Asset management industry critics of the Department of Labor's fiduciary initiative issued a torrent of comments blasting the proposed regulation as costly, unworkable and harmful to low- and middle-income investors.
BlackRock asserted that instead of protecting investors, the proposal props up index funds at the expense of other investment products; Vanguard warned that if the DoL "defines investment advice too broadly, the attendant costs of a fiduciary level of service are likely to result in increased costs to retirement investors for basic investment counseling, or even the termination of important investor services."
The Investment Company Institute made a number of attacks on the proposal process and the DoL, stating "it has failed not only to support its assertion that there is a 'substantial failure of the market for retirement advice,' but has failed repeatedly to consider facts that contradict its conclusions."
Supporters have countered that the measure is a needed consumer protection that would shield vulnerable investors from conflicted advice as they plan for retirement.
The initial comment period for the DoL's proposal ended last Tuesday, and industry groups, consumer advocates and other regulators have inundated the department with letters of support or criticism of the effort to impose fiduciary responsibilities on advisors working with retirement plans or plan participants.
Much of the criticism from industry representatives centers on the notion that the proposal would amount to a prohibition on the brokerage model that currently serves small retirement plans and retail clients of modest means. Longstanding critics like the Financial Services Institute, SIFMA and the U.S. Chamber of Commerce all express support for the Labor Department's goal of improving the quality of advice provided to plans and consumers, but caution that, as written, the regulation will increase costs and limit access to retirement-planning services.
The FSI distills that strain of criticism in its comment letter, writing that the Labor Department's "proposal is based on flawed assumptions and creates a new regulatory regime that is too complex, too cumbersome and far too costly to manage."
Meanwhile, the Financial Planning Coalition, a group representing the CFP Board, FPA and NAPFA, calls an expanded fiduciary standard "necessary and appropriate."
"The current regulatory framework allows advisors' interests to be misaligned with retirement investors' interests," the FPC writes. "Importantly, while many advisors seek to do what is best for their clients, others take advantage of regulatory gaps to steer their clients into high-cost, substandard investments that pay the advisor well, but eat away at retirement investors' nest eggs over time."
That concern about conflicts of interest that could compel advisors to put their interests ahead of those of their clients is the starting point of the DoL's proposal. In defending the regulation, Labor officials have explained that advisors will remain free to offer advice that's free of conflicts, such as through a fee-based arrangement common to the RIA channel. Brokers working on commission or through other models that present potential conflicts will be still able to do so, but only after entering into a contract with their client averring that they will act in the client's best interest.
That so-called best-interest conflict exemption is a principal target of industry groups' criticism of the fiduciary proposal.
The Insured Retirement Institute is one of several business organizations to take issue with the so-called BIC exemption, which it argues would entail a major disruption in the way advisors work with clients. The group is calling on the Department of Labor to modify the BIC provisions so that retail investors would not have to sign a specific contract, but that the best-interest obligations would instead be included in a unilateral advice agreement. Additionally, IRI is calling for the contract requirement to be triggered ahead of making a transaction, rather than providing a recommendation, and is asking the DoL to narrow the scope of the best-interest provisions.
"The definition of the term 'best interest' in the proposed BIC exemption is overly prescriptive and should be revised to make clear that advisors and financial institutions must always put their clients' interests first, but would not be required to completely disregard their own legitimate business interests," IRI writes.
Some consumer advocates counter that the contract provisions don't go far enough. In comments filed with the DoL, the Institute for the Fiduciary Standard cautions that some firms might comply with the letter of the regulation but not its spirit. "The main risk," the institute writes, "is that these firms will agree to meet the best interest standard and hold themselves out as such; yet, they won't materially change their practices and, instead, make voluminous arguments why their current practices are best practices. They will essentially place a bet that their legal arguments prevail in any subsequent enforcement action or legal challenge."
But some firms have argued that the BIC exemption is simply unworkable, and would compel them to abandon the brokerage channel in the retirement space. A top executive with Janney Montgomery Scott vowed as much at a recent SEC committee meeting.
A consortium of leading advisory players, including Schwab, LPL Financial and Ameriprise, is warning that small businesses and individual investors who don't meet the minimum requirements for fee-based accounts will lose access to retirement guidance.
Despite the DoL's assurance that it is not taking aim at any specific business model with its proposal, some argue it is doing just that by proposing what would amount to an effective ban on commissions. Still others take aim at the DoL on philosophical and procedural grounds.
SEC Commissioner Daniel Gallagher, an outspoken critic of the fiduciary initiative, calls the proposal a "fait accompli," suggests that "the comment process is merely perfunctory," and dismisses the undertaking as "rampant nanny-statism."
The DoL is planning to hold a public hearing on its fiduciary proposal in August, to be followed by a month-long comment period.