Here are the need-to-know highlights on the SEC Reg BI rule.

On June 5, 2019, the Securities and Exchange Commission (SEC) officially voted in the Regulation Best Interest (Reg BI) rule to bring a new set of standards to broker-dealers. The rule – which will go into effect June of 2020 – aims to strengthen the guidelines previously outlined by the suitability rule.

The new rule is also an attempt at closing the regulatory gap between broker-dealers and Registered Investment Advisors (RIAs), who have long been held to a higher measure of client care with the fiduciary standard. Rather than recommending investments that are simply “suitable” for clients, RIAs are beholden to recommend the best possible option for the client’s situation regardless of their own interests (commissions or other incentives).

Here are some of the highlights from the official 771-page SEC document that broker-dealers need to know about the new Reg BI rule.

Suitable vs best interest

The suitability rule under which broker-dealers currently operate requires that recommended investments are suitable for a client based on their demographics, characteristics, goals, and level of acceptable risk. The issue is that broker-dealers are not necessarily required to present the best option for the client’s situation, instead just one that fits their needs in some way.

For example, consider that two investment options with similar risk are presented to a client: option A that has historically returned six percent and option B that has historically returned four percent. Say that option A carries a commission of one percent, but option B carries a commission of two percent. If both options A and B are suitable for a client, the broker is not required to present option A over option B and can recommend the one that pays a higher commission.

In addition to preventing broker-dealers from presenting options that favor their interests over that of their clients, the rule will ban firms from offering sales incentives such as free vacations or bonuses for selling certain products. Further, Reg BI restricts broker-dealers from using the title of ‘advisor’ if they are not dually registered as an investment advisor.

The SEC breaks down the Regulation Best Interest rule into four main components:

Form CRS

In addition to these concepts, the Reg BI rule calls for the required distribution of a new document titled “Form CRS” to clients at the start of the relationship. This document is meant to summarize information about a firm’s services, fees and costs, conflicts of interest, legal standard of conduct, and whether or not the firm and its financial professionals have disciplinary history.

In comparison to the former DOL fiduciary rule

Critics of the new rule say that although it is a step in the right direction, Reg BI is weak in comparison to the DOL fiduciary rule that was rescinded on July 20, 2018. One area of contrast was the fiduciary rule’s requirement of a signed best interest contract with clients that could allow for litigation and class action lawsuits. This contract would have bolstered the enforcement of the new standards but is not included in Reg BI.

Another critique is that there are now two sets of rules: a fiduciary rule for RIAs and Reg BI for broker-dealers. The fiduciary standard aimed to make a much larger portion of financial professionals – including financial advisors – legally obligated to act in the best interest of the client. Not only did this hope to clarify the rules that govern financial professionals but also make it easier for clients to understand. Many believe that even with the improvements made with Reg BI, the regulations have only become more complicated for consumers.

Though Reg BI has already been voted through, expect more news surrounding the ruling to appear before it goes into effect next June.

You may also read more about the fiduciary standard vs. suitability standard HERE on our website.

Jul 01, 2019     Article sponsored by Advicent HERE.

Acumen shares investment related responsibilities as a co-fiduciary for plan investment decisions with our 401K plan sponsors.   We conduct participant education meetings frequently and Reese and Cheryl recently visited a client’s plant in Texas to do so.  We work with participants to educate and guide them in making informed decisions to manage this tax-efficient pool of savings accumulated through this important employer-sponsored benefit plan. Our commitment to participant education is essential in providing an effective method to achieve financial goals for retirement.

 

Understanding the principles necessary for establishing and maintaining a successful retirement strategy can be a daunting task. For this reason, many plan sponsors rely on the guidance of a plan consultant.  Acumen Wealth Advisors, as a fiduciary and plan consultant, has developed skilled knowledge in retirement planning and welcomes the opportunity to help you and your participants.

Neither the Department of Labor (DOL) nor the Securities & Exchange Commission (SEC) has given any indication of how they are progressing with their new respective fiduciary rules. Last year, both agencies said they would publish their respective rules in September of this year. At this point, it seems unlikely either agency will meet this deadline. Additionally, it is possible these rules may never materialize due to the current administration’s general view on regulations.

In March of last year, almost 10 years after the DOL’s Fiduciary Rule was first proposed, the Fifth Circuit of the U.S. Court of Appeals vacated the rule in its entirety. The DOL elected not to appeal to the Supreme Court. Quickly following this decision, and to no one’s surprise, the SEC issued a package of its own proposed advice standards. This includes a “Regulation of Best Interest.” The Commission indicated that a final rule would be forthcoming this fall.

