How the SEC advice rule improves on the DOL fiduciary rule

The SEC initiative seeks to raise standards and let investors understand the motivations of their adviser, without limiting choice

May 29, 2018 @ 12:23 pm

By Mark M. Goldberg

The Department of Labor building is a mere 0.7 miles from the Securities and Exchange Commission. I've had meetings at both offices many times in the last three years. Some celebrate the 5th Circuit Court of Appeals' decision to vacate the fiduciary rule, and approve the SEC's new proposed rule. Others denounce the former's demise and claim the latter is insufficient. However, I see the two efforts as quite similar in intent but different in approach. The distance between the DOL effort and the SEC rule is a short one to travel and a material improvement for our industry — a worthwhile destination.

I am disappointed to watch the attorneys general in some states and some congressional Democrats double down on their dogmatic position of fiduciaries for all. It is time to move forward to find the middle ground and finish the job that the Department of Labor staff started. Let's begin by acknowledging the validity of the DOL's effort to breach the resistance to eliminate or mitigate conflicts embedded in the financial services industry and discern there is a better way. The DOL and its staff did a laudable job. Unfortunately, they were working from the wrong playbook.

The Employee Retirement Income Security Act of 1974 came about because of the failures of the private pension system — a system which in 1973 administered the retirement funding of 27 million U.S. households. Pension participants had no control over their retirement accounts: They went to work and their employer or union made all the decisions for them. Workers didn't pick their pension plan manager and had no options to direct their money elsewhere. Pensions were largely unregulated and without rules against self-dealing and conflicts of interest. The private pension system suffered from mismanagement and abuse, which left American retirement savers unprotected and underfunded. Out of this debacle, the pillars of ERISA — duty, loyalty and prudence — were passed.

ERISA remains a welcome protection for retirement savers, but it wasn't designed for individuals who self-direct their investments. The landscape of investment opportunities available to individual investors has undergone a sea change over the last 40 years. Individual investors are now empowered to a remarkable degree. Today, 77 million households make their own decisions regarding their retirement savings — a 700% increase since 1973. The number of retirement savers subject to the private pension system has fallen from 27 million households to 15 million. Before the 1974 legislation, we didn't have 401(k)s or IRAs. Individual investors now control all the options relating to their retirement savings. They choose their funds. They hire a trusted adviser and, if unsatisfied, can fire them. They also can choose to manage their retirement accounts on their own. They invest in most anything they wish and custody those assets where they see fit. When changing their place of employment (under five years on average), they can take their retirement accounts with them. They no longer rely on their employer to provide for their retirement. They do it themselves. They have total control.

Against this backdrop, I liken the blanket application of ERISA principles to all types of accounts and investor options to using a vice grip to screw in a light bulb. It has the wrong torque. As determined as the DOL staff was to make ERISA work for individual accounts, it was the wrong tool for the job. Retirement savings today in qualified or nonqualified accounts are not large pension plans for the benefit of employees who are without options. Not even close.

Putting investors first has always been the business objective of most financial advisers I know. They do so in the real world where conflicts of interest exist, but where their clients have absolute control over their assets. Making all intermediaries fiduciaries won't guarantee better outcomes or more choices for retirees, and the suitability standard absent improvements is not good enough. We need to capture the spirit of improved outcomes for investors by raising standards, not eliminating options for investors.

The SEC proposal sends a clear message to the industry: We need to improve, we need to better inform, and we need to eliminate or mitigate conflicts. Some describe the SEC initiative as a means to mitigate conflict with disclosure. These are legal and regulatory terms. I prefer to see it as a progressive approach to advance the cause of "informed choice." I applaud the language used therein, which implores the industry to use plain speak and not legalese. The SEC initiative offers the opportunity for investors to explore their options and understand the motivations of their adviser with absolute transparency on all costs and incentives. It also includes language to improve standards of care that closely tracks some of the impartial conduct standards in the DOL's best-interest-contract exemption.

The SEC has the appropriate mandate and tools to raise the standards of this industry. We need to both embrace these higher standards and suggest our own. It is our opportunity to better our industry, build trust and codify best practices.

I encourage all financial intermediaries and investors alike to use this comment period to raise your voices. Don't let the extremists on either side drown out the prospect of thoughtful regulation. See past what some would argue is a binary decision of higher standards or more choice. We can have both. Power to the people!

Mark M. Goldberg is chief executive of Griffin Capital Securities. He was the former chair emeritus, chairman and board member of the Institute for Portfolio Alternatives, formerly known as the Investment Program Association.


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