Castle Rock Investment Company

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Fiduciary

Major Move by Merrill Lynch to Comply with Fiduciary Rule

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By Mack Bekeza

In order to comply with the upcoming Fiduciary Rule, Merrill Lynch decided to discontinue offering commission based IRA accounts to investors starting April 10th of 2017. Specifically, they want to remove a major conflict of interest between them and their clients by only offering fee-based advisory, robo-advisory, and self-directed services for IRA accounts. Merrill Lynch’s decision is expected to have a major ripple effect for not only their clients, but for their advisers and their respective competitors.

So, how does Merrill Lynch’s decision affect their advisers and their competitors?

  1. As of April 10th of 2017, the firm’s 14,000 plus advisers will no longer be able to open new commission based IRA accounts, which is a notable source of their compensation. On top of that, advisors will now have to further prove their value to their clients when their primary form of compensation will be under a fee based model.
  2. Since Merrill Lynch is one the first major wirehouse firms to make this move, it is expected that other wirehouse firms will also follow suit in order to remain competitive in the upcoming Fiduciary focused marketplace.
  3. Merrill Lynch as well as other wirehouse firms will more than likely face other regulatory issues such as having fee-based variable compensation, which will be prohibited under the Fiduciary Rule.
  4. This might lead to certain broker dealers to no longer service IRA accounts due to additional costs of complying.

Although we believe this is an excellent move by Merrill Lynch, we believe that wirehouse firms such as Merrill will still face regulatory issues as they may have to forgo recommending certain investments to clients as well as having to develop a truly uniform method of compensation from their IRA accounts.

©2016 Castle Rock Investment Company. All rights reserved. Please share your insights and comments with us at Mack@Castlerockinvesting.com

Thrivent is Afraid of Getting Sued!

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By Mack Bekeza

In recent news, Thrivent Financial for Lutherans filed a lawsuit against the DOL over the new fiduciary rule and how it could prevent Thrivent from resolving disputes internally. Specifically, Thrivent is seeking a preliminary and permanent injunction against part of the rule that will allow investors to bring a class action against them.

So, why is Thrivent Financial worried about not being able to resolve disputes internally? For one, Thrivent primarily employs sales representatives who sell proprietary insurance and investment products on a commission basis, which will be considered a prohibited transaction under the new rule. Second, one of the primary sources of their total revenue comes from IRA investments and rollovers from qualified plans. In essence, Thrivent is basically claiming that they will have to completely overhaul their business structure.

Although there is not an official comment from the DOL in regard to this lawsuit, experts are curious to see if the DOL will point to statutory authority for regulating retirement accounts and whether or not they will prevail over the Federal Arbitration Act.

Although Thrivent is not the only firm dealing with this issue, it is ironic that a company that was founded and claims to operate under Christian principles is having issues with the contractual obligation to be a fiduciary. Also, the reason why the fiduciary rule and its allowable exemptions are being put into place is so firms such as Thrivent have to work in their retirement investors’ best interest. And on top of that, the fiduciary rule will help make the financial services industry a more true and honest profession, which will give investors more confidence to invest with these firms.

What are your thoughts on this case?

©2016 Castle Rock Investment Company. All rights reserved. Please share your insights and comments with us at Mack@Castlerockinvesting.com

Who is Trying to Stop the Fiduciary Rule?

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By Mack Bekeza

On September 21rst, US District Court Judge Daniel Crabtree over saw a preliminary injunction hearing involving Market Synergy Group (“Market Synergy”) and the Department of Labor (“The DOL”). Market Synergy is an independent marketing organization (“IMO”) that represents 20,000 independent insurance agents and claims that the new DOL fiduciary rule will create irreparable harm to these agents. Specifically, they believe that independent agents selling Fixed Indexed Annuities (“FIAs”) should not be required to comply with the new rule.

One of Market Synergy’s primary claims is that IMOs are not considered “Financial Institutions”, a requirement to be subject to the rule, and therefore are not required to comply. They also claim that the DOL lacks the authority to regulate FIAs.

In our opinion, even if Market Synergy and other IMOs are not considered “financial institutions”, they are still selling FIAs that are primarily purchased via individual retirement accounts and, therefore, should be subject to the new rule. On top of that, FIAs typically pay notable commissions to agents, regardless if they are independent or not. In other words, these agents still need to prove that selling a FIA is in the retirement investors’ best interest.

Secondly, although states technically regulate insurance products, Judge Crabtree pressed Market Synergy, asking, “Couldn’t the federal government step in to regulate fixed indexed annuities if the states were doing a bad job regulating fixed indexed annuities?” Market Synergy agreed that if the DOL found that the states’ regulations were “woefully inadequate”, federal agencies, such as the DOL, could further regulate such products. Market Synergy essentially shot itself in the foot by agreeing to that statement.

