How will 2018 Regulation Impact the way you Invest?



 

Though not as sensational as other news stories or as appealing to the pundits on cable TV talk shows, a new federal regulation goes into effect next year concerning the way many receive advice on how to invest their hard-earned money.

“On February 23, 2015, President Obama called on the Department of Labor to create new rules that ensured financial advisors would put the interests of their clients first before their own,” says Kim O’Brien, CEO of Americans for Annuity Protection and founder of AssessBEST.

Although it is still under review, the new regulation is set to begin on January 1. The aim is to address concerns that some financial advisors may charge fees and advise clients to invest in ways that the advisor’s interests take precedence over their client’s.

The new regulation would require all advisors to follow fiduciary standards (for IRA assets and rollovers) and abandon the suitability standard that allows them to recommend investments that, while suitable to their client’s situation, may be recommended so the advisor can make additional profit from the investment.

“Putting the customer’s interest first is a good position and suitability didn’t quite get us there,” says O’Brien. “Advice following suitability is usually given before listening to the customer and assessing their needs.”

Some investment firms, however, have always followed the fiduciary standard. Cincinnati’s Horter Investment Management has since 1991.

“Our fiduciary advisors at Horter Investment Management, LLC are fee-based and don’t work for commissions,” says Drew Horter, founder of Horter Investment Management. “We’ve always been putting the client’s interests first. The new regulation requires advisors to review a client’s interests, needs and objectives before making suggestions on how to invest.”

Horter addresses all of the client’s objectives, concerns and risk tolerance through conversations, questionnaires and the AssessBEST software, which assists the advisor in finding the optimal, customized solution for their client.

“For example, when meeting with a client to talk about their future goals and lifestyle during retirement, a client may mention they want to be prepared in case they need long-term nursing care,” says Horter. “The fiduciary advisor must then address that client objective by finding the best coverage. Sometimes an advisor will do the research and find out that their client doesn’t qualify for long-term nursing care coverage and will then talk to their client about the best ways to proceed from there.

“Although there will be some change for us after January 1, it won’t be nearly as extensive as it will be for the brokerage and banking communities.”

O’Brien notes she has already witnessed a change in the investment industry.

“Some of the people who sell annuities and life insurance policies are deciding to retire early. Advisors are dropping out of the market,” she says.

The last time regulations or rules regarding investment advice was changed was in 1975.

“Other advisors are increasing their fees or decreasing their services to people with less money, which really limits the customer’s choices,” says O’Brien.

Horter has also noticed that some competing firms have raised their minimum threshold for a client’s net worth.

“What a lot of firms are doing is moving away from the $250,000 to $1.5 million client base and pushing those clients towards call centers instead of a personal advisor,” says Horter. “Some insurance companies have gotten rid of all advisors and now just have a call center. Investors need at least $3 million before some banks will even meet with them.

“This simply is not true at Horter. We’re there for the clients at the $250,000 range and higher.”

In order to comply with the new regulation, more documentation is required.

“Today’s annuity application is about 54 pages long,” says O’Brien. “When I first started out it was five pages. Now with disclosures and up to 25 more pages of information, these once five-page documents are now starting to look like mortgages.

“The more paper you add and throw at a consumer, the less they will read and the less informed they will be. The Department of Labor’s theory behind the regulation is good, but it’s just not implemented well.”

Horter believes the additional documentation could potentially puzzle many investors.

“Some investment advice agreements will now be over nine pages for each agreement. That means nine pages for the wife’s IRA and another nine for the husband’s,” he says. “It will add to the confusion as suddenly investors will be asking ‘Why am I signing so many papers?’

“The documentation will ensure that investors are getting full disclosure and transparency from their advisors, but the lay investor may not understand all of the legalese. This really only benefits those who are in the field and who are detail-oriented and knowledgeable on investment terms and vocabulary.”

In order to prepare for the new regulation, Horter encourages investors to assess their current financial advisor and broker.

“Is your advisor a fiduciary? Not just advisors for your IRA and 401(k) plan, but do you have a fiduciary on all of your assets?” he says.

“Check to see if you’re being charged by your broker for commissions and internal fees like 12b-1 fees for the A shares or C shares of your IRA’s mutual fund. Is your broker charging commissions to buy bonds inside your IRA and rollover assets and marking up those bonds 1 to 3 percent? If they are, they need to sign an agreement showing full transparency on January 1, 2018 to let you see where these commissions are going.”

O’Brien also shared some guidance for investors.

“If I was giving advice to my mom, I would tell her to ask her advisor, ‘Are you acting in my best interest and how can you demonstrate that?’ I would also have her ask ‘If I have a problem with this sale, who should I call?’

“See, one of the other potential problems with the Department of Labor’s rule is just that – who is the regulatory body that is governing this sale? Is it the state commissioner? Is it the Department of Labor? It depends on the license of the advisor. I suggest getting the answer to the question up front so you’re not wondering later on.”

 

Horter Investment Management is located at 11726 Seven Gables, Cincinnati, OH 45249. For more information, call 513.984.9933 or visit horterinvestment.com.

 

Investment advisory services offered through Horter Investment Management, LLC, a SEC-Registered Investment Adviser. Horter Investment Management does not provide legal or tax advice. Investment Adviser Representatives of Horter Investment Management may only conduct business with residents of the states and jurisdictions in which they are properly registered. Insurance and annuity products are sold separately through Horter Financial Strategies, LLC. Securities transactions for Horter Investment Management clients are placed through Trust Company of America, TD Ameritrade and Jefferson National Life Insurance Company.