This post is was originally published on The College Investor

What’s The DOL Fiduciary Rule?

The Department of Labor (DOL) Fiduciary rule is a rule that states that all investments within retirement accounts must pass a “best fit” standard. Additionally, all customers must have a full disclosure on how much an advisor is making from you.

The rule only applies to retirement accounts and retirement advice, but it’s having a surprising effect on the industry. It’s changing how firms pay their advisors and (as a trickle down effect) how firms recruit new clients.

Why Does The Fiduciary Rule Influence Signup Bonuses?

The new fiduciary rule is pushing more and more advisors away from sales commission compensation and toward fee based compensation. While commissions aren’t banned by the fiduciary law, their severely curtailed. Whether an advisor earns commissions or a set fee, the product they sell to you must meet the best fit standard.

In many cases, that means that advisors can no longer rely on the profits of loaded mutual funds or annuities to make money. Companies with a history of compensating employees based on the sales of these products have to restructure their profit and loss centers as they work to follow the law.

As a result of these changes, broker-advisors don’t necessarily stand to gain as much from establishing a relationship with you. These days, the opportunity for a quick buck is gone, so brokers have more to gain by attracting long term clients.

Since brokers have to overcome a larger hurdle to becoming profitable with any individual client, they’re not as eager to give cash to every individual who opens an account. Additionally, the higher administrative and regulatory burden means that companies need to look carefully at their marketing costs.

Promotions You Might See Instead

That’s not to say that major companies don’t want your business. They do want you to become a customer, but they need to find new ways to make a profit, and in many cases that means reconfiguring their promotional structure.

For example, Fidelity and Charles Schwab both used to offer cash bonuses. Today, they’ve switched to offerings a limited number of free trades, and a growing array of commission free products. Both companies can continue to earn their management and administrative fees on mutual funds and ETFs that they own. 

They can also earn “shelf space” fees from major investing companies who will pay to have their products listed as commission free products.

On the other end of the spectrum, roboadvisors such as Wealthfront will manage up to $15,000 free of charge. 

They do this to hook you on the service early, and then as your wealth grows, you’ll begin to pay the modest fee year in and year out.

Cash Offers You Still Might See Today

That’s not to say, the cash promotions are entirely gone. Low cost brokerages such as TD Ameritrade, ETrade, Ally Invest all offer up to several hundred dollar bonuses when you start accounts, and these are on top of the free trading bonuses. 

These companies earn their money through trade commissions and shelf space fees, so they can expect to make their bonus money back faster than the broker-advisor companies. Plus, these companies don’t have to follow the fiduciary rule since they only execute orders that you give to them.

The only major brokerage still offering a cash bonus is Merrill Edge. They’re offering up to $600 to open and fund an IRA. Interestingly, Merrill is one of the few companies who is continuing to allow commission sales within their IRAs.

Most other companies have backed away from that completely to make compliance with the new fiduciary standard easier to understand.

Do you support this? Why or why not?


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