Critics say DOL fiduciary rule makes too many industry concessions

While many investment advisers and their organizations praise the rule, some who formerly advocated for it believe the final version doesn't go far enough to protect investors

Apr 6, 2016 @ 1:01 pm

By Jeff Benjamin and Liz Skinner

The rule the Department of Labor published Wednesday raising investment advice standards for retirement accounts is so watered down in response to industry concerns that investors may not be any better off, critics say.

Even though the new regulation would boost the advice bar for brokers, the final rule clarifies that there is no bias against selling proprietary products. It also requires fewer disclosures to clients than the proposed version of the rule, and doesn't specifically spell out the need to disclose the amount of fees and other charges being paid.

“The final rule has moved significantly away from the assumptions consistent with trust law and ERISA,” said Knut Rostad, president of the Institute for the Fiduciary Standard. “They have adopted the assumptions of the industry, which is that there are important benefits of conflicted advice.”

The final rule requires advisers to direct clients to a web page for “information on the fees charged,” which could allow advisers to simply disclose what factors were involved in coming up with the fees and expenses, instead of mandating actual disclosure of what people will pay, Mr. Rostad said.

DOL Secretary Thomas Perez said Tuesday that the final regulation was a “streamlined” version of the department proposal. He said the agency listened to critics of the proposal and edited the rule to make it “workable and doable.”

(More: DOL details changes in 'streamlined' fiduciary rule)

The rule requires advisers to act in the best interests of clients in 401(k) and individual retirement accounts. Brokers currently only have to ensure their recommendations are “suitable” for clients, rather than in their best interests.

Financial industry interest groups lobbied hard against the rule, which it said would significantly increase liability risk and regulatory costs for advisers, and reduce advice options for smaller investors.

So far, most industry groups that opposed previous versions of the rule, such as the Financial Services Institute, have been mum on the final regulation's specific changes.

LPL Financial, the nation's largest independent broker-dealer, said in a release that it is pleased by the changes the DOL made to the rule before it was finalized.

Many proponents of a rule change, including the Financial Planning Coalition and the Consumer Federal of America, said they believe the final rule is balanced on the whole.

(More: Webcast goes under the hood of the new DOL fiduciary rule)

“Our initial review indicates that the rule is a huge win for consumers,” said Micah Hauptman, CFA financial services counsel.

But others argue the industry concessions gutted the rule's intended consequences, which is to ensure advisers put client interests before their own profits when handling retirement savings.

“While the DOL deserves so much credit for taking the lead on this crucial issue while the Securities and Exchange Commission twiddles its thumbs, there are some serious issues with its rule,” said Andrew Stoltmann, a plaintiff's attorney with an eponymous law firm. “There are things brokers can do with retirement accounts that no real fiduciary could ever do.”

For instance, firms can sell high-fee variable and indexed annuities in individual retirement accounts, he said. He also mentioned brokers being able to still recommend proprietary products.

These sorts of activities have been at the crux of many of the problems and abuses seen in litigation and arbitration against brokerage firms over the years, Mr. Stoltmann said.

More than a year ago President Barack Obama directed the DOL to move ahead with the proposal on retirement advice. He used a speech at the AARP to call out financial advisers who receive “back-door payments or hidden fees for steering people into bad retirement investments that have high fees and low returns.”


Independent financial advisers who already abide by a fiduciary standard mostly praised the final rule.

“The DOL has indeed taken a major step toward a more secure and dignified retirement for millions of Americans,” said Harold Evensky, chairman of Evensky & Katz/Foldes Financial.

The agency “obviously carefully listened and responded to the concerns raised by many financial service participants regarding the original proposal, including easing the compliance process but maintaining a strong, legally enforceable best interest standard,” he said.

Ron Bernardi, president and CEO Bernardi Securities, a broker-dealer that also owns RIA Bernardi Asset Management, said it appears the best interest contract exemption that deals with commission-based trades will be less onerous than how it was originally proposed.

If so, Mr. Bernardi's firm may not need to move all of its brokerage clients over to its RIA, a prospect that would have increased costs for small clients.

“We might have to revisit that,” he said on Wednesday after reading initial information about the rule.

Duane Thompson, senior policy analyst at Fi360, a fiduciary training firm, said he's pleased so far with what he's seen in the final rule.

“The DOL has gone the extra mile to accommodate a lot of critics who thought the rule went too far in the direction of making it difficult to provide advice,” he said.

Dick Pfister, founder and CEO of AlphaCore Capital, an RIA that works with retirement accounts building alternative investment portfolios, said the rule should have been implemented a long time ago.

“The more you can act as a fiduciary, the better it is for your clients,” he said.

One industry group said the final rule doesn't go far enough to meet financial company concerns.

The Equity Dealers of America, an industry group that represents Raymond James Financial, Janney Montgomery Scott and other mid-sized and regional securities dealers and investment banks, is asking Congress to review the measure. In a statement, its chief executive, Chris Iacovella, said the group's considering legal action.

“By the Obama administration's own admission, it has not identified a single market failure that needs to be corrected,” Mr. Iacovella said. “It has put forth a rule that reduces access to financial advice for millions of low-income Americans and retirees, damaging their ability to save for and live in comfortable retirement.”

The group said the rule also “picks winners and losers among financial firms,” and it suggested the nation's largest investment banks could “get richer” as a result of the new requirements.


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