Proposed Rule Would Mean Big Change for Brokers

In this Wall Street Journal video, our own Mitch Tuchman talks with journalist Daisy Maxey on the new rules to make retirement investing safer and explains how the old model of working with a broker is broken.


Daisy Maxey – The Department of Labor has proposed a regulation that would require those who give investment advice to individual retirement accounts to act in the client’s best interest. I’m here with Mitch Tuchman. He’s the Managing Director of Rebalance, an online investment advisory service. We’re going to talk about the repercussions of this regulation. Welcome Mitch.

Mitch Tuchman – Thank you Daisy, it’s good to see you.

Daisy Maxey – Thanks for coming. Well what is this regulation, if it succeeds, what would it mean for brokers who are giving advice in regard to individual retirement accounts?

Mitch Tuchman – Well right now most people who have a 401(k), or a 403(b) at work at some point they roll the money out into an IRA. Once they have the money rolled in an IRA the money is no longer overseen by their employers so brokers tend to come in and help people manage that money. And right now the brokers are usually on a commission-based system and they operate under something called a suitability standard, which means that they can sell you, as the investor products, any kind of product, any kind of fund so long as they are suitable for you. But there’s a different type of money manager like my firm, Rebalance, where we operate under a fiduciary standard, and it’s a higher standard where you can sue me if I don’t show that I am operating under your best interests. So the brokers are having a fit because they have to move from this standard to this standard and they’re worried that’s going to become very expensive.

Daisy Maxey – As you know Mitch, this regulation was proposed before, or a similar one by the Department of Labor, and some of the criticisms that came up then, and it was withdrawn by the Department of Labor, but some of the criticisms that came up was that it would increase regulatory costs and liability costs for brokers, and that it would make it impossible, some people said, to give investment advice on modest retirement plans. Do you expect any of those issues to come up again and do they hold any water?

Mitch Tuchman – Sure, they’ll come up but they don’t hold water. So the brokers are going to scream and yell that this is going to increase their compliance costs, which is true, but it doesn’t really hold any water because there are many firms like ours at Rebalance, and even this new movement of what are called robo-advisors, that are providing great advice for low balance accounts. It really reminds me of the auto industry in the seventies when we had gas prices going up 5 times. We had all this pollution in the air, people were suffocating in Los Angeles, and it led to the formation of the EPA and also regulations on the automotive industry to get gas mileage up. They resisted and balked, meanwhile the Japanese retooled their whole industry for this new environment and the rest is history. The Japanese took over the US industry in terms of automotive sales because they came out with a much better product at a much better price, and the same thing is happening in our industry, and hopefully the Department of Labor’s initiatives will work.

Daisy Maxey – So it’s a whole new remaking of the industry –

Mitch Tuchman – Yes, retooling the industry, lower fees, using index funds, not having people on commission that have a conflict of interest in terms of selling you something that probably isn’t in your best interest. Those days are over.

Daisy Maxey – And as you mentioned, your firm is a fiduciary. You are a registered investment advisor, and you are required to act in the best interest of the clients. What do you see, or hear from clients who come to you from brokerage firms?

Mitch Tuchman – I have well over 100 examples of that. We call them the broker refugees. One great example that comes to mind is a young woman, she’s in her early 40s and her family had a long-standing relationship with one of the well-known broker dealers. Her father was a successful real estate developer and he passed away, and he left she and her brother with a bunch of stocks and bonds and she began to try to build a relationship with this man. There was no reason to end this relationship, but she was just curious to know what she was paying in fees and she was told 1%. And then actually we got to know her a little bit and analyzed her portfolio and we found that she was also paying 1.4% in the mutual fund fees that were invested in her account. She was also paying 5% load on an emerging market fund that was just put into her account and her broker was getting a kick back of 0.25% on all of those funds and she was just so incensed that the broker didn’t tell her this and that she had no idea, and that we could do the same job for 1/3 of the price. So we hear these stories all of the time, I could rattle off more, but it’s just a common event that the old model with working with a broker is really broken and the newer model, the fiduciary standard, working in the best interest of the client is the one that’s going to win the day.

Daisy Maxey – Thanks for sharing your thoughts.

Mitch Tuchman – Thank you Daisy.