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Should DOL Extend Comment Period on Fiduciary Rule?

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While more than a dozen financial trade associations have urged the Department of Labor (DOL) to provide more time for the public and financial services industry to comment on a recently proposed change to the fiduciary standards, not everyone believes an extension is necessary, and some would prefer the agency get on with it.

The associations, including the Financial Services Roundtable (FSR), insist that the 75-day comment period on the proposed rule change is inadequate to address “the far-reaching modifications that will be required to meet the conditions to the exempted relief that DOL perceives as important,” to protect the needs of retirement investors, they wrote collectively, as previously reported by ThinkAdvisor.

The DOL sent its proposed rule change to the Office of Management and Budget for regulatory review in February. Following that ensuing review period, DOL released the proposed standard change to the public on April 14. That started the 75-day review period currently underway. Written comments are due by July 6.

The associations want a 120-day public review period instead, which they said would help advisors and consumers better review the fiduciary standards proposal – more than 1,000 pages in length.

Under the proposed rule change, all professional retirement advisors, which include brokers, financial advisors, insurance agents and others, would have to adhere to the fiduciary standard. That means that when they provide advice, they must do so with the client’s best interests at heart. They must disclose any potential conflict of interest toward that goal.

The proposed standards change would also establish several prohibited transaction exemptions that would allow retirement advisors and service providers to continue arrangements such as revenue sharing and fees. A “best interest exemption contract” would enable financial advice firms to continue setting their own compensation practices as long as they do not violate that client-first mandate.

A new “principles-based exemption” would allow advisors to recommend certain fixed-income securities and sell them to from their own inventory to an investor.

Not impacted by the rule change would be appraisals or valuations of employee stock plans of advice provided by call center employees.

Financial Services Firms Fear Legal Risks

In announcing the joint trade efforts to seek more time to comment, the Financial Services Roundtable also urged the DOL “not to propose any rule that would make professional financial advice more expensive or out of reach for workers and middle class Americans who need it most.”

Between one-third to one-half of all Americans have nothing saved for retirement and many more are not saving enough to maintain their present quality of life after they retire, according to the roundtable.

At stake for the financial services industry is potentially increased legal risks for advisors when providing financial education and guidance to clients. In the event that a firm violated the fiduciary requirement it would be considered a breach of contract. Customers could seek enforcement through mediation, and the firm could also face an excise tax penalty.

FSR led the joint trade effort to submit a letter to the DOL. The letter was signed by:

  • American Bankers Association
  • American Council of Life Insurers
  • American Retirement Association
  • Association for Advanced Life Underwriting
  • Bond Dealers of America
  • Financial Services Institute
  • Investment Company Institute
  • Investment Program Association
  • Insured Retirement Institute
  • National Association for Fixed Income Annuities
  • National Association of Insurance and Financial Advisors
  • Securities Industry and Financial Estate Roundtable
  • United States Chamber of Commerce

Eliminating Conflict of Interest From the Equation

The DOL said the motive behind the fiduciary standards change is to protect consumers from investment advice that poses a conflict of interest on the part of an advisor.

Many advisors work on a flat fee-only basis. But there is no legal requirement that prohibits advisors from recommending investment advice that in turns benefits their firm, such as products they may make. According to a White House Council of Economic Advisers analysis, conflicts of interest result in annual losses for investors to the tune of one percentage point, or $17 billion.

While the large financial associations clearly have a lot they want to review about the proposed change, many individual retirement planning firms are not concerned.

“It won’t alter our current business practice,” said Craig Howell, vice president of business and development at Ubiquity Retirement & Savings. Ubiquity is a flat-fee, web-based retirement plan provider that work with more than 7,500 small businesses nationwide.

“The investment managers presently incorporated into our IRA and 401(k) products are fiduciaries, operating in the best interest of the customers, and providing full disclosure of compensation and—since there is no financial benefit to recommending one investment versus another—without any conflicts of interest. Also, this proposal may hamper less-efficient competitors with products to sell.”

Howell said that Ubiquity advisors believe that all retirement accounts—IRAs as well as retirement plans regulated by ERISA—deserve equal protections.

“This rule delivers that,” Howell said. “Further, threat of unintended consequences aside, it’s hard to argue that the principal of advice delivered in the “client’s best interest” with clear disclosures of conflicts of interest, is anything other than a step in the right direction for consumers and retirement savers.”

Finally, Howell said that “self-interested institutions argue that the cost of adherence will drive them from the market, limiting the advice to the very savers this rule is intended to help. The first argument may be true. The second is false.”

“There is no shortage of business models or financial professionals delivering advice, and innovation and improvements in technology that allow for the better delivery of that advice,” Howell said. “If one organization can’t provide advice in the customer’s best interest and make reasonable profit, then another will. So, the DOL should be prepared to adjust to the marginal unintended consequences, and stay on the current path.”


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