In October, DOL released its regulatory agenda for 2019 which includes plans to issue a revised Fiduciary Rule in September of 2019.  The essence of the DOL’s original Fiduciary Rule was that persons advising plans, participants or IRA holders, are acting as fiduciaries and may only make recommendations that are in the “best interests of the client.” The SEC’s new rule goes beyond the existing rule of suitability and requires that brokers and advisors put the best interests of their clients ahead of their desire to make money. Both rules have generated controversy. They have been criticized as unnecessary and overly complex (DOL’s rule is 176 pages long and the SEC’s proposed rule is almost 1,000 pages). The DOL’s rule experienced challenges in the courts on the grounds that the attempt to regulate the financial services industry went beyond the Department’s statutory authority. Although the aims of these two agencies are similar, they have made no attempt to coordinate their efforts.

ACR#315762 05/19

Posted on May 8, 2019 by retirementtimesnewsletter

Acumen Wealth Advisors, LLC® is affiliated with RPAG and utilizes their robust retirement plan consulting tools and resources to deliver enhanced value to plan sponsor clients. RPAG™, a wholly owned subsidiary of NFP (NFP Corp.), provides retirement advisors premier technology, systems, training, and resources through its practice management platforms.

Fiduciaries are responsible for the management of employee retirement plans in many regards, including plan investments and plan administration.  As such, fiduciaries have responsibilities to both their participants as well as their employers, to hold to the fiduciary standards in all aspects of their work.

What are fiduciary responsibilities?

Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include:

Who is a fiduciary?

ERISA, while not applicable to public sector plans, is the primary resource for guidance for fiduciary responsibilities.  State laws, on the other hand, do apply to public sector plans, and language about fiduciary responsibilities and requirements can be found in trust provisions. Under ERISA, there are two types of fiduciaries:  named and functional.  Named fiduciaries are just that: identified by position, title or name as a fiduciary to the plan.  Functional fiduciaries are those who have discretion over plan administration and investments; who provide advice to the trustees or administrators, or who have decision-making authority over the plan investments.

Individuals become fiduciaries by title or by actions. ERISA broadly defines a retirement plan fiduciary as a person or entity that does any of the following with respect to a retirement plan, such as:

A plan’s fiduciaries will ordinarily include the trustees, investment advisors, plan administrators, plan sponsor, members of the plan sponsor’s board of directors, corporate officers, and those who select committee members.  The key to determining whether a person or entity is a fiduciary is to determine whether they are exercising discretion over the plan.

Under ERISA, there are three types of functional fiduciaries:

Most advisors are typically either 3(21) or 3(38) advisors. Please consult with your advisor to further discuss fiduciary roles, responsibilities and duties for your plan.

ACR#315080 04/19

Posted on May 2, 2019 by retirementtimesnewsletter

Acumen Wealth Advisors, LLC® is affiliated with RPAG and utilizes their robust retirement plan consulting tools and resources to deliver enhanced value to plan sponsor clients. RPAG™, a wholly owned subsidiary of NFP (NFP Corp.), provides retirement advisors premier technology, systems, training, and resources through its practice management platforms.

This past November, the IRS issued proposed regulations to effectuate changes made for hardship withdrawals in the Bipartisan Budget Act of 2018. Comments were due by Jan. 14, 2019. Although the statutory changes are effective beginning in 2019, the proposed regulations do not require any changes in how hardships are administered until 2020. Plan documents must be amended to reflect changes to the safe harbor rules. Most recordkeepers updated their systems so participants are no longer suspended from making contributions following a hardship distribution, but they have not set a time frame for when plan sponsors can expect to receive the necessary amendments. The deadline for amendments will be the end of the second calendar year beginning after the hardship changes appear on the IRS’ Required Amendments List. The proposed regulations include some changes that go beyond what is required to conform to the statutory changes. While the changes generally make hardship distributions more accessible, the IRS makes it clear that plan sponsors are free to add their own restrictions, such as limiting the sources eligible for hardship distributions.

Current Law

Prior to age 59½, in-service distribution of elective deferrals is limited to certain events including hardship. A distribution qualifies as a hardship only if made on account of an “immediate and heavy financial need.” The amount distributed cannot exceed the amount necessary to satisfy this need. The determination of whether the participant has “an immediate and heavy financial need” must be based on “all relevant facts and circumstances.” A distribution is considered necessary to meet “an immediate and heavy financial need” only if other resources are not available to the participant. Plan sponsors may accept a participant’s representation that he/she has no alternative resources, unless the sponsor has actual knowledge to the contrary. Certain sources are not eligible for hardship distributions – post 1988 earnings, safe harbor contributions, QNECs and QMACs.

