For instance, it’s likely those investing for retirement in IRAs and 401(k) plans won’t be sold something that’s not in their best interest, said Knut Rostad, president and founder of the Institute for the Fiduciary Standard McLean, Va. during the panel discussion dubbed The Fiduciary Quagmire.
“There is a difference between advice and sales,” he said during the discussion which was moderated by Mark Hulbert, a senior columnist for MarketWatch.
“If it goes into effect (as written now), not only does it not work — which is its own set of problems — but it’s going reduce choices and make it harder for folks to get advice which is ultimately to their detriment,” said Campbell.
| Provider | Products and or services offered | Paid by | Regulatory standard | Primary regulator |
| Broker (registered reps) 639,000* | Sale of stocks, bonds, mutual funds | Commission | Suitability | Finra |
| Registered Investment Advisers 11,000* | Management of assets | Fee (% of assets under management) | Fiduciary | SEC |
| Insurance agents 443,000* | Annuities, mutual funds, life insurance | Commission or fee | Fiduciary or Suitability -- varies by product or service | State insurance commissioners |
| Dually registered advisers 26,000* | Annuities, investments, stocks etc. | product or service dependent | Fiduciary or Suitability -- varies by product or service | SEC and/or Finra |
| *Finra, Investment Adviser Association, Bureau of Labor Statistics, Cerulli | ||||
If the rule is adopted as is
If the rule goes through as is, investors will likely have to worry a bit less about the conflicts of interest that exist in today’s retirement-advice industry. Advisers, for instance, will have to disclose fees and conflicts of interest in ways that they don’t today.“They’ve got to promise in writing that they will act — that they [will] be a fiduciary,” said Rostad. “They’ll promise in writing to tell the truth. They will promise in writing to try to give objective advice. They will promise in writing to only charge reasonable fees. They will promise in writing to follow state and federal law. This is the essence, and they will promise in writing to have policies to ... ensure they are doing these things.”
But Campbell said the rule if implemented as is, especially given the requirements of what’s called the best-interest contract exemption (see definition below), could lead to problems. Fewer advisers will serve retirement investors and those investors will likely pay for more for services and products. And that could lead to investors not getting the advice they need, some panelists said.
“If you’re a small account, if you have an IRA brokerage account of let’s say $50,000 or less, the concern is you’re not going to be able to be serviced by your registered representative at the brokerage firm any longer because the rule that the (Labor Department) has proposed is going to be so complicated and convoluted and punitive to the brokerage firm that they can’t comply with it so that as a small customer you’re going to be left on your own,” said Hammerman. “You’ll be doing it yourself.”
During the panel discussion, it was noted that the White House Council of Economic Advisers has said that conflicts-of interest — which is the Labor Department is trying to address with its new rule — cost investors collectively $17 billion a year due to paying higher fees for lower performing investments.
But Campbell also noted that there’s a cost to no advice. “And it dwarfs the cost of so-called conflicts,” he said. “Most people in 401(k) plans and similar plans, IRAs, get no advice at all. And when they get no advice at all (the Labor Department) said they make $114 billion every year in investment mistakes and losses… The lack of access to advice has a cost.”
Another issue is that sophisticated investors could be precluded under the proposed rule from investing in complex securities, Hammerman said. “If you’re a customer that has developed some means, let’s say you have a couple of hundred thousand dollars after working for a long time and you have an IRA brokerage account, the Department of Labor is saying you could basically only have nine different types of investments in your IRA brokerage account,” he said. “We, the government, are going to tell you that you can no longer have IPOs, foreign securities, options.”
The panelists didn’t necessarily agree one the pros and cons of the Labor Department’s proposed conflict-of-interest rule, but they did seem to agree that if the rule is adopted as is, retirement investors will need to up their game.
Among other things, investors will need a new laundry list of questions to ask advisers before investing their money inside IRAs, 401(k)s, and similar retirement plans. “The bottom line is that investors should be no less diligent and no less careful in selecting and screening who they work with,” said Rostad.
What if the rule isn’t adopted?
If, however, the Labor Department doesn’t adopt its proposed or a revised conflict-of-interest rule, panelists said the onus will still be on the investor to be informed and educated. Investors still need to adopt a “buyer beware” approach to searching for and selecting an adviser.“If the rule goes through or if it doesn’t go through, I think the impact or the importance for the individual investor really in many ways stays the same,” said Rostad. “And that is to not assume anything and to essentially verify in terms of what it is that’s being recommended, what it is that you’re paying, and what it is that you can expect from a relationship. In many ways that’s not going to change regardless of whether we go forward with the rule or not. So that I think is the bottom line for investors.”
Do conflicts put retirement investors at risk?
Federal officials have proposed a fiduciary rule to try to solve the conflicts-of-interest problem that some say plagues the financial-advice industry. But will it help retirement investors? At a recent MarketWatch event, experts debate the issue.For his part, Hammerman said investors should be educated and aware of who is providing their advice. Is it a broker/dealer? Is it an investment adviser?
