Fiduciary Rule Increases Cost, Oversight, Not Consumer Protection, Say Financial Officials
May 28, 2015 by Arthur D. Postal, arthur.postal@innfeedback.com
WASHINGTON — The Department of Labor’s proposed fiduciary standard adds another regulatory layer while increasing costs and failing in its stated mission of unifying a standard of care, according to financial services officials attending a conference today.
“The DOL’s proposal goes far beyond [putting your customer first] standard to limit choice and raise costs, unnecessarily so in our opinion,” said Ken Bentsen, president and CEO, Securities Industry and Financial Markets Association (SIFMA) said in closing remarks at a conference in Washington, D.C., that summed up the views of an industry lawyer, as well as representatives of the Financial Services Roundtable and Fidelity Investments.
The event was sponsored by the Bipartisan Policy Council, and was the second conducted by the BPC on the issue within the past several weeks.
Bentsen said the entire proposal “underscores” a failure in the public policy market marketplace because it doesn’t provide a uniform standard supported by all financial regulators, including the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Agency (FINRA) “that will apply across the entire retail market place.”
He contended that the DOL proposal implies that “we are headed in a direction of bifurcated rules, compliance and disclosure regimes imposed on the same market participants from different regulators.”
“It is hard to see how investors won’t be confused and the industry forced to build duplicative and redundant systems that will further affect costs,” Bentsen said.
Bentsen said the DOL proposal does not live up to its definition of “best interest,” the core of the DOL proposal, but because of the “further conditionality and restrictions on investors that the DOL proposal seeks to impose on top of and beyond that standard that we believe is extraneous, burdensome and perhaps ultimately in practice inconsistent with the best interests of the client.”
Mark Smith, a lawyer at Sutherland, Asbill & Brennan, noted that the costs of revising technology to implement it “will be substantial,” therefore increasing the cost of providing advice to owners of 401(k)s and IRAs.
He also said that while the administration talks about a simple contract dealing with “best interest,’ it took the administration more than 400 pages to get its point across, meaning that the proposal is far more complex than the administration says it is.
Smith also said that current rules imposed by the DOL, SEC and FINRA “have in fact protected their clients.”
Felicia Smith, vice president and senior counsel for regulatory affairs, Financial Services Roundtable, said that the issue of the fiduciary standard as opposed to the suitability standard “requires a lot more nuance.”
She noted that FINRA and SEC recently issued reminders about what they will focus on in examinations of broker-dealers and said that while they talked about suitability, in fact they were requiring the entities they oversee to act in the best interests of their clients.
She also said that current regulations are adequate, adding that, “I think there are some bad actors, and they should be dealt with.”
Pamela Everhart, senior vice president, government relations for Fidelity Investments, said that the financial services industry “would like to work with the DOL to get this right,” but wants to work to secure “a more balanced approach.”
She noted that provisions of the proposed rule, including the best interest standard and compensation disclosure provisions, “creates material conflicts.”
In defending the proposal, Jeffrey Zients, director of the National Economic Council, said its core “put the client first” provision is necessary to ensure that investment advisers put the best interests of the client first when providing financial advice to working people.
He said the DOL proposal is part of the Obama administration’s efforts to help Americans claw their way back from the 2008-2010 economic crisis, adding that investing their retirement funds is “one of the most difficult and complex decisions” Americans face, “and that is why so many people turn to investment advisors for help. “And when they do, they should be able to be certain their investment advisors to always have their best interest in mind,” Zients said.
He said the current rules don’t require all financial advisers to put their client’s interest first, and that the concern is that “too many advisers have sales incentives to steer Americans into bad investments with high fees and low returns.”
He said some the conflicts of interests allow investment advisers to roll over clients’ retirement funds into higher cost investments. The economic justification analysis done by the Council of Economic Advisers as part of the preparation of the fiduciary rule proposal found that these incentives cost the average investor one percent annual loss in their retirement account. “That adds up to $17 billion in lost retirement savings per year,” he said.
The rules for retirement advice have not been updated in 40 years. Loopholes allow some advisers to claim they are acting in their customers’ best interest “while hiding behind confusing fine print and legalese,” he said.
He assured the audience that advisers deserve “to be fairly compensated for their advice, and the DOL rule will allow just that.”
