfolio allocations for all of the clients and how your portfolio might vary, if at all, from that recommended for other clients. You will want to know, with a new adviser, if they intend to sell out of your existing investments and buy different securities they recommend. What you are looking for is whether you are being treated as an individual with his or her own particular circumstances and receiving a plan that addresses those or if everyone gets the same advice, regardless.

Does the plan take into consideration what you, the client, wants and needs to do with your money or does it simply focus on managing the money, whether for growth, income, or asset preservation?

Your plan should work towards helping you reach your specific goals and meeting your financial needs. A plan that relies on “making you a lot of money”, “beating the market”, or “protecting you from the upcoming market crash” or other similar statements is not a plan focused on you. You will want the plan to show you how it will help you reach your goals and how you are not going to be taking any unnecessary risk.

Does the plan consider what might happen to derail your goals such as early death, disability, job loss, divorce or other life changing events?

Only a foolish person would assume that a plan (or their life) will proceed right down the straight and narrow expected path laid out in the planning process. The likelihood that some event will occur to significantly affect the plan is actually fairly high and you likely know other persons who have encountered changes and issues they did not expect in their financial lives. These changes range through all the common events mentioned above and might include less common events such as long term care, civil suits, bankruptcy, natural disaster, criminal activity and more. Having considered possible events permits you and your adviser to plan for how they would be handled, providing you with more confidence in the plan itself.

Is the plan monitored on an ongoing basis and is it updated when changes occur in your situation?

The only way a financial plan can be effective is when it is regularly reviewed and updated as time passes and things change. Even if none of the major events we feared might happen actually occur during our lives, other things do change. How our accounts perform in the markets, how much we save or spend, what goals go away or are added or modified, all must be considered to keep that plan current. If the adviser does not make clear that this monitoring is a part of the process to be used, that plan is out of date the moment it is done. Much of the value of that plan is lost if it is not regularly revisited and kept current.

Six Ways the DOL Fiduciary Rule May Affect You

The news has been full of information and speculation about the upcoming – effective April 10, 2017 – Department of Labor fiduciary rule. We have all heard a lot of thoughts and opinions on the impact of the rule on both clients and their advisors. Of course, we do not know what impact the recent election will have on the rule and whether its activation may be delayed, its enforcement diluted or its terms modified or eliminated entirely. That said, under the current situation there are a few points you should know with respect to the rule. dreamstime_m_6604087

Who Must Comply?

The first point involves all of those folks giving you investment advice. Whether they call themselves brokers, financial advisors, insurance agents, registered investment advisers or whatever, so long as they are making recommendations to you concerning your investments in retirement plan accounts, now they are all held to a standard requiring them to act in the best interests of their clients. This is a fiduciary standard and, by the way, is what registered investment advisers have always been held to maintain with their clients. It eliminates any confusion you may have had regarding the differing standards that applied to different advisors in the past.

What Is the Standard?

The best interest standard means that the advice provided to you must be both in your interest as a client and at the same time meet a professional standard of care or what we might term prudence in the advice given. In order to meet the standard your advisors are going to have to be open and honest about their compensation and any potential conflicts of interest (between themselves and you, the client). In addition, the rule calls for any compensation to advisors to be reasonable compensation.

What Kind of Compensation Will Not Be Allowed?

Any type of advisor compensation which is not tied to a recommendation in the client’s (your) best interest will not meet the requirements of the rule. For example, a fee that varies depending on the investment recommendations would violate the rule. Commissions, front loads and trails likely will not be permissible for transactions covered by the rule. In addition,

Rule Does Not Apply to Your Investment Decisions

Among the transactions that are not subject to the rule are any transactions a client requests which did not come from the advisor’s suggestion or recommendation. Further, an advisor’s advertising or marketing efforts, to the extent they do not amount to making an investment recommendation are not affected by the rule. Therefore, you are not protected by the rule when you tell your advisor to purchase, on your account, any specific investments. This means you should be very careful in the decisions you make about investments where you are not relying on the investment professional.

What is the Best Interest Contract Exemption?

Under the new rule, your advisor may enter into an agreement – the best interest contract – with you as the client that will protect the advisor from being charged with a violation of the rule if the contract and the advisor’s behavior comply with the rule. This requirement of a contract does not go into effect until January 1, 2018. However, your advisor may enter into such an agreement with you prior to that date. Again, it is important for you to understand what the contract provides and to monitor what the advisor is doing to ensure that your interests are being protected.

What Is Excluded from the Best Interest Contract Exemption?

The exemption does NOT apply to protect advisors who have discretionary trading authority with respect to a recommendation unless that recommendation is for rolling over a plan participant’s account. Robo advice is not included in the exemption most likely because an algorithm would not necessarily automatically rise to the level of your own best interests in your own personal situation.
As you can probably tell from these brief points, there is a lot more to the new DOL fiduciary rule. Much of it relates to how advisors and their firms can comply with the intent of the rule and have some certainty they will enjoy its protections if they act appropriately. There are also many details that will still need to be worked out so this general guide, providing some pointers to you about the rule, is only the beginning.


George Chamberlin & Mentor RIA Consulting © 2016