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Watchdog Slams Sen. Johnson for DOL Fiduciary Comments

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Under a newly named chairwoman, the Committee for the Fiduciary Standard released today a note sent to Sen. Ron Johnson, R-Wis., charging that a letter sent by the senator to Department of Labor Secretary Thomas Perez “has it backwards.”

While Johnson wrote that a yet-to-be-released DOL rule requiring a fiduciary standard on retirement planning “could adversely affect middle- to low-income Americans’ access to investment advice,” the Committee said his charge “is just not true.”

Instead, the Committee writes that “small investors and savers are the ones being victimized by current practices of the big Wall Street and insurance companies. And they will continue to be so if the Department of Labor doesn’t extend the embrace of the ERISA fiduciary standard for advice to and management of retirement accounts, retirement plans and retirement investors.”

To support its position, the Committee cites an academic study — by Michael Finke of Texas Tech University and Thomas Patrick Langdon of Roger Williams University — which found that a state law “requiring brokers to act as fiduciaries has not reduced investor access to advice, but rather provided advice in the investor’s interest.” 

According to the 2012 Finke-Langdon study, “The Impact of the Broker-Dealer Fiduciary Standard on Financial Advice,” the authors set out to test “whether a relatively stricter fiduciary standard of care impacts the ability to provide services to consumers.” Their conclusion was that the number of registered representatives doing business within a state as a percentage of total households “does not vary significantly among states with stricter fiduciary standards.”

The Committee had announced Monday that Kathleen ‘Kate’ McBride has succeeded Ron Rhoades as its chairman.

In an interview on Wednesday, McBride, a former editor at Investment Advisor and ThinkAdvisor, said that as for Johnson’s letter, “it would have been nice if he put some facts into it.” Low-income and middle-class Americans “are not being served by brokers” as it is, she said, while “many RIA firms are willing to step up” and offer various methods to make professional advice affordable to those groups, citing the Garrett Planning Network as one example (Network founder Sheryl Garrett is a member of the Committee.)

The Hill first reported Feb. 9 that it had obtained the Feb. 5 Perez letter sent by Johnson, who is chairman of the Senate Homeland Security and Government Affairs Committee. The Hill’s Kevin Cirilli said that Johnson asked for a response by Feb. 19 from Perez on to “how the new regulations won’t ‘adversely affect middle- and low-income Americans’” and for DOL’s role in a leaked White House memo in which Council of Economic Advisers Chairman Jason Furman and advisor Betsey Stevenson were critical of the brokerage industry’s practices on retirement plan advice.

The broker-dealer industry responded sharply to the memo, including Financial Services Institute Chairman Adam Antoniades, who in a speech at the FSI OneVoice conference said that “The ignorance in the memo is shocking to me,” and that “for those who spend their lives in the industry, it is frankly offensive.”

Last year, Ken Bentsen, president and CEO of the Securities Industry and Finacial Markets Association, said of the DOL plan that “from day one, this has been a troubled proposal … that will harm the ability of everyday American investors and small business owners to save for retirement.”

However, McBride said that “SIFMA’s arguments don’t hold water” when it comes to serving the lower-income and middle classes, nor that there will be lack of access to advice and greatly limited choice on retirement products.

“The third item in SIFMA’s rhetoric is that it would cost more to work with a fiduciary. That’s just not true,” McBride said. According to the 2013 fi360 Fiduciary Standard Survey, nearly 80% of survey participants (who hailed from all the advisor channels) said it would not cost more, McBride said. “One of the fiduciary principles is controlling the costs investors pay, and clearly disclosing all costs to the investor,” she said.

“The industry has been taking a lot off the top for a long time. That’s bad policy,” she said.

Instead, she called for the fiduciary responsibilities borne by retirement plan sponsors to participants to be extended to all advice given to workers “when they roll over their plans into IRAs.”

While she said many registered reps do look out for the welfare of their clients — inside and outside retirement plans — still “there’s no way for clients to tell” if their broker has a fiduciary duty to them, and research has shown that “97% of individual investors have no idea” whether their ‘advisor’ owes them a fiduciary duty. However, those reps “do have a fiduciary duty to their companies” as registered representatives of their broker-dealers.

McBride is an original founder of the Committee for the Fiduciary Standard, which was formed in 2009 to advocate for one fiduciary standard for all investment and financial advice givers.

Rhoades, a J.D. and certified financial planner who teaches at Alfred University in New York, had served as the Committee’s chairman for two years. He is taking up a new teaching position at Western Kentucky University later this year. He will remain on the group’s steering committee, McBride said.

McBride is a former bond trader and stockbroker, in addition to a longtime journalist. She is an accredited investment fiduciary (AIF), founder of the consulting firm FiduciaryPath LLC and the longtime editor of the fi360 Fiduciary Standard Survey, which measures the fiduciary-related attitudes and activities of employee brokers, independent contractor registered reps, “hybrid” advisors and RIAs.  The most recent survey is expected to be released soon, McBride said.

— Check out Wall Street Finally Blinks in Fiduciary Standoff by Bob Clark on ThinkAdvisor.