Existing Safe Harbor Rules

Although not a legal requirement, the majority of plan sponsors follow the safe harbors. If a plan sponsor follows the safe harbor rules, the IRS will not challenge hardships on audit. These rules are included in virtually all prototype and volume submitter documents. There are two aspects to the safe harbor rules:

What Has Changed

ACR#308175 02/19

Posted on February 4, 2019 by retirementtimesnewsletter

 

Acumen Wealth Advisors, LLC® is affiliated with RPAG and utilizes their robust retirement plan consulting tools and resources to deliver enhanced value to plan sponsor clients. RPAG™, a wholly owned subsidiary of NFP (NFP Corp.), provides retirement advisors premier technology, systems, training, and resources through its practice management platforms.

On Wednesday morning, August 7th, Beth Tremaine and Grant Allen visited Zacks Investment Management office in Chicago.  Acumen uses Zacks Dividend Strategy for a large percentage of our clients.  To perform due diligence, Beth and Grant visited the manager and met with a few members of the Zacks team.  They first met with Greg Murphy, the Managing Director of National Sales.  Greg walked Beth and Grant through an overview of Zacks processes and informed them they were stepping up their attempt to further protect client information through increasing cyber security efforts.

Greg then introduced Beth and Grant to Metin Akyol, a data scientist at Zacks.  Metin contributes to the performance of the Dividend Strategy.  Metin provided Beth and Grant with insight into the performance of the fund first, which is quite impressive as it provides investors with 3.35% of yield (compared to 2.54% for the Russell 1000 Value) and has continuously outperformed its benchmark during the last ten years.  Metin then gave insight into the process Zacks uses to make investment decisions and gave a brief economic outlook.  Metin alluded to global trade tensions as the key factor providing a headwind to current economic growth.  However, he also seemed to think, one way or another, businesses will find a way to trade with each other, possibly by using passthroughs in other countries, and growth may be stunted but not stopped.  It should be pointed out though, the United States is increasing protections of this type of trade, which could provide the current trade war with the strength to be an even tougher headwind than we have seen thus far.

Finally, Beth and Grant had the opportunity to meet Mitch Zacks, CEO and Senior Portfolio Manager of Zacks Investment Management.  Meeting Mitch was a great pleasure for Beth and Grant, and it was almost like meeting a celebrity in the investment management field.  Mitch also discussed his outlook on the markets.  He said his biggest advice to investors would simply be to stay invested.  It is often mentally straining for investors to remain invested during volatility, but, if they can, it will prove to be beneficial in the long run.  Mitch believes weathering the storm is a key component to generating consistent return in the markets, and it is seen through his management of the Zacks Dividend Strategy.

 

 

 

The opinions expressed in this commentary should not be considered as fact.  Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities.  The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness.   It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.  Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.  Diversification does not protect against loss of principal.

Acumen Wealth Advisors, LLC® is a Registered Investment Adviser.  Advisory services are only offered to clients or prospective clients where Acumen Wealth Advisors, LLC® and its representatives are properly licensed or exempt from licensure.  Past performance is no guarantee of future returns.  Investing involves risk and possible loss of principal capital.  No advice may be rendered by Acumen Wealth Advisors, LLC® unless a client service agreement is in place.

On Tuesday, August 6th, Acumen’s Beth Tremaine and Grant Allen visited RCP Advisors office in Chicago for Hatteras Funds’ symposium to prospective investors for their Evergreen Private Equity Fund.  Hatteras’ Evergreen Private Equity Fund is an investment opportunity presenting exposure into the lower-middle market of private investments. The Raleigh based Fund Manager is focusing the opportunity of investing in this fund specifically to RIA’s, family offices, and consultants.  Acumen’s Portfolio Management Committee (PMC) has currently committed a focus to analyzing private equity investment opportunities for our clients, as we believe they may provide alpha (the measure of an active return on an investment), especially during an economic slowdown.  Hatteras presents the idea, through the Evergreen Fund, that there is a specific area of the private equity market not currently priced efficiently and may provide investors with an opportunity to capture additional return.  This area is the lower-middle market, and one of the main advantages of investing in this area of the private equity market is Inefficient Sourcing.

