Earlier this month, the Labor Department
held public hearings to discuss the input and concerns they have received from industry groups and other stakeholders that will be impacted by the department's proposal to expand the definition of “fiduciary” under ERISA.
In the debate over the DOL's proposal — which, as written, stands to effectively eliminate commission-based compensation on advice for individual retirement accounts, price small and moderate investors out of the market, and create a vast and costly new regulatory regime for independent firms and advisers across the country — it is absolutely vital that members of our industry understand the content of the proposed rule and how it would impact their businesses.
FALLING SHORT OF WHITE HOUSE'S VISION
In announcing its support for the DOL's proposal, the White House said if the industry were willing to accept a best-interest standard and provide a few basic disclosures, firms could retain the ability to set their own compensation practices, thereby preserving choice for investors.
In other words, if investors like their advisers, they could keep their advisers.
FSI wholeheartedly agrees with the goal of establishing a uniform fiduciary standard for all advisers that preserves investor choice. As written, however, the Labor Department's current proposal falls far short of this vision.
Put simply, the proposal is currently too complex and costly for firms and advisers to operationalize in their businesses. The mechanism it introduces to preserve commission-based advice on IRAs and other retirement accounts — the best-interest contract exemption (BICE) — is so complex, costly and fraught with unpredictable legal liability as to amount to an effective ban on commissions as a viable form of compensation for advice.
COMMISSIONS ARE VITAL
This problem should concern investors just as much as it does advisers. One critical fact that has received scant attention in this debate is that the commission-based model is crucial for the financial well-being of investors of moderate means. Currently, 98% of smaller IRA accounts — defined as having $25,000 or less in assets — are advised on a commission basis. As predictable and discrete expenses, commissions enable smaller and midsize investors to maintain reliable control over their investment costs while preserving their access to professional advice.
The value of this access cannot be overstated. Research from a range of sources shows that investors who work with financial advisers save more money and are better prepared for retirement than those that go it alone. An April 2014 study by Quantria Strategies, for example, found that retirement savings balances are 33% higher for individuals who have consistent access to financial advice. The same study also found that limiting access to retirement advice leads to more investors cashing out their retirement plans and could reduce the accumulated retirement savings of these affected investors by up to 40%.
Any serious disruption in an investor's long-term retirement planning and saving strategy can put their dreams for a dignified life after work in serious jeopardy. From that perspective, the impact of losing access to advice — as the numbers above make plain — can be catastrophic.
ALTERNATIVE SOLUTIONS
In our comment letter to the DOL, we suggested several common-sense alternatives to the DOL's current complex and unworkable approach. Our suggestions would come much closer to the core White House concept of a best-interest standard and essential disclosures, and include:
• A prudential standard to act in the client's best interest; to provide skillful, careful and diligent advice based on the client's needs; and to disclose, avoid where possible and otherwise obtain consent for material conflicts of interest.
• The adoption of written policies and procedures to manage material conflicts in reasonable and specified ways.
• A more streamlined and focused set of disclosures at account opening, on the web and at the point of sale that conceptually have much in common with the Labor Department's prior guidance on disclosures to qualified retirement plan participants.
Beyond the measures mentioned above, we continue to emphasize in our interactions with the DOL and lawmakers that coordination between the department and other federal and state regulatory authorities, including the Financial Industry Regulatory Authority Inc. and the Securities and Exchange Commission, will be critical if the stated objectives of the proposed rule — assisting retirement investors at the least possible cost to the retirement system — are to be successfully achieved.
Dale Brown is president and chief executive of the Financial Services Institute Inc.
