An Aging America and The Department of Labor Conflict of Interest

The Perfect Storm: An Aging America and The
Department of Labor Conflict of Interest Rule!
Craig W. Lemoine, PhD, CFP®!
Jarrett L. Davis Distinguished Professorship in Financial Planning Technology!
Associate Professor of Financial Planning
Dawn of New Standards
- Department of Labor Conflict of Interest Proposed Rule -
•  An Aging America
•  Magnitude of Retirees
•  Understanding Standards of Care
•  Advisers and Consumers
•  Meeting New Standards
An Aging America
Retirees in America
Estimated % of US
Population > 65
•  “Baby Boom” 1946-64
–  Peaked around 1960 with 4
million American babies born
that year
–  Steep increase in number of
Americans over 65 will run
2010-2030
•  Increasing by 1.7 Million in 2015
•  Will peak at 2.0 Million annually
2020
•  2 x as fast as growth under 65
2040
2030
2020
2010
0
10
US Census Data – Via economic report found http://fivethirtyeight.com/features/what-baby-boomers-retirement-means-for-the-u-s-economy/#ss-1
20
30
An Aging America
Fewer Babies and Longer Retirements
•  Birth Rates
–  1957 – US Fertility rate was 3.7 births
per woman
–  2010- 2.1 births
•  Average Time in Retirement
–  1960’s – 12 yrs
–  Today – 15 yrs
–  2030 – 20 yrs
TIAA Creff Institute Research on Aging and America - https://www.tiaa-crefinstitute.org/public/pdf/aging_and_america_0115.pdf
Macroeconomic Consequences
An Aging America
•  Large elderly population reduces GDP per capita,
Investment per GDP and lowers inflation
•  Coupled with a lower birthrate higher population of retirees
will likely be permanent
•  New pressures on social benefits (ratio of workers to
retirees) and markets
St. Louis Federal Reserve Report on Aging March 2015: https://www.stlouisfed.org/~/media/Files/PDFs/HFS/assets/Emmons-CFA-Retirement-Demographics-Mar-5-2015.pdf
A Staggering Thought
•  Fewer Children
•  Longer Lives
•  Baby Boom
Covered Workers to Beneficiaries “Paying
in to paying out”
6
4
2
0
1960
1980
2000
2020
2040
St. Louis Federal Reserve Report on Aging March 2015: https://www.stlouisfed.org/~/media/Files/PDFs/HFS/assets/Emmons-CFA-Retirement-Demographics-Mar-5-2015.pdf
Pressure!!
•  Increased pressure on federal and
municipal retirement plans
Fewer
Pensions
Stresses on
Social
Security
•  Decreased use of pension plans in
private sector
•  Americans must secure and fund
their retirements
Longer
Retirements
Need for Self Sufficiency
TIAA Creff Institute Research on Aging and America - https://www.tiaa-crefinstitute.org/public/pdf/aging_and_america_0115.pdf
Driving Department of Labor Concerns
Retirement Dollars
•  2012 – 23.7 Trillion of Retirement Assets
–  24% IRAs (5.7 Trillion)
–  17% 401(k) and Profit Sharing Accounts (4 Trillion)
•  Concern: Cost of Bad Advice
–  17 Billion
•  For Scale:
–  Amount spent by NASA or the Department of Justice in 2014
St. Louis Federal Reserve Report on Aging March 2015: https://www.stlouisfed.org/~/media/Files/PDFs/HFS/assets/Emmons-CFA-Retirement-Demographics-Mar-5-2015.pdf
http://www.ebri.org/publications/benfaq/index.cfm?fa=retfaq4
Department of Labor Fiduciary Rule Cost of Advice Estimate: http://www.dol.gov/ebsa/regs/conflictsofinterest.html
Federal Budget 2014: https://en.wikipedia.org/wiki/2014_United_States_federal_budget
Conflict of Interest Proposed Rule
Department of Labor
Expands Fiduciary Duty
–  Investment recommendations to IRA
holders (including insurance
products)
Carve Outs
–  100/100 Large Plans
–  Education
–  Distribution Recommendations
•  Buying LTC Insurance
•  Source of Funds
–  Recommendations to Retirement
Plan
Additional Requirements
–  Best Interest Contract
Exemption (commission)
–  Inclusive: insurance agents,
registered reps, call center
employees
Department of Labor Fiduciary Rule: http://www.dol.gov/ebsa/regs/conflictsofinterest.html
Understanding Standards of Care
Today’s Environment
Suitability
– 
– 
– 
– 
– 
Rules Based
Risk Profile
Insurance Agent
Registered Representative
FINRA/State
Fiduciary
– 
– 
– 
– 
Principle/Agent Relationship
Best Interest
Registered Investment Adviser
Working with ERISA Plans,
Trustees
http://www.thefiduciaryinstitute.org/wp-content/uploads/2013/02/lornaschnaseFiduciary-Duty-Paper.pdf
Lemoine, C, Financial Planning Process and Environment Chapter 3, pp 3.3 – 3.7. 5th Edition American College Press
Preparing for a Standard – A Tough Conversation
A Duty of Care
•  Prudence & reasonableness
•  Avoid misleading
•  Basis for investment and retirement advice
•  Best execution of trades
A Duty of Loyalty
•  Best interest of clients
•  Put interests of clients above your own
•  Minimize conflicts of interest
•  Obtain clients informed consent with full and transparent disclosure
http://www.thefiduciaryinstitute.org/wp-content/uploads/2013/02/lornaschnaseFiduciary-Duty-Paper.pdf
