Wall Street turned up the heat in its battle against a new fiduciary standard on Wednesday with a 16-page memo warning that financial advice would become less affordable and less accessible to many Americans as a consequence.
The new standard would lead to higher fees for investment advice and have the “perverse affect of reducing the number of — and the amounts set aside by — low- and moderate-income retirement savers,” the memo said.
Written by attorneys with New York-based law firm Debevoise and Plimpton and released by the Financial Services Roundtable, an industry lobbying group, the memo offered little that hasn’t been heard before in the years-long debate, aside from dismissing White House assurances that similar laws in other countries have had minimal impact on the industry.
The memo was distributed a day after the Wall Street Journal reported that the new fiduciary standard will be endorsed by the Obama administration as soon as next week.
The fiduciary standard has long applied to retirement plan advisors, meaning they must put their clients’ interests ahead of their own. Broker-dealers, on the other hand, are held to a lower standard called “suitability.” Critics say brokers who work on commissions often steer clients to the mutual funds that pay them the highest fees.
The workers most likely to be affected by a new standard, the Debevoise memo said, typically lack the knowledge necessary to understand complex investment options. They also lack the “time and proclivity” to acquire such knowledge, it said.
That’s why they seek out brokerage services, the memo said. Lower-income workers are not only aware that brokers rely on commissions for their compensation, the memo said, but they in fact prefer it to a fee-based model.
Also, it said, the resulting regulatory burdens of a new rule would force advisors to small retirement plans out of that market, leaving small businesses without access to financial planners with adequate experience.
The memo also said that limiting “revenue sharing,” which allows brokers to be paid from the investment vehicles they recommend, would result in higher costs passed on to plan participants, presumably because participants would have to cover the revenue lost from prohibited transactions.
The memo uses the example of a 25-year-old IRA investor, for whom an equity-heavy IRA fund, it says, could be the most suitable investment choice.
But under a fiduciary standard, selecting an equity fund could be perceived as “self-dealing” by a broker, because cheaper alternatives exist, such as a money-market fund.
But would that be a suitable strategy for a 25-year-old with years of investing ahead? The memo suggests it wouldn’t.
In January, a leaked internal White House memo, co-authored by Jason Furman, chairman of the president’s Council of Economic Advisers, cited research saying “self-dealing” by brokers costs retirement savers $8 billion to $17 billion a year.
That memo also suggested the DOL’s expanded fiduciary standard would not prohibit all commission-based transactions, as seen in other industrialized economies.
New regulations overseas have not forced a massive exodus of advisory services from the lower-income segment of markets, argued the White House memo, countering concerns the U.S. financial services industry has been raising since the DOL first signaled its intention for a new fiduciary standard in 2010.
But the Debevoise memo said the White House is misrepresenting the reality in the U.K. and Australia.
In the U.K., the financial services industry had seven years to prepare for new standards. In that time, some banks and advisors did abandon the lower-income investor segment of the market.
The decline in new accounts after those U.K. regulations came to pass was most significant in the small-account segment, according to Debevoise.
And any comparison to Australia’s experience is pointless, says Debevoise, because that country requires all workers to contribute 9.5 percent of their income to default “superannuation” investment products.
“Australians who no longer sought advice from a financial advisor as a result of the reforms still had meaningful retirement savings,” according to the memo.
In the U.S., oversight and regulation of the investment advice industry is the domain of the Securities and Exchange Commission, as designated by Congress in the Securities and Exchange Act of 1934, and not the DOL, argue the attorneys.
A provision of Republican Sen. Orrin Hatch’s proposed SAFE Act, which he has said he would reintroduce this year, would squash DOL’s efforts to implement a new fiduciary standard by moving the regulation of IRAs to the SEC.
Under Dodd-Frank, the SEC was given authority to write its own definition of a fiduciary standard for advisors and brokers, though the law did not require the agency to do so.
Recently, SEC chair Mary Jo White suggested the fiduciary rule remained on the commission’s agenda this year.
White and Labor Secretary Thomas Perez have met at least twice to discuss the DOL’s new fiduciary standard, according to the Wall Street Journal.
The DOL was expected to advance the proposed standard to the White House Office of Management and Budget for review last month but has yet to do so. Once it does, it would be subject to public comment.
Marcus Stanley, policy director of Americans for Financial Reform, a coalition of more than 250 national, state and local groups who advocate for reform of the financial sector, told ThinkAdvisor in a Wednesday email that Debevoise is analyzing a proposal that “they haven’t even seen yet,” adding that the “high-priced” law firm’s concerns are “hypothetical scare stories about what the unreleased proposal might contain, along with unsubstantiated speculation that it might reduce savings.”