Although Judge Crabtree is skeptical about Market Synergy’s claims, he is also skeptical whether or not the DOL has a strong claim that IMOs and their independent agents are subject to the new fiduciary regulation. In other words, there is still a possibility that an injunction will be placed on the DOL which will allow these agents to sell high commission products to retirement investors.

What are your thoughts on the case?

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at Mack@castlerockinvesting.com or via phone at 303-719-7523

State Farm and Edward Jones React to the Fiduciary Rule

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By Mack Bekeza

With April 10th, 2017 quickly approaching, a large number of investment firms and insurance agencies are scrambling to comply with the DOL fiduciary regulation. However, some firms believe they have found a solution to the upcoming rule. Knowing that their representatives cannot put their clients’ interest first, State Farm and Edward Jones have announced plans to prevent their employees from selling mutual funds when the new fiduciary rule takes effect next April.

So how will they be able to do this without significantly reducing their revenue? State Farm plans to only sell and service their mutual funds, variable products, and tax-qualified bank deposit products by a self-directed call center, as opposed to having their agents sell the products directly. In other words, State Farm still wants their customers to purchase these products while being able to avoid liability if the product turns out not being in a customer’s best interest.

Edward Jones’s solution involves curtailing retirement savers’ access to mutual funds in commission based accounts and lowering their investment minimums. Basically, Edward Jones is planning to shift completely into the fee only side of compensation for retirement accounts and allow more investors to move their money to them.

Although it will be interesting to see how State Farm’s self-directed call center will play out, at least they have a strategy to deal with the upcoming rule. As for Edward Jones, going completely towards the fee-only side for retirement accounts is a good move as they are eliminating a major conflict of interest for recommending certain products.

Although there are a number of firms still trying to strategize to comply with the DOL rule, we are still waiting to hear plans of other advisers that sell investments that may not be in their clients’ best interest. However, we will attempt to keep you posted as more firms finalize their strategies.

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

The DOL Rule and Why Brokers and Insurance Agents Should be Concerned

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By Mack Bekeza

Are you currently a Registered Representative or an Insurance agent? If so, you will want to keep reading!

As you may know, the Department of Labor will have new regulations in effect on April 10, 2017, which will change how Brokers and Insurance agents conduct business with retirement investors.

For starters, when dealing with retirement investors, the broker or insurance agent cannot receive variable compensation. This means that someone receiving commissions, asset based fees, 12b-1 fees, etc. must create a uniform method of compensation.

Additionally, any investment recommendations must be in the retirement investor’s best interest, meaning that the agent or broker must have a thorough understanding of the client’s overall financial picture and cannot just rely on FINRA’s suitability standards.

Finally, if you still want to receive variable forms of compensation, you must be able to comply with something called the Best Interest Contract Exemption, aka the “BICE.” And, in order to truly comply, you have to be certain that recommending a product that will pay you variable compensation is in the retirement investor’s best interest.

The major caveat with complying with the BICE is that even though the client is fully aware of how you are compensated, if he or she believes the product is not their best interest, he or she can file a lawsuit against you. In other words, you can still sell commission based products, but don’t expect the BICE to bail you out if you are sued!

So, who is considered to be a retirement investor? To make this simple, do you sell or make investment recommendations for the following accounts?

  • ERISA governed Retirement Plans (with less than $50 million)
  • Non-ERISA Retirement Plans (e.g., Keogh, Solo Plans)
  • IRAs
  • Health Savings Accounts, Archer MSAs, and Coverdell ESAs

If you fall into one of these categories, you will want to seek advice on where to go from here! If you reside in the Greater Denver Area, Castle Rock Investment Company and The Law Offices of Ed Frado, LLC are hosting an event to educate Brokers and Insurance Agents on the details of the new DOL regulation on September 20th at Maggiano’s in the Denver Tech Center. If you would like to register, click here

We hope to see you at the event!

© Castle Rock Investment Company. All rights reserved. Please share your insights with us at info@castlerockinvesting.com or via phone at 303-719-7523

Fund Families sued by their own employees over their retirement plans??

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By Mack Bekeza

Over the past two years, a number of investment firms have been sued by their employees over their 401(k) plans. That’s right! Investment firms have been sued over their own in-house retirement plans! Why? In most cases, these firms would only provide proprietary funds to their employees at a full or slightly reduced cost. In fact, here are just a few of the recent cases from the past two years:

1. Transamerica
2. Fidelity Investments
3. Ameriprise
4. New York Life
5. Great West (Empower)
6. MFS Investment Management
7. Waddell and Reed
8. Allianz Global Investors
9. MassMutual
10. Neuberger Berman
11. Putnam Investments
12. BB&T
13. Edward Jones
14. Morgan Stanley
15. American Century

Why do these investment firms offer their own funds to their employees without significantly lower fees? First, they do not want to convey to their employees that there are potentially superior investment opportunities outside of the company. For instance, Fidelity might not want to offer an outside fund that could be cheaper and possibly better performing than a comparable Fidelity fund. Additionally, since these plans tend to be very significant in size, reducing investment fees for their own employees could be problematic, since it could potentially increase fees for their retail investors to absorb the cost.

