More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
After much anticipation, Oliver Wyman released to the Department of Labor and the Securities and Exchange Commission on Thursday the data underlying its report stating that applying a fiduciary standard to individual retirement account (IRA) recommendations is costly.
As part of its economic analysis on the redraft of its rule amending the definition of fiduciary under the Employee Retirement Income Security Act (ERISA), DOL’s Employee Benefits Security Administration (EBSA) sent out two data requests: one issued on Dec. 16 for the data underlying the Oliver Wyman report, which was commissioned by 12 financial firms; and the second was a request from EBSA’s Office of Policy Research on Dec. 15 that industry trade groups voluntarily assist EBSA in its expanded “regulatory impact analysis.”
EBSA has complained about Oliver Wyman’s reluctance to release the data, but Kent Mason, a partner at the law firm Davis & Harman, who represents the companies that participated in the study, told AdvisorOne that a confidentiality agreement kept Oliver Wyman from releasing the data sooner.
A DOL spokesman told AdvisorOne on Thursday that the department had received the Oliver Wyman data and was reviewing it. Phyllis Borzi, assistant secretary for EBSA, has remained steadfast in her determination to include IRAs in the fiduciary duty redraft.
As Mason explained to EBSA’s Office of Policy Research in an April 5 letter, the data underlying the Oliver Wyman study includes information on over 19 million IRA holders who hold $1.79 trillion in assets through 25.3 million IRA accounts. This, he said, constitutes approximately 40% of IRAs in the United States and 40% of IRA assets.
In particular, Oliver Wyman was asked to evaluate the potential impact, if enacted, of the DOL’s proposed rule change on smaller retail IRA investors with respect to access to investment help and services from a licensed investment professional, choice of investment professional, relationship model in terms of commission-based brokerage versus single-fee, “wrap” investment advisory accounts, as well as breadth of product choice, and cost impact to IRA holders.
“We believe [the data] is compelling,” Mason told AdvisorOne. Brokers, he said, are “not opposed to being held accountable” under a fiduciary standard, but the concern they have, and the reason they want EBSA to revise its rule proposal, is “that under ERISA, unlike under securities laws, if the broker-dealer is a fiduciary then they would be prohibited from giving the investment services they give today” to IRA investors.
As stated in the original Oliver Wyman report released last April, under the EBSA’s proposed fiduciary rule, “brokerage firms would likely only offer today’s level of investment services and guidance to IRA investors through fee-based advisory accounts, which would also include additional services such as ongoing account surveillance required to satisfy a fiduciary duty relationship.”
The report goes on to say that while it may be possible for firms to preserve a brokerage IRA option, “this model would likely involve very low support. Such a service model would likely need to involve strict limits on baseline services such as offering investment services. Even interactions which are a common part of many discount brokerage relationships today, such as discussions with call center and branch staff, could be curtailed (so as to avoid inadvertently establishing a fiduciary duty).”
Some firms without a registered investment advisor, the report says, “may choose to exit the IRA market completely rather than incur the expense involved in setting up an investment advisor and licensing its representatives.”
For investors with existing IRA accounts within a brokerage relationship model, Oliver Wyman said three likely outcomes would occur if IRA recommendations were held to a fiduciary standard:
Move to an advisory relationship: this will not be feasible for all affected investors, as many may be too small to serve economically as part of an advisory relationship. Indeed, smaller IRA holders with low trading activity levels may experience higher fees in this model;
Move to a “low support” brokerage model: this option may not be suitable or even practical for many investors, given the time and expertise needed to understand tax-advantaged investing without outside support, thus significantly impacting current and future IRA holders; and
Move existing funds out of the tax-advantaged retirement account market: this could have significant impacts on ultimate savings available to support the retirement of affected investors.