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Exclusive: ‘We are Absolutely Not Banning Commissions,’ says DoL Fiduciary Hearing Chief

New Anti-Fiduciary Bill Faces Long, Long Odds

Advisors can keep their "conflicted" commissions, but it's time to stop harming clients by depleting their retirement savings, the chairman of the Labor Department's hearings on its proposed fiduciary rule tells Financial Planning

The agency wants a fundamental shift in Wall Street culture and sees a "best interest contract" as a way to reduce investor harm, says Timothy Hauser, a Labor deputy assistant secretary, in an exclusive interview. This shift would permit advisors to continue receiving "conflicted" streams of income like commissions.

"We are absolutely not banning commissions," he says, a day after the hearings concluded. "We just want everyone who is working on retirement accounts to be acting as fiduciaries."

Fiduciaries are legally bound to put their clients' best interests before their own when providing financial advice.

Planning to take additional public comment for about another month, Hauser and other Labor officials are then expected to release a final version of the fiduciary rule, which would only apply to financial advice on retirement accounts.

Hauser and other officials heard 25 hours of testimony this week on its draft rule, which it released in April, from about 80 different experts, ranging from brokers, custodians, fee-only advisors, investor advocates, lawyers and others.


During the hearing Wednesday, Hauser asked if it is "naïve" to think that conflicted income streams could benefit clients, given the incentives they create for the people who sell them.

"I wasn't really calling into question whether commissions are OK or not," Hauser says on Friday. "We are trying to do something to take those conflicts of interest [in commission sales] and tamp them down."

The rule would deliver the following message: "Fine, you can have those conflicted streams [of income], but, if you are going to do that then, at a minimum, we should give you an incentive that your agents and representatives really are acting in their clients' best interest."

During Wednesday's session of the hearings, an investor advocate pointed out that the United Kingdom banned commission sales of most financial products in order to rid its financial system of those conflicts. The Labor Department studied the U.K. model and that of Australia, which also banned commissions, Hauser says.


"We wanted to try a more measured approach here, a more market-based approach," he adds. "There are all these income streams [in the U.S.] that are conflicted and we can't just change all of those without [causing problems]."

"I think our goal here is just, right now, we think that investors who are receiving conflicted advice are getting worse investment advice than they would by getting unconflicted advice by a pretty significant margin."

Industrywide, those losses amount to about 1% of all retirement savings, he says. A White House study estimates the total at about $17 billion annually, and possibly up to twice that amount.

"That's a big number over time," Hauser says. "We think that this proposal will reduce that harmful impact. Will it be all 100 basis points right away? No … but, I think we can improve this market quite a bit, given the magnitude of the injury."

This rule aims to do that through a "best interest contract" exemption allowing commission sales of financial products. This would require planners to sign a legally binding contract in which they commit to putting their clients' best interests first.

This tells brokers and their firms, if you take conflicted income, you warrant "that your policies and procedures are designed so that you are not going to incentivize your people to act contrary to those precepts" of a client's best interest, Hauser says.

Many brokers and executives of financial firms say that this will expose them to a flood of lawsuits by allowing clients to Monday-morning-quarterback their planners' advice.

Hauser disagrees.

"It's not like we are trying to generate business for trial attorneys," he says. "I think this proposal will create more of a level playing field for firms that are not playing with a conflicted model."


The fiduciary rule will strengthen the entire industry, he says. "It actually, in the long run, will be better for business and it will build up trust. If people trust in their brokers, I think it will avoid the litigation peril."

Reminded that at least one investor advocate predicted that a fiduciary rule is likely to slice billions of dollars out of Wall Street profits, Hauser's response is that he cannot speculate on any company's future performance.

"Our aim is not to reduce anyone's profitability," he says. "Our aim is to reduce the detriments that investors are incurring by this conflicted advice. We think there are plenty of people in this marketplace, including quite a few brokers, who really are fully capable, even with these financial incentives … of making decisions in the clients' best interest. But unfortunately financial incentives really matter. It's easy for people to talk themselves into [putting their own financial interests first]. We are trying to change that."

And would that require a fundamental shift in Wall Street culture?

"That is the aim of the rule."

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