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Regulation and Compliance > Federal Regulation > DOL

Are Brokers Really as Anti-DOL Fiduciary as Their BDs?

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Over the years, I’ve become increasingly skeptical of organizations purporting to “represent” large memberships. For instance, I’m not a member of the AARP, although I more than qualify: because I’ve noticed that a number of their lobbying efforts in recent years appear (to me) to be more narrowly politically motivated than in the best interests of their elderly constituents.  

Closer to home, a few years ago, then FPA Chair Richard Salmon issued a “position paper” on why Congress should raise the debt ceiling (yet again). When asked, he said he did it on his own: no poll of FPA members. And more recently, the NAPFA Board voted to change the venue of its national conference, which had been scheduled for Indianapolis, because of an “objectionable” law passed by the Indiana legislature. Again, no membership poll. Now, I’m not saying that either of these positions were “right” or “wrong,” only that they were made by representatives of membership organizations without any clear buy-in by a majority of their members.

I dredge up this ancient history to follow up on two recent stories. The first is Janet Levaux’s Nov. 3 story: “FSI Urges Advisors to Prepare for ‘Post-DOL World’ in which FSI execs “explain” the DOL’s proposed new IRA regs to those attending its Financial Advisor Summit, in Washington, DC, earlier this month. The second article: Knut Rostad’s Nov. 11 blog: Brokers’ Views on DOL Fiduciary Rule Seem to Diverge From Their BDs’.

Now some of you will remember the Financial Services Institute as the organization formed by the former members of the FPA’s Broker Dealer Division, which was discontinued due to “agenda” conflicts with the member financial planners. But the BDs did more than create their own BD organization: they included a “financial advisor” division of their own, purporting to represent both groups.

Here’s how the FSI currently describes itself on its website: “FSI has successfully promoted a more responsible regulatory environment for more than 100 independent financial services firm members and their 160,000+ affiliated financial advisors.” The website also tells us that of those affiliated advisors, some 37,000 are members of the FSI; and that around 270 of them showed up at the recent Advisor Summit.

Now, here’s how the FSI execs at that Summit described the DOL’s proposals, as quoted by Janet:

  • David Bellaire, the FSI’s general counsel: “DOL represents a fundamental rethinking on the way retirement advice is delivered. It means huge and sweeping change for the industry and enormous challenges for us all… For instance, the contracts have warranties that entail “extensive changes to compensation models, since only reasonable compensation is allowed.” 

Oh, the horror. But wait: it gets worse.

  • Robin Traxler, associate general counsel for FSI, added: “If you currently limit your business lines, this could put you conflict with the new rules and would raise the question: Are you offering the best [products] to client?”
  • Traxler went on: “With the detailed disclosures required for investor costs, complex calculations will have to be made ‘to get it right,’” Traxler explained. And by sharing the information with clients, she said, “It will create a lot more questions” for the advisor.

I know, right? Reasonable compensation!? Offering clients the best products!? Disclosing investor costs!? Have the folks at the DOL gone completely mad? After I recovered from the shock, and my cognitive functions warmed back up, I began to wonder—despite the FSI claims to represent its BDs’ advisors—whether those reps really shared these concerns.

To find out, I turned to Knut Rostad’s blog. You may also remember that Rostad is the founder and president of the Institute for the Fiduciary Standard. In his blog, he talks about a survey, conducted this September by the IFFS in conjunction with, of some 317 financial advisors: 251 of whom are non-RIA registered reps at national, regional, insurance, bank, independent or other BDs.

They were asked how reasonable or unreasonable they thought the DOL’s requirements for its proposed Best Interest Contract Exemption. Here are some of the brokers’ responses: 

  • Contractually acknowledge fiduciary status in writing (which would include recommending the best products):
    Reasonable: 47%
    Neutral: 20%
    Unreasonable: 33%
  • Receiving no more than reasonable compensation:
    Reasonable: 54.6%
    Neutral: 26.9%
    Unreasonable: 18%
  • Disclosing expected fees and expenses for one year in advance:
    Reasonable: 39.3%
    Neutral: 16.1%
    Unreasonable: 44.6% 

As you can see, on the three major concerns of FSI listed above, 67%, 81.5%, and 55.4% of the 251 brokers polled were either neutral about them or found them reasonable. While this sampling may be a bit small for statistical significance, it does suggest that a fair number of brokers don’t toe the FSI’s party line.

How can this be? Rostad offers this explanation: “[The reason why] brokers and BDs appear to hold such divergent views of core fiduciary requirements may be…that underneath all the talk of gloom and doom they hear from their BDs, brokers don’t like hearing the notion that putting investors’ best interests first is ‘unworkable.’”

Works for me. Brokers are the men and women on the front lines. And from their perspective, meeting the BICE standards has to look a quite a big easier than explaining to their clients why they can’t charge reasonable compensation, recommend the best products, and/or disclose all of an investment’s costs.

Perhaps broker and BD interests aren’t as aligned as the FSI would have us believe.


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