DOL official downplays advisers' lawsuit fears stemming from fiduciary rule

Deputy assistant secretary Timothy Hauser also says liability exposure is relative to portfolio size, so regulation shouldn't prevent serving clients with modest assets

Sep 16, 2016 @ 3:53 pm

By Mark Schoeff Jr.

Timothy Hauser
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Timothy Hauser

A Labor Department official Friday tried to ease fears a new rule to raise advice standards for retirement accounts will lead to an explosion of lawsuits.

The rule, which requires that advisers act in the best interests of their clients, shouldn't make advisers leery to work with clients with modest assets because they are worried about being sued, said DOL deputy assistant secretary Timothy Hauser.

“The liability exposure moves in step with the size of the investment,” Mr. Hauser told an audience of about 150 advisers at the Financial Planning Association's annual conference in Baltimore. “I'm not sure why that should deter people from serving small accounts.”

(More: The most up-to-date information on the DOL fiduciary rule)

Mr. Hauser was responding to an adviser who said she's not sure she can afford to provide a fiduciary level of care to a client who has only $500 in an account.

Another adviser stood up and said, “It's not just the $500,” it's the threat of class-action lawsuits.

Mr. Hauser responded that in order for a class-action suit to be filed, the plaintiffs have to “show systemic violations,” which he implied is a high bar to meet.

Besides, he continued, fiduciary requirements of prudence and loyalty and the associated trust laws have been enforced by courts “for a long, long time.”

“I don't think they, in fact, have had the kind of consequences you're imagining,” Mr. Hauser said. “It's served the trust beneficiaries and others well for years.”

BICE

He also defended the best-interest contract exemption that is at the heart of the rule. Under the provision, advisers have latitude in how they collect their compensation as long as they enter into a legally binding agreement to act in a client's best interests.

“A right that doesn't have a mechanism for accountability associated with it isn't really a right,” Mr. Hauser said.

He leavened his push-back of advisers who brought up lawsuit fears with reassurances that the DOL will not jump right into enforcement when implementation of the rule begins in April.

At that time, advisers to 401(k), individual retirement accounts and other qualified accounts will have to act as fiduciaries to their clients. In January 2018, the rule will be fully implemented, including the best-interest contract exemption and the related disclosure requirements.

“Our main goal in the near term is going to be to help people get to compliance,” Mr. Hauser said. “Honestly, we think by April 2017, the industry should be in a position where it can be prudent, loyal, not charge more than reasonable compensation and be honest. We don't think that's a huge ask.”

An adviser at the FPA conference asked how the DOL will assess reasonable compensation.

“It really is primarily a market-based standard,” Mr. Hauser said. “The question is what do people charge for this service in the marketplace and are you in line with that? The first and most important thing you can do if you're worried about it is do a little benchmarking.”

As he has done at previous adviser conferences, Mr. Hauser promised the DOL would issue a document that covers frequently asked questions.

(More: A comprehensive, searchable database of advisers' fiduciary FAQs)

“There will be FAQs this fall,” he said. “It will be on a rolling basis.”

Some advisers want answers now. Mr. Hauser lingered for an hour after the FPA session fielding questions from a dozen advisers who gathered around him after he stepped off the stage.

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