Close Close
Sign In
Newsletters
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Podcast Center Video Center Webcasts Resource Center Events
About ThinkAdvisor Contact Us Advertise With Us Asset & Logo Licensing Sitemap Terms of Service Privacy Policy Copyright © 2024 ALM Global, LLC. All Rights Reserved.
ThinkAdvisor

Regulation and Compliance > Federal Regulation > DOL

Industry leaders testify on DOL proposal

By Nick Thornton

X
Your article was successfully shared with the contacts you provided.

In his testimony before the House subcommittee on Health, Employment, Labor and Pensions, Secretary of Labor Thomas Perez reiterated his commitment to finalizing a workable fiduciary rule.

Doing so will require continued input from a broad range of stakeholders, said Perez, in order to “operationalize” the uniform fiduciary standard laid out in the DOL’s proposal.

Perez’s leadership has been a welcomed improvement, as demonstrated by a continued willingness to work with the Committee on Education and Workforce on a range of issues, according to subcommittee member Rep. Joe Courtney, D-Connecticut.

Courtney called the DOL’s first efforts to advance a new rule in 2010 a “disaster” and a “fiasco.” That, of course, was prior to Secretary Perez’s appointment to Labor.

Perez said he and his team sought to “build a big table” in crafting its proposal and will continue to listen to stakeholders to assure the best rule is finalized.

The subcommittee gave him a chance to make good on that pledge. At a small table, five witnesses gathered after Secretary Perez’s testimony to give theirs. They offered no shortage of input.

Here is a breakdown of their perspectives, in the order of their testimony.

Kent Mason, attorney and partner at Davis and Harman

Mason’s legal career has been committed to the area of retirement plans. From his perspective advising plan sponsors and stakeholders in the financial service industry, everyone is “absolutely fine with a best interest standard,” echoing a policy sentiment proffered by SIFMA, FINRA, and other advocates of the brokerage industry that oppose the rule advanced by the DOL.

The primary concern of Mason’s clients has always been the question of prohibited transactions, according to his testimony.

“This has been the issue for 4 ½ years, and it hasn’t really been addressed,” he said.

The DOL’s proposal commits significant space to prohibited transactions, yet to Mason’s mind, it still fails to clearly define what exactly is prohibited.

In his reading, the proposal makes the existing brokerage model “illegal.”

The alternative, fee-based advisory model, simply doesn’t work for smaller IRA accounts, he added.

Also, the 2015 proposal “explicitly” cuts back on permissible financial investment education, whereas the 2010 rule attempted to preserve it.

“The perception is that this had been an evolution,” said Mason, comparing the latest proposal to the first. “In actuality, there is a growing consensus that the 2015 proposal is much worse and much less workable than the 2010 proposal,” he claimed.

“The trend line is going in a disturbing direction,” he added. Jack Haley, executive vice president, Fidelity Investments

Fidelity services almost 8,000 plans with less than $100,000 million in assets, and acts in the best interest of those clients, according to Haley.

“We support a best interest fiduciary standard, but the details matter. We fear this proposed regulation will severely restrict our ability to provide assistance to small businesses and workers,” he said.

Specifically, the Best Interest Contract Exemptions contain “so many problematic conditions” that the rule is unworkable as drafted, he added.

Ordinary customer service conversations would be jeopardized. And contracts would have to be signed before a conversation even begun, he testified, a point that Secretary Perez addressed in his testimony as an area of confusion that will be addressed.

Dennis Kelleher, president and CEO, Better Markets, Inc.

Aside from Secretary Perez, Kelleher was the day’s lone witness who fully backs the DOL’s efforts.

The existing regulatory system, which he says allows broker to put their interests before their clients’, is “unacceptable.”

ERISA is “outdated and incapable of protecting workers and retirees.” The rule has remained “frozen in time as if nothing has changed,” when in fact the country’s transition from defined benefit pension plans to self-funded plans has been a “monumental and mind boggling shift,” he said.

The DOL has addressed industry concerns and incorporated them into the rule, claimed Kelleher.

Yet the brokerage industry continues to object, and the reason to Kelleher is clear.

“They simply do not want to change the status quo and work under a simple principle—a rule that says you must put your clients’ interests first.”

If brokers don’t want to do that, or if they feel they can’t make enough money doing that, then should move on and make room for those advisors that already do, he thinks.

“There are plenty of investment advisors that are more than willing to put their clients interests first,” he said. “Today, there are tens of thousands of advisors across the country that do. Brian Reid, chief economist, Investment Company Institute

Reid has spent a lot of time with the economic analysis the DOL uses to justify its rule, he told subcommittee members.

Those numbers are “fatally flawed,” amount to an “exercise in story telling,” and, in Reid’s mind, were “crafted more to support the DOL’s agenda than to measure accurately the proposal’s impact on retirement savers.”

If those assessments weren’t clear enough to define where he and the ICI, which represents the interests of mutual funds, stand, Reid said the DOL’s numbers raise the question as to whether or not the regulators have even a basic understanding of the market for retirement advice.

He said the DOL’s proposal would yield “significant net social harm.”

The $1 trillion the DOL says investors will lose over the next 20 years without its rule is simply flat wrong, says Reid.

That number is based on front-loaded mutual funds, which the DOL says brokers are incentivized to direct investors to even when those funds underperform.

But Reid says a “simple test” shows the opposite: front-loaded funds have outperformed investment classes since 2007.

Moreover, the DOL claims its rule will drive down brokerage commissions by two-thirds, but that it won’t drive brokers from the market.

“That seems highly unlikely to me,” said Reid.

The DOL’s rule is “hopelessly complex” and “unworkable,” he added.

Dean Harman, CFP, representing Financial Services Institute

Harman is a Texas-based money manager who services clients on a fee-based and commission model.

Compiling with Best Interest Contract Exemptions in the proposal would ultimately create a “mountain” of regulatory burdens and costs that would either be passed on to investors or limit advisers from servicing retirement accounts with lower levels of assets.

“Investors of moderate means will find it difficult to gain access to valuable retirement advice and products,” he said.

Harmon testified that he oversees about $200 million in assets for 618 clients.

About $10 million is held by 331 low net-worth and elderly clients, with an average account balance of $30,000.

For them, the fee-based advisory model does not make sense, said Harman, who said the commission model is the only way to get lower net-worth investors the advice they need.

“This proposal would fail those investors,” said Harman.

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.