RIN 1210‐AB32 – 3ethos response   Page 1

3ethos    169 Long Wharf Road    Mystic, CT 06355    860.415.9191

we inspire and serve ethotic leadersTM

May 26, 2015

U.S. Department of Labor

200 Constitution Ave. NW

Washington DC 20210

Sent electronically to e‐ORI@dol.gov and through www.regulations.gov

Ref: RIN 1210‐AB32; Response to Conflicts of Interest Proposed Rule

Dear Madam or Sir:

Existing fiduciary best practices surpass DOL’s reproposed definition.

It is my professional opinion that the U.S. Department of Labor’s (DOL) reproposed fiduciary definition

will cause more harm than good:

1. The reproposed fiduciary definition does not take into account the full scope and depth of

generally accepted fiduciary best practices that are fully substantiated by existing regulations,

regulatory opinion letters and bulletins, and case law.  

[See fiduciary handbook, Prudent Investment

Practices, which was first published in 2003.

http://www.sec.gov/nb/comments/akendal0331

05‐hand1.pdf  The latest research on a uniform

procedurally prudent process is included in the

recently published book, LeaderMetrics®: What

Key Decision‐makers Need to Know When

Serving in a Critical Leadership Role (Trone and

Wattman, 2014, published by 3ethos

www.3ethos.com). The legal substantiation for

the uniform procedurally prudent process also is

available through 3ethos.]
RIN 1210‐AB32 – 3ethos response   Page 2

3ethos    169 Long Wharf Road    Mystic, CT 06355    860.415.9191

2. The Council of Economic Advisors (CEA) released on February 19, 2015 research which showed

that conflicted advice is costing retirement savers more than $17 billion dollars a year. The DOL

has relied on this research in the construct of its reproposed definition. Unfortunately, neither

the DOL nor the CEA took into account the positive impact generally accepted fiduciary best

practices are having on retirement savings. As a result, I do not believe the CEA’s findings are

accurate; are overly inflated; and, were released for the primary purpose of inflaming and

unnecessarily alarming the public.

3. If passed, the new rules will not meet the stated objective of protecting retirement savings. To

the contrary, the new rules will result in increased complexity in the oversight of retirement

advice. The new rules will make it harder for good advisors to provide generally accepted

fiduciary best practices, and make it easier for dishonest advisors to hide their mendacious

activities.   

Background

I am one of three co‐founders and CEO of 3ethos and have been actively involved with the fiduciary

movement for more than 28 years. I have authored or coauthored eleven books on the subject of

fiduciary responsibility; served as an advisor to the DOL’s ERISA Advisory Committee; testified on

fiduciary practices before the U.S. Senate Finance Committee; developed the curriculums for the GFS®

(Global Financial Steward), AIF (Accredited Investment Fiduciary) and AIFA (Accredited Investment

Fiduciary Analyst) professional designations; served as an expert witness on pay‐to‐play investigations;

trained the Directors of the Federal Retirement Thrift on fiduciary practices; and, have trained more

than 10,000 financial advisors and brokers on fiduciary responsibility.

In 2000, I founded the Foundation for Fiduciary Studies. The mission of the Foundation was to define the

details of generally accepted fiduciary best practices. The Directors of the Foundation were fiduciary

experts who represented the breadth of different fiduciary constituents:

o Trustees of defined contribution plans;

o Trustees of defined benefit plans;

o Trustees of Taft‐Hartley plans;

o Trustees of public retirement plans;

o Investment committee members of foundations and endowments;

o Family offices and personal trusts;

o Socially‐responsible investors;

o Money management firms; and

o Broker‐dealers.  

The result of the Foundation’s work was the production in 2003 of, Prudent Investment Practices, the

first handbook on generally accepted fiduciary best practices. As previously stated, the handbook can be

viewed at http://www.sec.gov/nb/comments/akendal033105‐hand1.pdf
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3ethos    169 Long Wharf Road    Mystic, CT 06355    860.415.9191

The handbook covers the details of 27 fiduciary practices, three of which deal specifically with the

disclosure, control and management of fees and expenses – the subject of the DOL’s reproposed

fiduciary definition. However, the new definition does not address the remaining 24 widely recognized

practices; such as, the importance of asset allocation, preparing an investment policy statement, and

conducting a thorough due diligence process when selecting and monitoring a retirement saver’s

investment options.  

Does this mean that the DOL’s new fiduciary definition is ONLY concerned with fees and expenses?

1. Is the DOL saying that the scope of fiduciary responsibility has now been reduced solely to the

management of conflicts associated with fees and expenses?  

2. Or, do all generally accepted fiduciary best practices remain in effect, except now more

attention is going to be paid to the management and control of fees and expenses?

