Of the many industry critiques of the Department of Labor's fiduciary proposal, one of the most oft-repeated is the assertion that new regulations would cut off access to advice for low- and middle income investors -- precisely the segment of consumers the initiative aims to protect.

The Labor Department, which has drafted rules that would impose fiduciary responsibilities on advisors working with retirement investors and codify a best-interest standard of advice, is holding a series of hearings on the issue through Thursday.

At the first day of the proceedings, DoL officials heard an earful from industry representatives who insisted that if the rules take effect, brokers will be compelled to abandon the commission model, and with it the millions of low-end retirement investors and plans that wouldn't meet the minimum asset levels for fee-based accounts.


James Allen, chairman and CEO of Hilliard Lyons, offered an argument typical of that line of criticism.

"As we have considered the proposed rule changes, we are concerned that client choice, pricing and or cost and access to valuable information all will be negatively affected if the rule is enacted," Allen said during one of several panel discussions the DoL convened on the first day of fiduciary hearings. "This is particularly true for smaller investors who have the greatest need for support. We believe that the proposed rule would create tremendous investor confusion as different rules are applied to different assets and accounts within the same household."

Allen offered some statistics from his own firm, which includes both an RIA and broker-dealer division.

About 84% of all retirement accounts Hilliard Lyons oversees are maintained in the brokerage wing of the practice, with the remainder residing in the advisory wing, according to Allen. But to illustrate the point that the fee-based RIA model is better suited to more affluent investors, Allen told DoL officials that the average managed advisory retirement account has roughly $240,000 in total assets, twice the size of the average brokerage retirement account.


The Labor Department is advancing the fiduciary proposal out of concern that investors saving for retirement too often encounter financial professionals whose advice is clouded by conflicts of interest. DoL officials note that conflicted interest can take many forms, including unnecessary rollovers of 401(k) plans or pushing mutual funds or high-fee annuities which the broker has a revenue-sharing agreement or some other arrangement with the provider of the product.

In defending its proposal, the department takes pains to note that there is no outright prohibition on commission or other popular industry business models, but that advisors and brokers serving retirement investors would need to make up-front disclosures and aver that they will act in their clients' best interest in a formal, legally binding contract.

The result of that best interest contract exemption -- the so-called BICE or BIC exemption -- critics say, would be an untenable exposure to legal liability that would cause many brokers to abandon the commission model altogether, opting instead for the higher-end, fee-based advisory model.

"The bottom line is that as a practical matter, advisors will not choose to utilize the BIC. Instead advisors will choose to provide advice in a fee-based account structure where clients pay either a flat hourly rate or a fixed fee based on the dollar amount of the assets," Scott Stolz, senior vice president of private client group products and solutions at Raymond James, told DoL officials during the last panel of Monday's hearings. "On the surface, that may sound like a good thing, however for all the reasons that you've already heard from many people today, the end result will be one-size pricing for all clients on all products. Smaller clients will be left with the choice of paying too much or not getting any advice at all."


Stolz echoes the predictions of other prominent industry figures who anticipate that brokerage firms will cut off service to the middle market. And where would that leave investors who depend on advice when planning for retirement?

"Certainly some of these clients will switch to the robo advisors that have popped up on the scene today," Stolz said. "And if all they need is asset allocation that will work fine, but if they need help with retirement planning, saving for college, choosing when to have Social Security start, whether they need long-term care insurance or life insurance then they're going to basically be on their own, because ... these robo advisors aren't going to provide that."

Like others in the brokerage and advisory industry, Stolz accepts the Department of Labor's starting premise of ensuring that investors receive advice that's in their best interest, but maintains that the BIC exemption is unworkable. He suggests instead that the DoL scrap the binding contract provision but instead require companies to offer their clients a sort of bill of rights making certain assurances and disclosures, as Raymond James has done for several years.

Investor advocates counter that the industry is lobbying to defeat basic, commonsense consumer protections, suggesting that the kneejerk opposition comes out of fear that the Labor Department's rules would upset a business model rooted in conflicted advice.


Moreover, they note that the typical investor is ill-equipped to navigate an increasingly complex set of products and investment strategies, and needs good-faith, best-interest advice more than ever as they are having to shoulder more of the responsibility for planning for retirement.

"Investors today fail basic financial literacy tests. They know nothing about how to evaluate these investments -- that's why they turn to brokers and advisors for advice, and the research indicates that when they do turn to the brokers and advisors for advice, they rely extremely heavily on the recommendation, often without looking at another piece of paper, precisely because they don't feel that they have that expertise," said Barbara Roper, director of investor protection at the Consumer Federation of America. "This is a relationship that cries out for fiduciary protection because it is a relationship of trust and it's promoted as a relationship of trust."

Others in the advocacy community are only too willing to call the industry's bluff. Bartlett Naylor, financial policy advocate with Public Citizen, allows that many financial services firms are doing right by their clients, but points an accusing finger at some of the largest shops that he believes have been have been placing short-term profits over their customers' welfare.

"This is an industry that wants to make money, as quickly as possible," Naylor said.

"[I] would welcome the Wall Street industry staying away from the small saver," he added. "I think that would be a good thing if that threat was made good."

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