Lemoine, C, Financial Planning Process and Environment Chapter 3, pp 3.3 – 3.7. 5th Edition American College Press
Preparing for a Standard – A Tough Conversation
A Duty of Obedience
•  Agree to terms of engagement
•  Follow instructions provided by the client
A Duty of Good Faith
•  Transparency
•  Fairness
http://www.thefiduciaryinstitute.org/wp-content/uploads/2013/02/lornaschnaseFiduciary-Duty-Paper.pdf
Lemoine, C, Financial Planning Process and Environment Chapter 3, pp 3.3 – 3.7. 5th Edition American College Press
Conflict of Interest Proposed Rule
Suitability
Risk Profile
Objectives
Time Horizon
Age
Liquidity
Principal
Agent
Fiduciary
Client
Adviser
Sales Goals
Product
Innovation
Family
Ethical
Conduct
Government
Firm
Adviser
Risks
Outcomes
Industry Challenges ahead
•  Increased Costs
–  Liability
–  Arbitration
–  Compliance and Platform Changes
•  Challenges to Agency Relationships
•  BIC Exemption
•  Potential to Disenfranchise Middle and
Low Income Consumers
Executive summary: Cost and Value of Advice http://www.theamericancollege.edu/assets/binder/Binder1-1.pdf
Comments to the Department of Labor and Citations https://www.dol.gov/ebsa/pdf/1210-AB32-2-03076.pdf
Access to Planning
Value of Financial Advice
•  The Value of Advice
•  Threats
–  Correlated to increased family
wealth
–  More likely to insure risks
–  Diversification
–  Behavior / grounded
–  Plan for the future
Executive summary: Cost and Value of Advice
–  Increased costs and liability risk
–  Unclear standards and
preferences
–  Cost exceeds Revenue
http://www.theamericancollege.edu/assets/binder/Binder1-1.pdf
Cost Illustration
$300 per month
•  Family saves $300 per month into a ROTH IRA account
– 
– 
– 
– 
$3,600 annually
1% Fee based model = $36
5% front end load = $180
Increasing costs to $180 per consumer will fundamentally question
this relationship
Hypothetical Illustration: not indicative of a specific product or strategy
Market Reality
Cost
Exceeds
Revenue
Potentially
Disenfranchised
Consumers
Liability
Increases
Challenging the Model
A Fundamental Question
Can you be dedicated to the best
interest of your appointed companies
and the best interest of your clients
at the same time?
Client
Agent
How?
Insurer
Broker
Big Picture Rulemaking Timeline
2008 to Today
Dodd-Frank
–  Charged SEC with evaluating
standards of care
–  2010 SEC proposed a fiduciary
standard – was not acted on
2015
–  Proposed rules available for
review and feedback
–  August testimony on proposed
rules, very polarized
–  September feedback on
testimony
–  ???
Where do we go from here?
Without you – there are no advocates
Support
–  NAIFA
–  AALU
–  Society of Financial Service
Professionals
–  Engage Congress; enable your
clients
Evolve
–  Adopt business models that are
standard neutral
–  Investment Policy Statements
–  Continue putting your client’s
best interests first
–  Education
Questions to Ask
Reach Out – Get Involved – Help Shape the Future
Is the fiduciary standard
a proxy for product fees
and expenses?
A Rated
Insurer
B- Rated
Insurer
Stability
Is cheaper always better?
Example of a
$100,000 SPIA
$1,400/
month
Payout
Hypothetical Illustration: not indicative of a specific product or strategy
$1,800/
month
Payout
Questions to Ask
Arbitration and Regulation
•  Where will arbitration occur? •  FINRA Arbitration
•  Who will bear the cost?
–  $50 to $1,200 to file
–  $1,200 per half day session
•  Fiduciary/Investment Advisor
–  Inconsistent Process
–  $300 to $600/hour
–  Attorney fees
Cost of Arbitration
http://www.americanbar.org/content/dam/aba/publications/dispute_resolution_magazine/Gana_Lufrano_
TheInconsistentDisputeResolutionProcessforInvestmentAdvisers.authcheckdam.pdf
Preparing for a Standard – CLU and ChFC®
“In all my professional relationships, I pledge myself to the
following rule of ethical conduct: I shall, in light of all conditions
surrounding those I serve, which I shall make every conscientious
effort to ascertain and understand, render that service which, in
the same circumstances, I would apply to myself.”
Preparing for a Standard – A Tough Conversation
A Duty of Care
•  Prudence & reasonableness
•  Avoid misleading
•  Basis for investment and retirement advice
•  Best execution of trades
A Duty of Loyalty
•  Best interest of clients
•  Put interests of clients above your own
•  Minimize conflicts of interest
•  Obtain clients informed consent with full and transparent disclosure
Preparing for a Standard – A Tough Conversation
A Duty of Obedience
•  Agree to terms of engagement
•  Follow instructions provided by the client
A Duty of Good Faith
•  Transparency
•  Fairness
Submit questions using the form at the link below:
http://www.theamericancollege.edu/dol-webcast/