OT: New DOL broker fiduciary regulations?

[BumbleBeeDave]

My broker is feeding me information on the new DOL regulations that encourage (read: force) investors to change their relationship with brokers from a per-transaction basis to a fiduciary relationship based on set fees.

Under this arrangement, and based on my trading habits over the past years, I'd be paying him about double annually. His pitch is that by changing the relationship--which is being forced anyway--it makes it easier to trade at least mutual funds, since any front-loads on new funds would be included in my set fee, which would be locked in.

I'm still a little unclear on the advantages in single stock trading. But if I'm paying the same no matter how many transactions, it seems this would encourage more trading in general.

Obviously, I'm a leeeeetle bit skeptical of any arrangement that increases my costs, but some online research indicates the regulations are real and the info he's given me so far seems up front.

Impressions? Dark side? Advantages?

Any thoughts from the Paceline Brain Trust would be appreciated.

BBD

[Blown Reek]

You can always negotiate fees. If not, then find another broker.

[FlashUNC]

The fiduciary standard is a far better one than the suitability standard.

It's the right move for the industry in the long run.

[verticaldoug]

My broker is feeding me information on the new DOL regulations that encourage (read: force) investors to change their relationship with brokers from a per-transaction basis to a fiduciary relationship based on set fees.

Under this arrangement, and based on my trading habits over the past years, I'd be paying him about double annually. His pitch is that by changing the relationship--which is being forced anyway--it makes it easier to trade at least mutual funds, since any front-loads on new funds would be included in my set fee, which would be locked in.

I'm still a little unclear on the advantages in single stock trading. But if I'm paying the same no matter how many transactions, it seems this would encourage more trading in general.

Obviously, I'm a leeeeetle bit skeptical of any arrangement that increases my costs, but some online research indicates the regulations are real and the info he's given me so far seems up front.

Impressions? Dark side? Advantages?

Any thoughts from the Paceline Brain Trust would be appreciated.

BBD

From a 401(k) employer level, this is not a bad thing. Commissions is not the only way a broker can make money with you. The larger brokers can just funnel you into their in-house funds etc etc which is one of the conflicts the new regs are trying to eliminate.

At least your broker is dealing with the changing reality and not pretending nothing will change.

My understanding is the new regs do not come into effect until April 2017, and there is a transition period out until Jan 2018, so you have a lot of time.

In general, active management for bonds (provided the fees are not too high ) and index for stocks.

The fee is not legislated, so wait to see if the price comes down as the deadline approaches.

[rccardr]

Why use a broker at all? Does your broker bring you into deals you won't find yourself, or into IPO's that juice returns? Take a close look at the returns from things like that and determine your broker's true value.

If you're an active trader, less expensive to use an online platform like Fidelity (or insert name here, there are lots). Keep in mind that very few active traders (or actively managed funds) beat the averages, so even cheaper to buy index funds or ETF's with super low management fees & maybe play with a small percentage of your money through active trading if you've just got to do it.

If you're retired or close to it (or have even just done well and feel you need professional guidance), look into wealth management. A good wealth manager charges a fairly small percentage to do their job (I pay well under 1% with no commissions) and generally works with a modeled approach based on historical returns. Quarterly meetings, rebalancing to make sure the percentages don't go all wacky, and reliable returns.

Personally I'm retired, was never in the financial business, but education was in economics and it came in really handy as we invested over the past 45 years. Was an active trader and did extremely well, but migrated to a wealth management model as we approached retirement. Worked for me.

[fkelly]

I'll echo rccardr: "Why use a broker at all?"

Just use an online brokerage. Mine (etrade) charges $7.50 a trade. I buy mostly index funds and make less than a dozen trades a year.

While the fiduciary standard is a positive step forward ... and the resistance it has garnered from the financial advisor industry is very illuminating ... I really don't see where it is going to be very enforceable long run. It may reduce some of the most egregious abuses but after a while it will be like the lengthy terms and conditions you have to sign when you buy a software product.

[hockeybike]

Agree with lots of the above. There are some brokerages which allow you to purchase their own and some.others' etfs free of charge. There's still an expense ratio, which you should research, but if you only purchase etfs, you may incur far lower overall costs by going with a broker who offers low expense ratio etfs.

