Q. I trust my advisor implicitly but I’d like a second opinion on a recent recommendation made by another advisor. I went to a dinner seminar last week and the presenter suggested what sounds like a pretty good idea for a large portion of our retirement funds. He said that this type of investment may not be available a year from now for retirement funds due to a new Department of Labor Rule so, we need to make a decision pretty soon. We are retired, I’m 68 and my wife is 65 and most of our savings is in my IRA from a 401(k) rollover. The investment is an annuity that will grow with the stock market but even if the market declines in ten years we will be able to receive lifetime annuity payments of 5.25 percent a year based on twice the amount of our initial investment. We’d keep enough outside of the annuity to meet my required minimum distributions when I reach age 70 ½ for 8 years and then the annuity payment will begin. Our current advisor would lose our business so he’d obviously say no to this idea. Do you have any thoughts on this type of investment and just out of curiosity why would the DOL prevent having these in an IRA (the presenter says they will still be available for non-IRA investments).
A. I was in a meeting with some other financial advisors/money managers last month and one of them referred to the annuities “pitched” at free dinner seminars as “plate licker” annuities.
If an investment is so great why does someone have to buy steak dinners to generate any interest? If you trust your current advisor implicitly why not ask him for a second opinion? Also, if you trust him why are you going to free financial dinner seminars? I don’t know your current advisor but I trust him over the plate licker guy especially with the line about the new rule. Anyone using that as a way to generate urgency for people to buy annuities in their retirement accounts is, in my humble opinion, a sleaze ball.
The new ruling referred to as the DOL Fiduciary Rule takes effect April 10, 2017. This rule applies to recommendations concerning ERISA-qualified retirement plans and their participants and IRA owners. A portion of this new rule is called the “Best Interest Contract Exemption” (BICE). Each advisor’s broker-dealer or Registered Investment Advisor firm will be required to enter into a written contract with retirement investors to acknowledge that the firm and the advisor are fiduciaries and agree to the best interest standard of care, and disclose factors such as conflicts of interest that would help an investor make an educated and informed decision. BICE also requires compensation to advisors and their firms to be “reasonable” but it doesn’t define reasonable. The term fiduciary is significant.
Under the fiduciary standard an advisor must place his or her interests below that of the client and act in the best interest of the client. Some advisors have always adhered to the fiduciary standard but now those that adhere to what is called a suitability obligation will have to meet the fiduciary standard beginning April 10, 2017 when advising on retirement investments. Under the suitability standard, an advisor only has to believe that his or her recommendations are suitable for the client in terms of their financial needs, objectives and circumstances. The suitability standard can cause conflicts of interest, the most prominent one being fees. Under a fiduciary standard, an advisor is prohibited from recommending one investment over another because it would generate a higher fee or commission. This is not the case under the suitability requirement. As long as investment is suitable the requirement is met.
So, your seminar leader telling you that the investment product he is recommending will not be available for retirement accounts when the new DOL rule takes effect next year is misleading. It could still be recommended for your IRA but if it has high fees or commissions he is prohibited from selling it to you as a fiduciary. As stated previously, the rule does not apply to non-qualified or non-retirement account investments.
As for the investment, you could create the same income stream 10 years from now for 15 years if you achieve a 2.713 percent rate of return.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624