Others agree, to a point. “If the rule doesn’t happen and we go forward without it taking effect, I think what would behoove investors is to make sure they’ve asked the basic questions and understand who they’re dealing with, why they’re dealing with them, what it is they’re trying to get out of this relationship, ask the question: ‘Are you a fiduciary or not?’” said Campbell. “That may or may not be something that matters to you in each case.”
Does the rule address conflicts of interest?
During the discussion, panelists also debated whether the Labor Department’s proposed rule addresses the conflict-of-interest problems that retirement investors now face. In the main, panelists agreed that conflicts exist, and that it might impossible to remove those conflicts entirely.“We have a huge problem,” said Rostad. “And it’s a problem of at least two different sides of the same coin. One side of the coin is the massive distrust among most investors in financial services, in Wall Street specifically. Massive distrust unlike anything we’ve seen since the 1930s. The other side of that coin is the huge problem we have in terms of what investors face on a very practical level every day under the current ERISA (The Employee Retirement Income Security Act of 1974) scheme. And that is massive amounts of conflicts of interests. Conflicts of interest everywhere. The rule as designed, in principle, I think takes the correct approach. I think in terms of the details there are lots of things that can be improved but the rule as designed is taking the correct approach in terms of trying to mitigate the conflicts of interest.”
Campbell doesn’t believe the Labor Department’s proposed conflict-of-rule addresses the conflict-of-interest problem. “There are always going to be bad actors and there are ways that we can address the rules,” he said. “This is a 40-year old regulation. It has elements that I think all of us would agree should be modified. But that doesn’t mean that the proposal DOL has put out is the right one to do that. I think that’s really the debate we need to be having. What is the solution to those problems?”
Broker/dealers and advisers
Hammerman wanted the record to show that “broker/dealers and investment advisers should be held to a fiduciary best interest of the customer standard.”He said the organization for which he works, Securities Industry Financial Markets Association, (SIFMA), the lobbying group for the broker/dealer industry, has been on record for more than six years “advocating for the best interest of the customer standard.”
However, he said it’s not in the investor’s best interest that the Labor Department be the regulator that dictates how advisers — be they registered representatives (otherwise known as stockbrokers or registered investment advisers — serve retirement investors. “We have too many regulators looking at the same issue,” he said. “And unfortunately the Department of Labor is out in front. They’re taking the lead when the correct agency, really the pre-eminent securities regulator, the Securities and Exchange Commission (SEC), they should be the one taking the lead on this issue.”
To be fair, Hammerman said the Labor Department should have a seat at the table, but the SEC — the regulator that’s been dealing with this issue for 81 years — should be at the head of the table.
Of note, the Labor Department’s proposed rule is also designed to help investors make sense of the increasingly confusing number of providers of investments and advice. But Hammerman argued that the Labor Department’s proposed rule might lead to more confusion, fewer products and most costly products.
“Many, many years ago broker/dealers executed transactions and for that they received hefty commissions,” he said. “Literally hundreds of dollars to execute a trade. And investment advisers dispensed investment advice and charged a fee for that advice. And really the two models were separate. What has happened over the last many decades is a convergence. What we need to do is have the regulatory scheme catch up with what’s happened in the business. And we at SIFMA would like the SEC to take the lead in having that regulatory requirement be the same, a best interest standard, to benefit individual investors.”
BICE definition
The Best Interest Contract Exemption was developed to promote the provision of investment advice that is in the best interest of retail investors such as plan participants and beneficiaries, IRA owners, and small plans. ERISA and the Code generally prohibit fiduciaries from receiving payments from third parties and from acting on conflicts of interest, including using their authority to affect or increase their own compensation, in connection with transactions involving a plan or IRA. Certain types of fees and compensation common in the retail market, such as brokerage or insurance commissions, 12b-1 fees and revenue sharing payments, fall within these prohibitions when received by fiduciaries as a result of transactions involving advice to the plan participants and beneficiaries, IRA owners and small plan sponsors. To facilitate continued provision of advice to such retail investors and under conditions designed to safeguard the interests of these investors, the exemption would allow certain investment advice fiduciaries, including broker-dealers and insurance agents, to receive these various forms of compensation that, in the absence of an exemption, would not be permitted under ERISA and the Code.Rather than create a set of highly prescriptive transaction-specific exemptions, which has generally been the regulatory approach to date, the proposed exemption would flexibly accommodate a wide range of current business practices, while minimizing the harmful impact of conflicts of interest on the quality of advice. The Department has sought to preserve beneficial business models by taking a standards-based approach that will broadly permit firms to continue to rely on common fee practices, as long as they are willing to adhere to basic standards aimed at ensuring that their advice is in the best interest of their customers.
‘The lawyers always win’: Advice for advisers was one focus of the MarketWatch-hosted panel discussion on the Department of Labor’s proposed fiduciary standard. Mark Hulbert summarizes the major pieces of advice that emerged.
When financial ‘advice’ is really a sales pitch: Conflicts of interest cost financial services consumers billions, but it’s not easy to let them know when they’re being sold something.
