Best interest is in the eye of the beholder in debate over DOL fiduciary rule
Both sides claim they're doing what's best for the average investor.
The term “best interest” is subjective it seems in the debate over the Labor Department’s fiduciary rule. The phrase is used by both critics and supporters of the measure to describe what they’re trying to do for the average investor.
The latest example of the fluidity of the term was seen in a July 13 hearing of the House Financial Services Subcommittee on Capital Markets, Securities and Investments. Lawmakers on the panel debated draft legislation offered by Rep. Ann Wagner, R-Mo., that would kill the DOL rule and replace it with a regulation written by the Securities and Exchange Commission that would “establish standards of conduct for brokers and dealers that are in the best interest of their retail customers,” according to the preamble of the measure.
But wait, in my reporting on the partially implemented DOL rule, I’ve always described the regulation as “requiring financial advisers to act in the best interests of their clients in retirement accounts.” Investment advisers must already meet a fiduciary standard, and the DOL rule also would apply it to brokers, who now operate under the less stringent suitability standard.
Industry critics of the DOL rule and Republicans in Congress say that it would force brokers to abandon clients with modest accounts because it would be too costly for brokers to serve them.
Opponents of the DOL rule are embracing Ms. Wagner’s bill and emphasizing the “best interest” theme.
“By increasing costs, the fiduciary rule is having a direct effect on the marketplace and forcing advisers to limit their services to only those accounts that can handle higher costs,” Rep. Bill Huizenga, R-Mich. and chair of the subcommittee, said at the hearing. “This ultimately prices out the low- and middle-income savers that would benefit the most from having access to this information and financial advice. How is that in the best interest of those trying to save for their retirement?”
Supporters of the DOL rule say that Ms. Wagner’s alternative is a weak substitute because it doesn’t force brokers to mitigate conflicts of interest the way that they say the best-interest contract exemption [BICE] of the DOL rule would.
“Best interest has become synonymous with fiduciary in the political conversation,” said Knut Rostad, president of the Institute for the Fiduciary Standard, who recently wrote a paper on the importance of avoiding conflicts. “Legally, ‘best interest’ has a definition that does have meaning, and that’s what we see in the DOL rule. If there’s no substantive and serious requirement to deal with conflicts of interest, nothing else matters. The BICE is a serious way to address conflicts.”
Ms. Wagner’s bill does not make an explicit attempt to equate “best interest” with fiduciary duty. The term “fiduciary” appears seven times in the legislative text and each time it is in reference to the DOL rule or to federal retirement law.
Jerome Lombard, president of the private client group at Janney Montgomery Scott, said at the hearing that Ms. Wagner’s bill would “enhance the existing suitability obligation” for brokers and “be akin to, and well aligned with, the investment adviser standard under the [Investment] Advisers Act [of 1940] as the new standard would include a duty of loyalty and a duty of care.”
But Mr. Rostad said that there are too many loopholes in Ms. Wagner’s bill, including allowing brokers to satisfy the best-interest standard through disclosure only.
“There’s no one who seriously believes that disclosure works,” he said.
Actually, there are plenty of supporters of Ms. Wagner’s bill who would eagerly debate that point with Mr. Rostad, and they’ll invoke an investor’s best interest when they do.
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