One other note: under the suitability rule, your broker may have been able to sell you an etf or mutual fund with a higher expense ratio (ie more money for broker for identical product: conflict of interest) than a very similar one with a lower expense ratio. Under the fiduciary standard, that becomes more or less verboten.

[54ny77]

I think you answered your own question. If your broker isn't adding any value to you, and is now going to be classified as a fiduciary based upon your account restructuring, it's doing nothing to change his day-to-day value-add to you but now gets paid more. I'll take a wild guess his pitch that the front-load thing is "baked in" to the new fee structure is a load of slippery crap--he'll be pushing in-house mutual funds that have that fee structure, which more often than not perform worse than a low cost externally managed fund or even an index fund for that matter. He gets paid more in commissions for getting you in those, but his comp on that is not transparent to you.

In other words, it's a win-win.....for him. For you, no. :crap:

[tumbler]

Why use a broker at all? Does your broker bring you into deals you won't find yourself, or into IPO's that juice returns? Take a close look at the returns from things like that and determine your broker's true value.

If you're an active trader, less expensive to use an online platform like Fidelity (or insert name here, there are lots). Keep in mind that very few active traders (or actively managed funds) beat the averages, so even cheaper to buy index funds or ETF's with super low management fees & maybe play with a small percentage of your money through active trading if you've just got to do it.

If you're retired or close to it (or have even just done well and feel you need professional guidance), look into wealth management. A good wealth manager charges a fairly small percentage to do their job (I pay well under 1% with no commissions) and generally works with a modeled approach based on historical returns. Quarterly meetings, rebalancing to make sure the percentages don't go all wacky, and reliable returns.

Personally I'm retired, was never in the financial business, but education was in economics and it came in really handy as we invested over the past 45 years. Was an active trader and did extremely well, but migrated to a wealth management model as we approached retirement. Worked for me.

Good advice here.

[slidey]

Echoing the response of a couple of other respondents above, I too fail to see how a broker is useful in this day and age.

Having said that, I'm not an active trader, and put the lions share of my petty portfolio into index funds.

If anything, it seems that the more active an investor you are, the more you have to lose by having a broker, or am I missing something else here? Besides, getting in on IPO action.

[saab2000]

Echoing the response of a couple of other respondents above, I too fail to see how a broker is useful in this day and age.

Having said that, I'm not an active trader, and put the lions share of my petty portfolio into index funds.

If anything, it seems that the more active an investor you are, the more you have to lose by having a broker, or am I missing something else here? Besides, getting in on IPO action.

This is how I do it as well. I'm a saver, not so much an investor. My savings are largely in mutual funds. I have a couple stocks as well and a few have done well over the years but I definitely don't trade. I buy and hold.

I may sell some when I need a cash downpayment for a house in the next year or two. I hope the markets are up when that day comes!

But my retirement is pretty much exclusively mutual funds and much of that is in low-cost index funds.

[wombatspeed]

https://www.youtube.com/watch?v=gvZSpET11ZY

Beyond this video, all scientific evidence suggests that active traders, over any longer period of time, do not beat indexed funds.

[Climb01742]

The fact that the financial services industry needs a law that mandates a fiduciary duty, and is in many cases fighting the implementation of the fiduciary standard, tells you a lot. The suitability standard really means suitable for the broker's best interests. Fiduciary is in your best interests, at least in theory.

[Mr. Pink]

https://www.youtube.com/watch?v=gvZSpET11ZY

Beyond this video, all scientific evidence suggests that active traders, over any longer period of time, do not beat indexed funds.


Vanguard.

[54ny77]

That was funny.

Lot of truth in that video.


https://www.youtube.com/watch?v=gvZSpET11ZY

Beyond this video, all scientific evidence suggests that active traders, over any longer period of time, do not beat indexed funds.

[tumbler]

Since several posts have mentioned "IPO action", I'll chime in to clarify that unless you are a major player, you aren't getting in on IPO action... unless it's an IPO that literally no one else wanted. The real IPO action goes to favored clients of the underwriting investment bank, and the bar for "favored" is unbelievably high (ie. those paying millions per year in commissions or other services with them). The bar is high enough that small and medium size hedge funds are often snubbed, so I wouldn't put much importance on IPOs and would be suspicious of any broker promising IPO access (unless you are a major player as described above... in which case, "Carry on and good day, sir.")