Using information provided by PitchBook and Dun & Bradstreet, Hatteras presented data showing most of the capital being invested by private equity funds is focused on investments having an enterprise value greater than $250 million; 77% of invested private equity capital to be exact.  To the contrary, the remaining 23% of private equity capital is dedicated to the much larger $10 – $250 million enterprise value universe creating an inefficient market in which the Evergreen Fund is positioned to take advantage.  Another way Hatteras will use the Evergreen Fund to generate return is by focusing primarily on the secondary market.  The secondary market of private equity gives the opportunity to make investments essentially eliminating most of the j-curve, which is the negative returns most investors experience when they make primary investments in the private equity universe.  Instead, investors in the secondary market are making most of their allocations when the investments are beginning to generate positive returns.

Hatteras has partnered with RCP as their subadvisor on this fund, and Beth and Grant were both able to see the operation RCP was running in Chicago.  They were quite impressed to see the data collection and analysis on private equity funds RCP performs.  As their partner, Hatteras can utilize this data and analysis.  The Evergreen Fund has the potential to be a well-suited investment vehicle for Acumen clients who would benefit from private equity exposure.  Acumen’s PMC will continue to perform analysis on the lower-middle market and the surrounding investment opportunities.  This market seems to be poised to generate great returns and act as a cushion to a potential market correction.  However, more analysis should be done on the other potential investments in it.

 

 

The opinions expressed in this commentary should not be considered as fact.  Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities.  The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness.   It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.  Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.  Diversification does not protect against loss of principal.

Acumen Wealth Advisors, LLC® is a Registered Investment Adviser.  Advisory services are only offered to clients or prospective clients where Acumen Wealth Advisors, LLC® and its representatives are properly licensed or exempt from licensure.  Past performance is no guarantee of future returns.  Investing involves risk and possible loss of principal capital.  No advice may be rendered by Acumen Wealth Advisors, LLC® unless a client service agreement is in place.

Acumen Wealth Advisors manages our clients’ portfolio risk with prudent investment selection, due diligence, tactical asset allocation, and diversification. With our commitment to maintaining transparency and the highest standard of fiduciary responsibility, we conduct ongoing due diligence meetings of our money managers’ investment and operational practices. We believe continued research helps capitalize on opportunities to discuss the money managers’ market outlook and insight into how this outlook impacts the positioning of client portfolios.

Our team held onsite due diligence meetings on June 12, 2019 at Lazard Asset Management in New York City.

Compliance Meeting

Acumen’s Chief Compliance Officer, Amy Stone, met with Christine Fairclough, Senior Vice President, of Lazard Asset Management’s Legal and Compliance Department.  They discussed the three levels of Lazard’s risk monitoring.

Portfolio Management Meeting

Acumen’s Chief Investment Officer, Beth Tremaine, met with Lazard Asset Management’s Director and Client Portfolio Manager, Robert Failla.  They discussed the depth of Lazard’s resources and their global presence.

This original article was written by Brian Menickella for Forbes.

Brokers offering advice on retirement savings accounts are required to put clients’ interests first as of June 9, 2017. The requirement, also known as the Department of Labor (DOL) fiduciary rule, will officially take effect then, after delays and considerable angst.

The DOL has said it will not enforce the rule until after January 1, 2018, when the requirements about disclosures and new contracts are set to take effect. However, that too could change. If the current administration has its way, the fiduciary requirement could be amended in the future.

Shifting Political Sands and Questions About the Need

The new DOL rule expands the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA) to ensure that advisors act in the best interests of their clients, and to put clients’ interests above their own. It requires that fees and commissions be clearly disclosed to clients, and it expands the reach of the law to a wider range of financial professionals. Previously only Registered Investment Advisors (RIA’s) and their representatives were considered to be fiduciaries for advisory & consulting services. They are paid a fee based on an hourly basis or based on a percentage of a client’s holdings and this compensation method helps ensure they are acting in their client’s best interest. The new rule applies the requirement to anyone making a recommendation or solicitation of any kind of retirement account.

The DOL regulation was controversial when it was created under the Obama administration. The Obama Labor department believed the change to be needed to address biased financial advice that was significantly costing unwitting investors. However, to give the industry time to make changes, enactment was set for April 2017, during the next president’s term.

