Today’s REI Classroom Lesson

Clay Malcolm explains what’s involved with the new fiduciary rule, including if it changes SDIRAs at all.

REI Classroom Summary

Find out what you need to know about the new fiduciary rule and how it might impact you.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the REI Classroom where experts from across the real estate investing industry teach you quick lessons, take your business to the next level. And now, let’s meet today’s expert host.
Clay: Hello and welcome to the REI Classroom. I’m Clay Malcolm at New Direction IRA and today we’re going to be talking about the fiduciary rule.
Mike: This REI Classroom real estate lesson is sponsored by, FlipNerd’s private investor coaching program and your blueprint to investing success.
Clay: The new fiduciary rule has gotten a lot of talk, some of it speculation, and as we’re starting to see how this rule takes place, I think that the financial landscape will adapt itself to the new rules. Now, in its principle, of course, the fiduciary rule, I think has three main focuses. One is an advisor or somebody who is helping a plan along like a 401(k) or something like that that they take the best interest of the participants over their own best interest, meaning that they’re not moving the plan for just incentive assets that make them more money. It’s more about the participants and the money that they’re making. Seems pretty logical.
Secondarily, a transparency about fees, so anybody who is fiduciary to the plan discloses, “Hey, this is how we make money and this is what it’s going to be in terms of your burden. You, the participant or you, the plan administrator, for having my service.” And for that transparency of fees to be in dollars rather than basis points or something that’s a little bit more esoteric.
And then, the third one I think is probably ingrained mostly in the exclusion that it has in the fiduciary rule which is to say it encourages education, ongoing, solid financial education is not going to be something that incurs this fiduciary “responsibility.” So the advisors or asset providers or other service providers that are simply giving you education and concepts about ways to invest or rules about investing and things like that, they’re going to be able to continue to deliver that content to you without having to worry about changing their business model very much.
So interestingly and this is really the topic today is does the fiduciary rule really change self-directed IRAs very much? And certainly, in our particular case, and I think for a lot of our competitors as well, self-directed IRAs are probably not going to be affected a whole lot. Partially because of the neutral place that we occupy in the financial landscape anyway. So a company like ours at New Direction, we don’t give any tax, legal, or investment advice anyway, so all we’re really doing is the documentation of what’s happening in your IRA so that you get to keep the tax benefits.
And we do do a lot of education, so it was important for us to recognize that this fiduciary rule really won’t affect that ability to deliver education about the way the account works and the types of assets that are available and that kind of thing.
So from anybody who is worried about their self-directed IRA provider or self-directed IRA strategy being affected a lot by the fiduciary rule, it seems relatively unlikely. Now the things that may change and may have already started to change are really things that they probably have to do an advisors and maybe asset providers. The burden produced by “fiduciary” is really that idea of putting the participant first rather than the advisor’s best interest first. And a lot of advisors are people that participate in plan investments were able to be in a category called suitability. So what they recommended simply had to be suitable according to what the plan goals were and the participant’s goals were and things like that.
Now, if they move from suitability to fiduciary and have to put their best interest of the participant ahead of them, that may very well change their revenue model which you know, I realize some people will have a little bit of angst about that but all providers in the financial world work around the rules and produce a revenue model because we’re in business as well. In our particular case, we charge for bookkeeping services but advisors charge for their services and asset providers usually charge something for providing assets so on so forth.
So the revenue models for everybody may change a little bit. Certainly advisors I’ve heard some of them are very worried about the cost of the compliance and things like that, so will they have to change how much they charge? That’s certainly possible. Will some advisors just call it quits? And that’s also possible as well.
One of the things that I think that we will see probably is in the asset provider world, and in terms of marketing, so if somebody’s marketing precious metals or real estate or private equity or that kind of thing, it seems like we will probably be seeing a shift here and have probably already started to see a shift from, “You should do this” or “This is the best,” that kind of terminology, to more of, “This is available. These are what its good qualities are” and things like that.
So maybe a little bit less heavily weighted towards should and a little bit less heavily handed to more of this is more of an accounting of what this does and hopefully move toward transparency and things like that. All of which, I think, personally being in the self-directed IRA industry is great because I think that self-directed IRA investors, particularly real estate investors are savvy people who do their due diligence and are thinking about the overall landscape. And so it really does fit in quite nicely with self-directed IRAs and particularly, real estate investors.
So will there be some changes? I suspect so and certainly, there’s also some worry about lawsuits and things like that and that will also give some more shape to the fiduciary rule. So as we move forward, we’ll see how that all progresses, but from a general perspective, that idea of the investor being in charge and taking charge of their account and their investments, I think that’s probably going to be something that persists pretty easily in concert with this fiduciary rule.
So thanks for joining us today in the REI classroom. I’m Clay Malcolm from New Direction IRA. If you need more information, please feel free to go to our website or I will see you next time on the REI Classroom.
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Clay Malcolm
Clay Malcolm is the Chief Business Development Officer for New Direction IRA. In this role, he oversees marketing, education programs, and facilitates the training of business development and client representative teams. Clay has shared his expertise regarding self-directed IRAs and HSAs at speaking engagements across the United States. Currently, he teaches continuing education classes for CPAs, CFPs, and real estate professionals as well as presenting informational sessions for retirement investors looking to acquire precious metals, real estate, private equity, and more. Clay received his Bachelor of Science degree in communications from Northwestern University.