More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
After much anticipation, Oliver Wyman released to the DOL and the SEC in early April the data underlying its report stating that applying a fiduciary standard to IRA recommendations is costly.
As part of its economic analysis on the redraft of the rule amending the definition of fiduciary under 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; and 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, (left), a partner at the law firm Davis & Harman, who represents the companies that participated in the study, told Investment Advisor that a confidentiality agreement kept Oliver Wyman from releasing the data sooner.
A DOL spokesman told Investment Advisor in early April that DOL 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. She told Investment Advisor that “all of the information will be available to the public in a completely transparent way once we publish the new proposed regulation.”
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 of the DOL’s proposed rule change on smaller retail IRA investors regarding 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 Investment Advisor. 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.
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 says 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 common interactions like discussions with call center and branch staff, could be curtailed to avoid inadvertently establishing a fiduciary duty, the report says.
For investors with existing IRA accounts within a brokerage model, Oliver Wyman said three likely outcomes would occur if IRA recommendations were held to a fiduciary standard:
1. 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.
2. 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.
3. 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.