Amid sharp criticism that some industry groups have lobbed at the Department of Labor's fiduciary proposal, officials with the agency insist that they are open to substantive changes to make the final rules more workable for brokers and advisors.

Timothy Hauser, a deputy assistant secretary at the DoL, said Thursday that the fiduciary rules are necessary to protect investors planning for retirement from conflicted advice, though he insisted that his team will carefully review the comments submitted and revise the proposal before enacting any regulation.

"We've identified what we believe are demonstrable injuries that flow from the current compensation structure, the current way advice is delivered to retirement investors," Hauser said during a meeting of the SEC's Investor Advisory Committee. "We're committed to doing something to fix that problem but we aren't necessarily wedded to any particular -- you know -- choice of words or regulatory text. The point is to improve this marketplace."


The DoL's proposal includes an exemption that would permit brokers and advisors to continue to provide retirement advice and receive commissions, revenue sharing or other common models. But doing so would require advisors to enter into a contractual arrangement with the client averring that they are acting as fiduciaries and committing to provide advice that's in the best interest of the investor.

That so-called best interest contract exemption has become a focal point of the industry's opposition. Jerome Lombard, president of the private client group at Janney Montgomery Scott, argues that that contract provision, which he dubs the "BIC," would entail considerable compliance requirements that his firm views as excessively burdensome.

"As the BIC is currently laid out, we would have no intention of utilizing it," Lombard says. "The BIC would impose onerous reporting requirements on Janney, heretofore not required by the current stringent regulatory framework we operate under. These reporting requirements would be on top of the many we already provide clients and regulators. And, as we see it, legal costs, reporting costs, compliance costs and surveillance costs would increase dramatically and ultimately be passed onto clients, increasing their costs to save for retirement."

Lombard's criticism of the proposed rule is typical of the industry, whose leading firms and trade groups have been warning that the unintended consequence of the fiduciary requirements will be for firms to abandon small plans and low- and middle-income investors.

"We see the rule as proposed as confusing, burdensome, increasing costs to retirement investors, practically eliminating many of the choices those investors enjoy today, and likely eliminating access to investment advice and education for the smallest retirement savers," Lombard says.


The Labor Department is accepting comments on its proposal through next Tuesday, and plans three or four days of hearings on the issue in August. At that point, the department will open another comment period slated for 30 days.

Hauser points out that the contract exemption still provides a path for commission-based sales and other conflicted advice, and notes that advisors working in the fee-based model that is common to RIAs would have no trouble under the DoL's proposal.

"First you can always, always, always give unconflicted advice. There is nothing in nature or the market that compels one to give advice that's conflicted," Hauser says.

He also says that the mechanism for implementing the contract is one area where the Labor Department is entertaining alternatives, so long as the ultimate goal of codifying the fiduciary relationship is reached.

"We've made clear to everyone we've talked to," Hauser says, "you tell us as a business proposition how you can get to an upfront, enforceable commitment and acknowledgement of fiduciary status. That's what we're trying to achieve. The exact timing of it, the exact way that you do that, we're completely open to suggestions and would like to make that as easy and non-problematic as possible from a business standpoint."


But if the contract provision stays more or less intact, and firms like Janney make good on their threat to abandon the brokerage channel, where will investors be left?

Lombard says that his firm serves about 130,000 IRA accounts, three-quarters of which are brokerage accounts averaging around $100,000 in assets. The fee-based advisory accounts average about $225,000 in assets.

So if the rules as drafted took effect and Lombard were true to his word, Janney would either transition its brokerage accounts to the full-service, higher-rate advisory channel, or simply cut them loose.

"Most IRA clients, especially the smaller ones, they clearly prefer brokerage relationships. As things presently stand, were the proposal to go into effect Janney would provide advice only to those IRA accounts that were fee-based advisory accounts," Lombard says.

"But here's the thing -- many of those IRA accounts and brokerage accounts are too small to qualify for our advisory account minimums," he adds. "What happens to those clients? Where are they going to go for advice? We'll end up needing to terminate many of these account relationships, and how ending those relationships with clients is in their best I just can't fathom."

Kenneth Corbin is a Financial Planning contributing writer in Washington and Boston.

Read more:

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access