Acosta’s Decision

President Donald Trump wasted no time trying to halt the fiduciary rule implementation. Two weeks into his presidency, he signed an executive orderdelaying it. His order included instructions for the DOL to conduct an “economic and legal analysis” on the fiduciary rule’s potential impact. Some in the industry hoped Mr. Trump’s move would lead to changes or the outright elimination of the regulation. However, Labor Secretary Alexander Acosta indicated on May 22 that the DOL’s analysis found no “principled legal basis” to postpone the rule’s effective date further.

Acosta wrote an opinion piece in the Wall Street Journal announcing that “respect for the rule of law leads us to the conclusion that this date cannot be postponed.” He noted that the Labor Department has to “keep in mind two core principles: respect for the individual and respect for the rule of law.”

While the secretary acknowledged the importance of ensuring that savers and retirees receive prudent investment advice, he added that the fiduciary rule does not align with Mr. Trump’s deregulatory goals. In other words, stay tuned for future efforts to overturn or modify the DOL rule before the January 2018 implementation date.

The Transition Period

Starting June 9, the changes will be primarily be product and fee related. Additionally, in some companies, the types of products that can be presented by some types of advisors (i.e. securities licensed versus insurance brokers) will change. There will also be more use of independent, web-based advisory tools.

Additionally, the DOL issued a Field Assistance Bulletin outlining their plans for the phased implementation. The bulletin acknowledged that the department would not “pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions.” Clients and their lawyers, however, are not likely to view any non-compliant advisors in as lenient a light.

Advisors who assumed the DOL rule would never be implemented should get in line as quickly as possible. They will find themselves out of business or facing lawsuits for not being compliant and showing no good faith effort to comply.

The Conflict Of Interest FAQs on the DOL website spell out the exemption provisions for items delayed until next January. The new definition of fiduciary advice goes into effect on June 9, 2017. At that time, the details on Best Interest Contract (BIC) and Principal Transactions Exemptions will be available to fiduciary advisors. From the outset, however, advisors and financial institutions must comply with the “impartial conduct standards” that advisors adhere to fiduciary norms and fair dealing. The standards specifically require the industry to give advice that is in the “best interest” of investors, charge reasonable compensation for services, and make no misleading statements.

Due Diligence Is More Than Checking Boxes

We hope this update finds you well and you are looking forward to the new summer season.  We would like to take the time to inform you of a recent opportunity for several members of our Acumen team.  The purpose of our trip to New York City was threefold: conducting onsite due diligence meetings with Acumen’s investment managers who we utilize for portfolio management; visiting the floor of the New York Stock Exchange; and meeting with a beloved client.  We firmly believe our activities translate to a more informed team and deeper capabilities with portfolio management.

With our commitment to maintain transparency and the highest standard of fiduciary responsibility, we conduct ongoing due diligence meetings of our money managers’ investment and operational practices.  In addition to due diligence completed at the beginning of a business investment, we believe continued research helps capitalize on opportunities to discuss the money managers’ market outlook and insight into how this outlook impacts the positioning of client portfolios.  The primary purpose of onsite due diligence at our money managers’ offices is to verify, cross-check, and analyze information.  Also, the money managers provide increased levels of transparency into their strategy and portfolios during the visit.  We had access to senior decision makers and received important benefits that occur from face-to-face meetings.  The onsite due diligence offers our team the opportunity to verify assertions, question the drivers of performance, better understand philosophy, and inspect all aspects of their operations.

At one of our international money managers, Lazard Asset Management, we were reassured to hear they don’t rely on the media news.  They have employees and trusted contacts with boots on the ground in countries they invest to gather the “real” news.  Lazard employs 750 people of which over 300 are investment professionals.  They are a lean organization with a focus on asset management and not sales.  At City National Rochdale, I had the opportunity to sit across the table from a Director and Senior Portfolio Manager of the firm and gained insight into their investment strategies, portfolio positioning, and market outlook.

 

A special opportunity for us was visiting the floor of the New York Stock Exchange.  Reese captured a photo of the 24 original signatures (above) of the men who established the “New York Stock and Exchange Board” on May 17, 1792.  This formation is called the Buttonwood Agreement as these 24 men would congregate beneath a buttonwood tree.  The name was shortened to “New York Stock Exchange” (NYSE) in 1863 and it’s current location at 11 Wall Street was built in 1865.  Since heightened security limits the number of visitors allowed to visit the NYSE, we were honored to be among the guests on the floor as the opening bell rang.

We will be updating our clients, face-to-face, on our findings and how these resources impact our decisions on their portfolios.  As always, feel free to contact us if we can do anything to better serve you.

Regards,

Beth Tremaine & Reese Veltenaar