Financial trade groups to DOL: Advisers dumping small accounts

As the comment-letter deadline for the Labor Department's fiduciary rule hits, industry organizations warn of orphaned accounts

Aug 8, 2017 @ 1:34 pm

By Bruce Kelly

Cracked concrete wall with rule word on and blue sky outside
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Cracked concrete wall with rule word on and blue sky outside

The Department of Labor's new fiduciary standard for retirement accounts is creating tens of thousands of "orphaned" investment accounts and limiting consumers' access to financial products and services, according to the Insured Retirement Institute, a trade association that represents insurance companies, asset managers, broker-dealers and 150,000 financial professionals.

Since the June 9 implementation of the new rule, the number of consumer accounts that are no longer being overseen or serviced by an adviser has increased significantly, according to a comment letter the IRI submitted in response to a Department of Labor request at the end of June soliciting suggestions from the public for streamlining major provisions of the rule.

"In a July 2017 survey of IRI members, a number of IRI distributor members reported that approximately 155,000 of their clients have already been orphaned, with far more accounts expected to be impacted as implementation of the rule proceeds," according to the letter.

Critics say the DOL measure is too complex and costly and would force brokers to abandon clients with small account balances. Supporters of the rule say it is necessary to reduce brokers' conflicts of interest that result in the sale of inappropriate high-fee investments that erode savings.

The DOL is soliciting comments to guide its review of the regulation that was mandated by President Donald J. Trump earlier this year and could result in changes to the regulation, perhaps streamlining major provisions. Two provisions of the rule, which requires financial advisers to act in the best interests of their clients in retirement accounts, were implemented in June. The comment period on whether to delay the Jan. 1 full implementation date of the rule ended last month. The comment period for suggestions to streamline major provisions ended Monday.

The financial services industry has been warning that the number of "orphaned" investment accounts could spike once the DOL's fiduciary rule took effect. A recent Investment Company Institute survey showed that brokers are abandoning small accounts and sending clients back to mutual funds because they can't afford to service them under a fiduciary standard.

Meanwhile, the American Council of Life Insurers in its comment letter also said the DOL's fiduciary rule was hindering consumers' access to annuities.

"The regulation's bias against commission-based compensation arrangements has already restricted access to annuities, the only product available in the marketplace providing guaranteed lifetime income," according to the ACLI. Since its partial implementation in June, the regulation has caused "significant market changes that now deny consumers access to advice," according to the ACLI.

The Consumer Federation of America, which supports the rule, said firms have adapted and the rule was benefiting consumers.

"A key purpose of the request is to seek input that could form the basis for new prohibited transaction exemptions, PTEs, or changes to the existing exemptions," according to the CFA. "Since the rule and PTEs were finalized, however, firms have developed a variety of innovative, pro-investor approaches to implementing the rule and new investment products to ease that implementation.

"As a result, retirement savers are benefiting from broad access to both fee-based and commission advisory relationships, with fewer conflicts and lower costs, and with a wide array of investment products available to meet their needs and goals," the CFA commented.

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