[FlashUNC]

Since several posts have mentioned "IPO action", I'll chime in to clarify that unless you are a major player, you aren't getting in on IPO action... unless it's an IPO that literally no one else wanted. The real IPO action goes to favored clients of the underwriting investment bank, and the bar for "favored" is unbelievably high (ie. those paying millions per year in commissions or other services with them). The bar is high enough that small and medium size hedge funds are often snubbed, so I wouldn't put much importance on IPOs and would be suspicious of any broker promising IPO access (unless you are a major player as described above... in which case, "Carry on and good day, sir.")

If you're getting IPO access, your biggest problem is deciding which Rolls Royce your chauffeur will pull from the garage to drive you to the club.

But yeah, if you're getting IPO access out of the blue as your regular retail investor, its a sign its a dog and should be avoided.

[BumbleBeeDave]

Is it worth it to me in terms of time and trouble to do all this myself? The answer so far has been no. He's knowledgeable, has access to in-house advice that I don't, and if I do see something that interests me, the I can talk with him and he does research.

I know it may be a simplistic comparison, but it's like my car. As I get older, it gets more worth it to me to have somebody else do the work on it even if it's something I know how to do and have done myself in the past. IMHO I have other, better things to do with my time. Is that value-add for me worth the extra money I will be paying him? That remains to be seen. My education was not in economics, and I like having the broker's expertise to fall back on.

This guy has been up front with me and I was up front with him: if I'm paying him more and it's now the all-you-can-eat buffet, then I'm going to be calling him far more often and be willing to shift things around more often if there are no fees involved. I'm willing to give him a chance for a year, but I'm open to doing exactly what others here suggest in taking my $$ and going elsewhere.

Another good question I've thought of is whether the annual fee is tax-deductible. Thoughts?

BBD

Why use a broker at all? Does your broker bring you into deals you won't find yourself, or into IPO's that juice returns? Take a close look at the returns from things like that and determine your broker's true value.

If you're an active trader, less expensive to use an online platform like Fidelity (or insert name here, there are lots). Keep in mind that very few active traders (or actively managed funds) beat the averages, so even cheaper to buy index funds or ETF's with super low management fees & maybe play with a small percentage of your money through active trading if you've just got to do it.

If you're retired or close to it (or have even just done well and feel you need professional guidance), look into wealth management. A good wealth manager charges a fairly small percentage to do their job (I pay well under 1% with no commissions) and generally works with a modeled approach based on historical returns. Quarterly meetings, rebalancing to make sure the percentages don't go all wacky, and reliable returns.

Personally I'm retired, was never in the financial business, but education was in economics and it came in really handy as we invested over the past 45 years. Was an active trader and did extremely well, but migrated to a wealth management model as we approached retirement. Worked for me.

[rccardr]

No, it is not tax deductible. And unless you're netting 4 or 5% above and beyond whatever he's charging you on an annual basis, he's not paying his own way.

There are some good brokers out there who really do have a feel for what the market is doing; unfortunately the majority of brokers are salespeople who are trying to move what 1) their manager is telling them to push, and/or 2) what they are making the highest commission on, and/or 3) whatever they can do to generate some churn in the accounts assigned to them that will generate a commission. Which is completely understandable, since these guys have to feed their families.

Don't get me wrong, I don't hate brokers or have any kind of vendetta against them. 40 years ago, a good broker was worth everything they got paid. Pre-Internet, they had access to information on companies and entire industries that just wasn't available to the average investor. But times have changed and today's broker has no more access to information or research than you or I, as long as we're willing to participate in our own financial future. WSJ costs under $500 a year; Morningstar premium access is maybe $260. Lots of other stuff is just, well, free. Spend an hour a day at most reading up on what's happening in the world, and you have no need for a broker.

If you're at the point where you have or are close to having the principle you need to retire, then wealth management is the way to go. To use Dave's car analogy, yeah I used to do all of my own wrenching and put in my share of time on my back in the parking lot in the rain. Now I just put in the key and it starts...off you go.

[tumbler]

I would suggest spending $12 at Amazon for this book (https://www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393352242/ref=dp_ob_title_bk), which provides a good overview of the academic research on individual investment strategies. The summary is that almost everyone is better off with a simple, low fee, passively managed, index-type strategy that you can setup yourself in an hour vs. using a broker or doing your own research to pick stocks or sectors or time market moves. I also recommend anything by John Bogle, founder of Vanguard, and one of the leading proponents of this type of strategy.