The DOL has not made the answers to these questions clear, and no organization or association should

be lending its support or approval for the reproposed fiduciary definition until these questions are

answered.

A Uniform Fiduciary Standard of Care

The Foundation’s 27 generally accepted fiduciary best practices are best viewed against the backdrop of

a 5‐step decision‐making process:  

1. Step 1 – Analyze: Define the client’s (plan sponsor or plan participant/beneficiary) goals and

objectives;

2. Step 2 – Strategize: Diversify the client’s investment portfolio to a specific risk/return profile;

3. Step 3 ‐ Formalize: Prepare and maintain for the client a written investment policy statement

(IPS);

4. Step 4 – Implement:  Implement the client’s IPS with prudent experts; and

5. Step 5 – Monitor: Monitor on a periodic basis the client’s IPS to demonstrate how the client is

progressing towards meeting their goals and objectives.

The prudent management of fees and expenses can impact all five steps. For example, a client may state

as a goal and objective (Step 1) that they are not fee sensitive, provided that their investment strategy

and supporting services warrant the additional cost. Likewise, an increase in asset classes in a client’s

investment strategy (Step 2) will often result in increased expenses associated with the management

and monitoring of the client’s investment strategy.  
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3ethos    169 Long Wharf Road    Mystic, CT 06355    860.415.9191

If a fiduciary skipped or did not appropriately execute any one of the five Steps, the resulting drag on

investment performance would be much greater than the “cost” of conflicted advice as estimated by

CEA. The management of fees and expenses is important, but not as important as identifying the

client’s goals and objectives; properly diversifying the client’s investment portfolio; preparing the

client’s IPS; prudently implementing the client’s IPS; and, monitoring the client’s investment strategy

on an ongoing basis.  

Calculating the Cost of a Fiduciary Standard

It also should be noted that the implementation of uniform fiduciary best practices comes with a cost –

something that has not been taken into account by either the DOL or the CEA in their recent

pronouncements.  

At a minimum, the provision of a fiduciary standard, as described above, would require 12 hours of work

per annum by a typical retirement advisor. If the retirement advisor charged $175/hour for their effort

(a conservative figure), they would need to generate, at least $2,100, per client engagement. Another

$1,500 would have to be added to each engagement to cover the cost of compliance and oversight and

compensate the advisor for assuming the liability of serving as a fiduciary. That brings the total

compensation to $3,600 per client engagement, per year.  

Apply $3,600 to the median IRA rollover account balance of $23,785 (as reported by the Employee

Benefit Research Institute www.ebri.org) and the expense of providing a fiduciary standard of care

would represent 15% of the IRA account balance per year – that’s 15 times more than the cost of

conflicted advice as estimated and reported by the CEA.  

In other words, the provision of a fiduciary standard in accordance with existing ERISA and DOL

requirements would be cost prohibitive to any account of less than $360,000. [For a $360,000 account

balance, $3,600 – the cost of providing a fiduciary standard ‐ would be 1%, or 100 basis points.] If the

DOL’s reproposed fiduciary definition is passed, the effect would be to further drive up these costs

because of increased complexity associated with compliance.  

Summary

With regards to the fiduciary’s duty to manage fees and expenses, we can simply state that:  

A fiduciary has a duty to control and account for a client's investment fees and expenses.

The fiduciary must inform the client of every party that has been compensated from, or by,

the client's account; and, demonstrate that the compensation is fair and reasonable for the

level of services being rendered.  

The DOL consumed 444 pages to express what I just communicated in 53 words. And, this simple

fiduciary explanation does not require the promulgation of any new rules and regulations.  
RIN 1210‐AB32 – 3ethos response   Page 5

3ethos    169 Long Wharf Road    Mystic, CT 06355    860.415.9191

The DOL will benefit from talking to people who are familiar with a fiduciary standard of care before

they progress with the current reproposed fiduciary definition. The primary reason why the Foundation

for Fiduciary Studies prepared its handbook, Prudent Investment Practices, 12 years ago was to provide

the industry a checklist of generally accepted fiduciary best practices so as to avoid misunderstandings

of what it means to serve as a fiduciary.  

There’s a better approach to improving retirement savings – educate retirement advisors and plan

sponsors on a prudent decision‐making process. More rules and regulations will not improve the

behavior of dishonest financial advisors and brokers; more rules and regulations will only make it more

difficult for honest advisors to serve their clients.  

We should be supporting those professionals in the financial services industry who have the passion and

discipline to protect the long‐term interests of others, and not disparage an entire industry because of

the conduct of a few.  I believe the DOL’s reproposed fiduciary definition will not help American

retirement savers; it will only add more paperwork and complexity.  

Lead to serve;

Donald B. Trone, GFS®

Founder and CEO