Is there a solution to this dilemma? Yes, there actually is! For the investment firms that are currently offering their proprietary funds to their employees without reduced expenses, these firms should consider offering outside funds to their employees. This could potentially result in lower expenses for the employees. Furthermore, this could remove the target off their backs from ERISA once the DOL regulation becomes effective in April of 2017. Of course, this is a lot easier said than done because it requires investment firms to expose their weak spots in their investment line ups, which could also potentially leak out to their retail investors. Also, a retirement plan was never meant to make the employer money, it is supposed to be a generous benefit for its employees.

With the new DOL regulation coming in April 2017, 2016 has proven that broker dealers and investment advisors are not the only target, but the fund families have also been dealing with quite the roller coaster themselves. And, as retirement investors, we should be glad that the investment business is starting to clean up its act for good and will in return make the industry more beneficial for everyone.

© Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

Rouge Broker Steals $1.3 Million From an 89-Year old!

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By Mack Bekeza

On July 2016, FINRA discovered that Travis Wetzel, a former broker who was originally barred from the industry in 2013, had been making fraudulent annuity withdrawal requests for an 89-year old’s Variable Annuity with Prudential. Once Prudential got wind of this, it immediately investigated the situation and discovered that the withdrawals were being made from an account in the broker’s wife’s maiden name! Overall, there were a total of 114 withdrawals made to this account between July 2010 through September 2012. Unfortunately for Prudential, even though it responded promptly and reimbursed the 89-year old, it was fined $950,000 by FINRA for failing to spot this while the withdrawals were being made.

Even though this story seems to be very unfortunate for both the 89-year old and Prudential, things like this happen more frequently than most people would think. For instance, MetLife was fined $25 million dollars for similar reasons. And, on top of that, LPL has paid over $12 million in fines and restitution for failing to supervise fraud in variable annuities, non-traded REITS, and even certain ETFs.

Since variable annuities are complex products that are mostly sold to the elderly, FINRA places a very high level of scrutiny on possible fraudulent activity. And, it can be quite a task for brokers to spot these transactions since they process millions of transactions on a daily basis. So, being able to spot fraudulent activity the minute it happens can be nearly impossible. In fact, it can take up to a couple of years to find out what exactly happened!

Is there anything the client can do to avoid these mishaps? Fortunately, yes, there is! Individuals can hire a financial advisor, such as Castle Rock Investment Company, that operates as a fiduciary to help them make the right choices and not get sucked in by a dishonest broker. Another thing that a client can do is look up their broker or investment advisor through FINRA’s Broker-Check website to see if they have had previous client complaints. Although most financial professionals are honest people, it is important that individuals seeking financial advice do their homework to see if they are walking into a trap.

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

The People’s Best Interest…The Battle Continues

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By Mack Bekeza

The official ruling for “fiduciaries,” meaning people who are legally bound in the best interest of retirement investors, will not take effect until April of 2017. However, the Department of Labor (“The DOL”) has been bombarded by lawsuits. This brings us to the recent filing from the National Association for Fixed Annuities (“NAFA”) in June 2016 with regards to how the ruling is defining a “fiduciary,” along with other material in the ruling.

Before we get into what exactly NAFA is complaining about, let’s review how the DOL defines a “fiduciary, which is:

“Any person who exercises any discretionary authority or control respecting the management or disposition of its assets or has any discretionary authority or responsibility in the administration of the plan” as well as “any person who renders investment advice for a fee”. [1]

So, what exactly is NAFA complaining about? According to them, “Congress intended ERISA fiduciary duties to apply only to those who participate in ongoing management of a plan or its assets.” As we mentioned in the previous paragraph, this is not the case. NAFA completely disregarded that fiduciaries are those who render investment advice for a fee. Put it this way, an annuity can play a large role in someone’s retirement, so how would selling annuities to people not be considered rendering investment advice?

Another claim made by NAFA was in regards to how the DOL is allegedly “exceeding its authority by imposing ERISA fiduciary obligation on parties to transactions involving IRAs.” Again, NAFA has it wrong. Although investment advisors to IRAs are considered fiduciaries, those individuals are not subject to the same scrutiny that an ERISA fiduciary would be.

This case is an excellent example of how people who work in the commission-based side of the financial services industry are trying to keep their industry alive. They realize that (as of late April 2017) their ways will no longer work for them in the marketplace, so they are desperate to fight this. Keeping things how they are now can lead to many retirement investors losing billions of their hard earned dollars from commissions and expensive products.

Attached is a link to the article that we used as a reference. And, for those who want to see the DOL’s official response to NAFA, click here! However, just a warning, the official response is about 105 pages long.

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at info@castlerockinvesting.com or via phone at 303-719-7523

[1] As a note, Castle Rock Investment Company falls under the DOL’s definition of a fiduciary for both ERISA plans and IRAs.