The Obama administration is preparing to re-propose a Department of Labor rule to redefine which financial advisers must act as fiduciaries when providing advice to retirement investors. While the proposal is not yet public, indications are that it will be hostile to many advisers and the middle-class clients they serve.
In a speech delivered at AARP headquarters, President Barack Obama stated that some financial professionals are “selling snake oil” and bilking their retirement clients out of billions of dollars per year. By implication, he zeroed in on advisers who receive commissions.
His argument is not convincing. Studies show that consumers who receive professional financial advice grow their retirement savings faster than those who go it on their own. Existing laws and regulations protect consumers from fraud and inappropriate practices. The products and services provided by advisers receiving commissions have helped tens of millions of American families obtain financial security and maintain needed income throughout their retirement years.
So why does the administration feel the need for such an aggressive assault on the financial advisory profession? Well, we've been down this road before. And, frankly, the first time was a fiasco for the administration.
In 2010, the DOL proposed and quickly withdrew a fiduciary rule that met widespread opposition from both Republicans and Democrats in Congress. Former Rep. Barney Frank, D-Mass., said at the time that any DOL fiduciary rule should “not have adverse effects on the choices available to consumers, municipalities and pension plans, among others,” and he strongly urged DOL to withdraw the rule.
The forthcoming DOL rule could also reduce consumer choice. While the administration claims that the rule will allow commissions and revenue sharing, it also has implied that the DOL may alter the definition of those terms. For example, commissions may be permitted, but only if they are level across all investment options. Stakeholders were not included in the development of the proposal so we have not seen the exact language. It's disconcerting that the president referred to “backdoor payments,” which seems to be a code word disparaging commissions. When you cut through the rhetoric, the rule seems likely to focus on how advisers are compensated, rather than whether consumer interests are served.
To prepare for round two, the administration has done an effective job of divide-and-conquer, pitting one group of financial professionals against another. Registered investment advisers who now operate under a fiduciary standard typically serve wealthier clients and receive fees and/or a percentage of clients' assets under management.
Registered representatives, who would be affected by the new DOL rule, already are tightly regulated by the Financial Industry Regulatory Authority Inc. and closely monitored by their broker-dealers. They must collect detailed information about their clients and clients' investment goals and provide products that are suitable. They often serve middle-market investors and receive commissions.
The pro-fiduciary crowd has boiled the fiduciary issue down to a simple sound bite: “Working in the client's best interests.” It's effective and has helped them in the public relations battle over the DOL rule. But, let's not mistake what we're really talking about: The DOL proposal will heap additional regulation on some of the most tightly regulated financial professionals on the planet. And the consequences will impact their clients profoundly.
CONSUMERS DESERVE CHOICES
Many middle- and lower-income American families cannot afford the fees charged by wealth managers. Or they lack the investment assets, often $250,000 or more, which RIAs require for clients who pay a percentage of assets under management. It's not clear under the administration's vision where these Main Street Americans would turn for advice. It's likely they would have nowhere to turn.
The president, in his AARP speech, presented the new layer of DOL regulation as “Wall Street Reform.” But the unintended consequences will reach far beyond Wall Street. More than 30 million American households have retirement savings in commission-based accounts, according to research by Oliver Wyman Inc. More than 7 million of those have balances too small to qualify for typical advisory accounts. For the remainder, shifting to fee-based accounts would increase their direct costs by an average of 73% to 196%, according to the research.
There is no “typical” investor. It is important for all investors to have choices about how they obtain financial advice. One investor may be better served paying an upfront fee, while another may fare better paying a percentage of assets under management, while many others may come out ahead paying commissions.
My firm is based in Spencer, Wis., a far cry from Wall Street. I have worked with clients for years whom I may no longer be able to help achieve their retirement goals if the government forces me to switch to a model that doesn't suit their needs or interests. It's a shame, because based on the relationships we've developed, I understand my clients' interests as well as anyone.
Regulations are important to protect consumers and to ensure their continued faith in their financial advisers. But those regulations have to be smart and address real problems. They need to avoid unintended consequences. They should not be based on cynical assumptions that honest advisers need the government to tell them to look after their clients' best interests.
Juli McNeely is president of the National Association of Insurance and Financial Advisors.