Fiduciary rule change would heap on costs, says SIFMA exec

Price of switch to advisory fee model underestimated, association claims

Mar 1, 2011 @ 3:58 pm

By Darla Mercado

The Labor Department's push to expand the definition of who's a retirement plan fiduciary threatens to heap additional costs on broker-dealers and IRA holders as firms will have to shift accounts to an advisory fee model, according to a SIFMA executive.

“The cost to [individual retirement account] holders has been greatly underestimated and the emphasis has been misplaced,” Ken Bentsen, executive vice president for public policy and advocacy for the Securities Industry and Financial Markets Association, said at a Labor Department hearing in Washington today. The DOL is hosting a two-day hearing to gather comments on its proposed rule, which would apply to anyone who provides retirement plans advice for a fee. Currently, the agency goes by a five-part fiduciary test that it says had allowed service providers, brokers and others to skirt the law and provide off-the-cuff advice to retirement plans.

The proposed change would affect retirement plans and IRAs.

If broker-dealers and registered representatives overseeing their share of the $4.3 trillion IRA market were subject to fiduciary duty, they would be given two choices: either stop providing services to IRAs or convert the accounts from a commission-based model to an asset-based model, Mr. Bentsen said.

“For small IRAs with limited trades, the asset-based account is going to cost more,” he added. “That's contrary to the intent of the rule, which is supposed to be to the benefit of the beneficiary.”

He also noted that the proposed rule had no exemption that would allow fiduciaries to sell securities, fixed income or other assets on a principal basis — in which a firm buys securities initially for itself and then sells them to clients with a mark-up — to fiduciary accounts, and that as a result, firms would have to trade away. That would lead to a commission on the trade, plus the mark-up.

Timothy Hauser, an associate solicitor at the DOL, countered SIFMA's objections. “With respect to principal transactions and fixed-income securities — those are areas where there are direct conflicts of interest between broker-dealers and customers, aren't they?” he asked. “To the extent you're selling the product yourself in a market that's thinly traded, there's a potential to take advantage of the customer.

“Why shouldn't we be in a position to create exemptions that put some conditions on your members and unsophisticated investors?” asked Mr. Hauser.


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