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DOL Seems to Soften Fiduciary Rule Without Selling Out Investors

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As you’re probably aware by now, earlier today the Department of Labor unveiled its new rules for advisors (now “advisers”) who provide advice on IRAs. While it’s doubtful that anyone has been able to review the entire document yet, the DOL had revealed bit and pieces of it over the past few months, which have been discussed, and form the basis for many of the analyses that began flooding the internet this afternoon.

You’re also undoubtedly aware that the DOL’s purpose in issuing these new rules is to close “loopholes” in the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986, which enabled the securities industry to create “Individual Retirement Accounts” (IRAs) that did not afford investors the same investor protections sported by other retirement products: specifically, a fiduciary standard requiring “advisors” to act in the best interests of IRA investors. 

Back in 2010, when the DOL first proposed changing its rules to close these loopholes, the securities industry  responded with a flurry of reasons why its registered representatives shouldn’t be required to act in the best interest of IRA investors, including that such a rule would:

  • increase investor costs
  • reduce the ability of less wealthy investors to get “advice”
  • cause a substantial number of BDs to go out of business,
  • would be bad for investors
  • be redundant, since brokers are already acting in clients’ best interests
  • increase the Federal deficit
  • send the stock market into a tailspin
  • undermine the foundations of our capitalist system. 

Yes, I made up the last three. But you have to admit they aren’t really any less plausible than the first five, considering that one of them is that claiming brokers are already doing for clients what would cause those disasters—and I can’t even formulate a comment about “their best interest isn’t good for them…” 

But despite the hollowness of these arguments, SIFMA was able to recruit enough feeble-minded politicians and journalists to stall the DOL for these six years (really seven, as the new rules don’t take effect until April 2017), and to force the DOL to modify some of its original rules. So the question on the table today for those of us who think that having advisors/advisers act in their clients’ best interests just might actually be good for investors is: what changes did the DOL make to accommodate the securities industry and its allies?

As I suggested, I haven’t read through the whole document, and, at the time of this writing, I haven’t found anyone who has. But I have found a few folks who had a pretty good idea what was going to be in it, including the changes in question. Once such expert is Linda Rittenhouse, director of capital markets policy at the CFA Institute, who has been following the DOL’s rulemaking process and watched the Department’s presentation on the new rules earlier today.

“It looks as if the DOL made significant changes,” she told me, “but managed to retain its commitment to putting investors’ interests first. At the Institute, we believe that investors should be able to rely on the integrity of the investment advice they receive, regardless of business model.” And by “business model” she means either brokerage sales or RIA fiduciary.

For instance, Rittenhouse thinks that “the DOL did a good job of balancing the issues involved with proprietary products: allowing their sales, but providing clear and reasonable guidelines for determining whether they are in a clients’ best interest.”

“We were concerned about educational advice,” she said. “But the new rules do a nice job of clarifying what’s “education” versus what’s “advice.” So brokers can provide much needed investor education, without bumping up against the rule: for instance, strict guidance and parameters so brokers can educate about asset allocation models, but not make specific recommendations that would constitute ‘advice’. Because IRAs don’t have a plan sponsor making recommendations to investors.”

Rittenhouse also pointed to the Best Interest Contract Exemption (BICE), which, she said, “was overly burdensome and too costly to comply with in its original form. Its complexity and potential legal liability scared the industry. We are pleased to see the simplified and clarified changes: they can now be presented in early client meetings and even by email, if need be.”

You may remember that it was the BICE component of the DOL’s proposed rules that caused many within the securities industry and more than a few observers to conclude it would be the end of commission sales. Even I think that would be a mistake: in circumstances where investors simply want to buy a specific security or product, commissions are the most transparent and cheapest form of compensation.   

But in cases where investors is looking for investment advice, then compensation based on the execution of that advice seems to create unmanageable financial conflicts.

In fact, I’d go so far as to say that if the DOL, and hopefully the SEC, is serious about increasing investor protections, they would legally separate financial “sales firms” from fiduciary “advisory firms,” with a Glass-Steagall type of law. That’s how investors could make informed choices between those types of services. 


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