The Department of Labor's fiduciary proposal has drawn considerable opposition from many industry groups, but one of the leading critics says it is optimistic that the final regulation will exclude some of the provisions that would require altering common broker and advisor practices.
The Financial Services Institute has been working aggressively to raise objections to the agency’s proposal, which would impose fiduciary obligations on brokers and advisors working with retirement plans and participants. The group identifies the fiduciary rulemaking as its highest policy priority.
FSI leaders outlined the group's advocacy efforts on the issue during a conference call in which they reiterated their opposition to what they describe as burdensome disclosure and record-keeping provisions, as well as the narrow exemption that would only permit commissions and other common forms of compensation if an advisor and client entered into a contractual arrangement.
The Labor Department has said that the rules are necessary to protect investors from conflicts of interest (President Obama has said the same), particularly in cases where brokers or advisors recommend rollovers into costly retirement accounts when a less expensive plan might serve an investor just as well.
Still, Labor Secretary Thomas Perez has said that he remains open to feedback from industry members and other stakeholders, and insists that while the department is advancing the proposal as a needed consumer protection, it is also sensitive to the concerns about how the rules would be implemented and open to modifications to make the fiduciary framework more palatable for brokers and advisors.
FSI CEO Dale Brown says his group continues to meet with the Department of Labor and other administration officials, and that he remains hopeful that the agency will address some of the industry's principal complaints about the preliminary proposal before advancing a final rule.
"All of the meetings and conversations that we've had with the Department of Labor and the administration have been positive and constructive," Brown told reporters. "We leave those meetings confident that they're listening, and yes, we take Secretary Perez at his word that they're going to listen to all the input and work toward a final rule that's workable."
Brown chooses the word "workable" deliberately. FSI has lately been circulating a document on Capitol Hill outlining its objections to the Labor Department's proposal, bending its talking points into the acronym U.N.W.O.R.K.A.B.L.E.
Brown and David Bellaire, FSI's executive vice president and general counsel, outlined an array of issues they would like to see addressed in any revised rule, though they take pains to note that, as a starting point, FSI supports efforts to ensure investors receive high-quality advice, including a uniform fiduciary standard for brokers and advisors.
CONCERNS ABOUT CLIENT CONTRACTS
But whereas that precept would come from the SEC, the Department of Labor operates under a different and in some ways more stringent fiduciary statute: the 1974 Employee Retirement Income Security Act.
The Labor Department is seeking to clamp down on conflicts by expanding the definition of a fiduciary under ERISA to include a wide range of actors in the retirement space. If the proposal as written were to become the law of the land, critics say that essentially all retirement-related advice would be subject to the ERISA fiduciary standard, which would mean that common business models like commissions and revenue sharing would be permissible only if an advisor entered into a contractual relationship with a client ahead of time. That provision -- the so-called best interest contract exemption -- could have the perverse effect of driving away many prospective new clients, some argue, while compelling current clients to sign a contract to continue to receive advice.
"The bottom line is that nearly all retail financial advisors -- whether affiliated with a broker-dealer or investment advisor -- will fall under the definition," Bellaire says.
FSI is also warning about the new disclosures and compliance requirements the DoL's rule would entail, including information that advisors would have to include on their websites, cost disclosures projected out over years' time, and, perhaps most burdensome, the obligation to generate in machine-readable format every potential form of compensation that advisors could receive through the products they recommend.
"This is a hugely complex and costly undertaking that firms do not currently provide in any format," Bellaire says.
The Labor Department is accepting comments on its proposal through July 21, and is planning to hold a public hearing on the matter in August. At that point, the department will reopen the comment period for another month.
The question of conflicts is at the heart of the issue. Defenders of the Labor Department's rulemaking, among them Knut Rostad of the Institute for the Fiduciary Standard, question the sincerity of some industry groups when they profess support for the spirit of the proposal, while raising fierce opposition to the initiative since the department proposed a first draft in 2010.
"Complaining just doesn't cut it," Rostad writes in an email.
WHO’S BEST INTEREST?
After all, he argues, conflicted advice almost invariably runs counter to advice that's in the best interests of the client, so is it possible that the real fight is over preserving a business model that might be harmful to consumers?
"DoL's proposal can be improved -- no doubt -- with industry input," Rostad says. "Yet the overriding fact remains that overcoming harms of conflicted advice is hard work because conflicts contradict best-interest advice."
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