New fiduciary rule driving investors to fee-only financial management firms

By ALAN J. ORTBALS
    As 2017 wound down, Ken Diel, principal of Diel and Forguson, an O’Fallon CPA firm and founding partner of Cambridge Capital Management, was receiving numerous calls from investors seeking to move their funds to a fee-only wealth manager.
    Driving this movement is a new U.S. Department of Labor rule that expands the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974. The rule will require all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary, meaning they must act at all times in the client’s best interest.
    The Department of Labor initially announced the ruling in April 2016 with full implementation to take effect Jan. 1, 2018. It has since been postponed. But, the fact that it was to become effective Jan. 1 caused a flurry of publicity and woke investors up to the new rule.
    “Now, all of a sudden, people are saying, ‘I always thought they were doing what’s in my best interest’,” said Diel. “And he may have been but now they have to meet this standard that they never had to meet before. Prior to this ruling they only had to be able to show that the investment was ‘suitable’ for the client. So, now we’re getting a lot of calls all of a sudden from people looking for someone who’s going to invest in their best interest. We’re seeing a lot more interest today generated by the heightened public awareness.”
    Diel opened Cambridge Capital in 1999 as a Registered Investment Advisory firm compensated on a fee-only basis rather than an activity basis. Typically, in 1999, investment advisors were paid by the transaction each time the client bought or sold a stock. They may also have been receiving a commission from the brokerage firm. From the beginning, however, Cambridge was to be a fee-only advisory firm which, Diel said, was a rarity at the time.
    “I had opened my accounting firm in 1979 and we were very independent,” Diel said. “In working with our clients, we saw times when their broker was making more money than the investor. I’d ask them how much they made from their investments that year and they wouldn’t know. I’d say, ‘well, your broker did well because you made 100 trades but you didn’t make any money.’ That’s when I decided we needed to do something different and create a fee-only wealth management firm.”
    Cambridge charges a percentage based on the value of the money under management. If the value of the portfolio goes up, Cambridge makes more. If the value goes down, Cambridge makes less. They don’t get paid by the trade and often invest their own funds in the same fashion as clients.

    “We eat our own cooking,” said Nathan Klitzing, a Cambridge Capital partner.
    While many of the brokerage firms have been scrambling to adapt to the new rule, for Cambridge Capital, it’s been business as usual.
    “Since our inception, we’ve always operated under a fiduciary model,” Klitzing said. “You know what you’re paying up front and our cost is fully transparent. We don’t make any money because we’re buying and selling securities for you. We didn’t need the government to tell us that being transparent is the right thing to do. We felt like it was the right thing to do at the start.”
    Diel said that the first step with a new client is to meet and discuss their needs and goals because those vary from person to person and change with time and circumstances. Cambridge then crafts an investment plan tailored to that individual.  
    “What’s important is the planning aspect,” Klitzing said. “You need to be looking at things like when to take Social Security. If you have a defined benefit pension, when should you take it? What accounts should you take money from? Should you take it from a taxable account or a qualifying IRA account or maybe a Roth account? Those elements in the planning process are really where the value is that advisers can provide.”
    The other thing that an independent adviser brings to the table, said Diel, is objectivity.
    “People can get caught up in the emotions of the markets, Diel said.
    “They see a story on the news that Bitcoin is going through the roof and want to run out and buy Bitcoin,” he said. “But we can offer you objectivity on creating a plan and sticking to that plan because we have independent objectivity. We’re not buying and selling to be buying and selling because we don’t make one nickel on the buying/sell. We tweak the plan as we go along. But we can stay objective with your plan versus jumping all over the place. Chasing the hot stock doesn’t work because you’re always behind the curve. You’re always buying it when it’s already high and selling it after it falls off. It hardly ever works.”
    As of press time, implementation of the fiduciary rule has been pushed back to July 1, 2019.