Outside-IN

Outside-INblog

Outside voices and views for advisers

DOL's fiduciary exemption is not a workable option for advisers

Too complex and cumbersome, provision would exclude investments such as alternatives

Dec 1, 2015 @ 10:41 am

By Dale Brown

+ Zoom

Despite months of media attention and frequent discussion within our industry, many financial advisers are only beginning to grasp the implications of the Labor Department's effort to expand its definition of fiduciary under ERISA. The rule, as written, will deny millions of small and mid-sized investors access to quality, affordable retirement advice.

Much has been written about the DOL proposal's Best Interest Contract Exemption, or “BICE,” which in theory presents a path for advisers to recommend a limited slate of investment options to IRA investors outside of a fee-based compensation structure. In practice, the BICE is too complex and burdensome to provide a workable option for advisers who seek to continue serving clients on a commission basis, but the only current alternative — banning all product sales based on commissions, revenue sharing or other forms of compensation altogether — would be much worse.

(More: The three biggest fiduciary stories of 2015)

Unfortunately, the DOL's current proposal includes only basic investment vehicles such as Treasuries, CDs and exchange-traded funds on the list of assets eligible for the BICE. A wide range of other products, including alternative investments and income-generating assets that have become key elements of many retirement investors' financial plans, were left off the list — effectively outlawing these products from retirement accounts.

NO CLEAR RATIONALE

With no clear rationale as to why these products were excluded from the BICE, it appears the DOL has determined that the excluded investments would never, under any circumstances, be in the best interest of any retirement investor. This conclusion overlooks the role many of these investment vehicles play in allowing clients to diversify their holdings and reduce overall portfolio risk.

It also unnecessarily ties financial advisers' hands. These professionals, who work with clients every day to help them pursue their financial dreams, are in the best position to understand their unique retirement savings needs and recommend the best investments in the context of those needs. As currently written, the BICE would limit a financial adviser's ability to make recommendations that reflect their clients' goals, risks and unique circumstances.

Clearly, the DOL's proposed rule poses real and significant problems for advisers and their Main Street clients. And we're not the only ones who think so.

Earlier this month, a bipartisan group of representatives in Congress proposed a succinct list of core principles to act as a guide for future legislative efforts around establishing a fiduciary standard for retirement advice. The group, consisting of Reps. Peter Roskam (R-Ill.), Richard Neal (D-Mass.), Phil Roe (R-Tenn.), and Michelle Lujan Grisham (D-N.M.), plans to introduce legislation based on these principles, including these powerful, common-sense observations:

• Investor choice and consumer access to all investment services such as commission-based sales and guaranteed lifetime income should be preserved in a way that does not pick winners and losers.

• Public policy must protect access to investment advice and education for low- and middle-income workers and retirees.

• Public policy should never deny individuals the financial information they need to make informed decisions.

These simple statements reflect an understanding of one key facet of financial planning that every adviser knows: decisions on investment products are best made after careful consideration and discussion between investors and the qualified, professional financial advisers who understand their goals.

UNIFORM FIDUCIARY STANDARD NEEDED

To be successful, we need a uniform fiduciary standard — something FSI has been calling for since before Dodd-Frank — to achieve the goal of investor protection while preserving clients' ability to receive qualified advice that can help them pursue their financial objectives.

The Labor Department and the administration appear set on implementing the DOL's expanded fiduciary standard in some form, despite significant misgivings on the part of our industry and many members of Congress. A bill sponsored by Rep. Ann Wagner, R-Mo., which would have halted the DOL's rulemaking on this issue until the Securities and Exchange Commission proposed its own uniform fiduciary standard, passed the House of Representatives last month, but President Obama has promised to veto it.

Despite these headwinds, our industry can still influence the shape of the final rule through continued dialogue with the DOL. There also may be opportunities to mitigate the rule's potential damage through future legislative solutions.

Dale Brown is president and chief executive of the Financial Services Institute Inc.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Oct 17

Conference

Best Practices Workshop

For the fifth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Featured video

Events

The client of the future

Your clients of tomorrow want you to stay ahead of the curve with technology. Some of the industry’s top young advisers and thought leaders explain what they think tomorrow’s clients will need.

Latest news & opinion

Fiduciary advocates press CFP Board for specifics on standards changes

Meanwhile, few brokerages and their trade associations, which blasted the DOL's fiduciary rule in comment letters, are responding to the CFP Board's proposal.

Big gains attract new money to emerging markets, but should investors stay?

An estimated $6.7 billion has flowed into emerging-market stock funds and ETFs so far this year, according to Morningstar.

Attorney blasts Finra after regulator loses insider trading case

Lawyer says it was 'slimy' of Finra to publicize the case while it was still being litigated.

Will Jeffrey Gundlach's Trump-like approach on Twitter work in financial services?

The DoubleLine CEO's attacks on Wall Street Journal reporters is igniting a discussion on what's fair game on social media.

Fidelity wins arb case against wine mogul but earns a rebuke from Finra

In the case of investor Peter Deutsch, Fidelity doesn't have to pay any compensation, but regulator said firm put its interests ahead of his.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print