Following his testimony before the Department of Labor hearing on August 13, Don Trone called to tell us our interview would have to wait. He needed to decompress and was going for a long walk on the beach. We have to admit we were initially amused at the mental image of the ex-military man holding a mug of chamomile tea and staring off into the sunset, but after the interview we understood his need for the break.
He didn’t win any friends with his testimony, and per Trone’s bulldog style, he didn’t care. The CEO of 3ethos, a consulting firm that specializes in researching the interrelationships between leadership, stewardship and governance, told it like it is, or at least as he saw fit: that we’re no longer facing a crisis but rather in a crisis; that the current DOL proposal cannot be effectively implemented; that it wouldn’t have stopped Bernie Madoff. The hearing’s sponsors might not have wanted to hear it but, Trone believes, needed to hear it.
All well and good—but ask Trone what he thinks will fix the current crisis. He practices what his firm preaches, and far from a superficial explanation, he delivers an extremely thorough and contextual answer.
“For some time, 10 or 15 years, we’ve been tracking the government’s growing interest in retirement assets,” he begins. “Broadly, it includes, Social Security solvency, underfunded state pensions, reductions of defined benefits plans with corresponding increases in defined contribution plans and the general shift in retirement responsibility from companies to individuals.”
He recalls a speech he delivered Peoria, Illinois in the late 1990s where he talked about the retirement pillars mentioned above. Coverage of the presentation was picked up by the Associated Press and sent nationally. The fallout was swift and immediate, with one head of a well-known retirement industry advocacy organization all but threatening him to keep his mouth shut. It didn’t work.
“The term ‘uniform fiduciary standard’ did not come about as a result of Dodd-Frank, no matter what some people might think,” Trone says. “It’s something we’ve been talking about for more than 25 years. Today, there are over eight million investment fiduciaries who manage 80 percent of our nation’s investable wealth. How they conduct themselves has a direct impact on the fiscal health of our nation.”
Take rollovers for instance; Trone argues that if a dollar is set aside for retirement in an account that is not currently taxed – as in the case of a 401(k) or IRA rollover – then the government should have the right to define how it is managed.
“We’re no longer facing a retirement crisis; we are now in a retirement crisis that, one can argue, is all the more reason for the government to have a hand in rollovers.”
The problem, of course, is how it’s done, and specifically how a fiduciary standard is defined and implemented.
“Opponents of the DOL say the SEC should be the first to define what the uniform standard of care should look like, and there is legitimacy to that argument. The reason is that the advice provided to a retirement saver needs to integrate elements of wealth management with retirement planning.”
And then he drops a bomb. When he gave his testimony, he bluntly told them he did not see existing fiduciary best practices in the current proposal. That fact, when combined with what they were proposing, meant the DOL’s plan cannot be effectively implemented for smaller accounts. Conservatively, he claims, a retirement saver would need to have an account balance of $300,000 to generate sufficient fees to support the costs associated with providing an ERISA fiduciary standard of care.”
“What’s an average advisor’s minimum account size these days? I think it’s $500,000 and heading towards $1 million. Ray Ferrara, the outgoing chairperson of the CFP Board of Directors, testified that providing fiduciary services to middle-class savers isn’t a problem. Well, his ADV says his minimum account size is $250,000. That’s 10 times the median IRA account balance of $25,000. Let’s see if Ray will be the first to lower his minimum to $25,000?”
So that leaves two possible outcomes, according to Trone:
1). The DOL confirms that existing fiduciary best practices, such as providing the client an IPS and a periodic performance report, will have to be provided, along with the newly proposed rules. If so, retirement savers with small account balances will be under-served.
2). Or, advisors will be told they only have to comply with the proposed rules – advisors will not have to provide the bundle of existing fiduciary best practices.
“The ERISA fiduciary standard of care was written to define procedurally prudent practices for investment committees. The practices were never intended to define a standard of care for individual retirement savers. What may happen is that we end up with a bifurcated ERISA standard; one for the plan sponsor and a second standard that applies to participants and beneficiaries.”
“A fiduciary standard is a journey of 1,000 miles, and the first step is to acknowledge you will act in the best interest of the client. The rest of the journey is the practices and procedures that define how. Whether or not the DOL defines it, the industry needs to ramp up its standards; for rollovers, for instance, because the wave is coming …maybe not now, but coming.”
Which, of course, brings us to robo advisors.
“They can’t hold the client’s hand, review their goals and objectives, ask about other assets, provide periodic performance reviews, nor handle major monetary events like a divorce,” he concludes. “But we can use them to blend automation with fiduciary best practices. The integration of robo technology with fiduciary best practices may make it possible to handle the $25,000 accounts. No matter what the DOL thinks, we cannot write laws to get us out of this.”