Dalbar CEO Lou Harvey.

Louis Harvey could be described as a fiduciary statesman.

The founder and CEO of Dalbar Inc., a Boston-based market research company that provides compliance support throughout the financial services industry, falls into a unique category of stakeholders when it comes to the Labor Department’s fiduciary rule: a fiduciary wonk who thinks the DOL’s regulation is riddled with negative unintended consequences.

“I’ve rarely seen the level of minutiae included in this regulation,” said Harvey, who is also president of the nonprofit Fiduciary Standards Board. “It is simply amazing.”

Back in 2010, after the Labor Department pulled its first proposed fiduciary rule from the table, Harvey approached regulators with a suggestion: Craft a rule that prevents brokers selling investments from calling themselves fiduciary advisors.

“Our discussions at that time didn’t really go anywhere,” Harvey told BenefitsPRO, a partner site to ThinkAdvisor.

But these days, that idea is gaining traction.

In comment letters to the DOL, Empower Retirement and attorneys at Davis & Harmon are among those calling for a so-called sellers’ exemption, which would distinguish one-time sales of investments by brokers and insurance agents from fiduciary advice.

In its comment letter, Dalbar goes further, and actually submits a proposed sales professional exemption.

At its heart, the proposed exemption, which Harvey authored, would prohibit brokers and insurance agents from marketing themselves as fiduciaries, something many fiduciary proponents say the Securities and Exchange Commission should have been doing all along.

“Much of the problems the fiduciary rule attempts to address have their origins with the introduction of dual registration,” said Harvey, referring to the SEC permitting investment brokers to also register as fiduciary advisors.

“It led to a lot of false and misleading activity. A registered advisor could switch hats at will and become a broker seller. They found it was a lot easier to sell a product with the advisor hat on,” explained Harvey.

Regulators at the SEC turned a blind eye, which Harvey calls an “egregious” failure. “Had that been fixed, we wouldn’t be talking about a fiduciary rule today.”

But that genie is out of the bottle, in part because the brokerage industry resisted calls to enforce a firewall between selling and advisory marketing practices, says Harvey.

Language in his sales professional exemption claims it is essential that retirement investors understand the difference between sellers of investment products and fiduciaries.

“This clarity begins with eliminating overlapping and ambiguous titles. Retirement investors must know the distinction between the recommendation of an advice professional and the proposal of a sales professional,” according to language in the proposed exemption.

Harvey bases his exemption on the fiduciary rule’s best-interest contract exemption, which makes any recommendation to buy, sell or hold a security a fiduciary act.

The sales professional exemption would not replace the best-interest contract exemption, underscores Harvey, but rather it would complement it.

“We go to great lengths to not appear to be challenging the BIC — there is a place for it, just not in every corner,” said Harvey. “If you are intending to offer fiduciary advice, then you would use the BIC. But if you are not, and are only selling a product, then you would use the sales professional exemption.”

To be sure, the sellers’ exemption would offer tremendous relief from the BIC.

Sellers would have to adhere to a fiduciary standard of care, but there is no contract requirement under Harvey’s proposed exemption. Sales proposals would be given to investors, which would include disclosed, reasonable compensation on the sales.

Perhaps the most essential language in Harvey’s exemption is this: “under no circumstances shall the term ‘adviser’ or other terms with similar meaning be used to describe a sales professional.”

To underscore that prohibition, Harvey’s disclosure would require the words “Sales Professional” to be displayed on page one in a font size and color that makes it the most prominent text in the proposal.

Enforcement would not be left to the plaintiffs’ bar, as the BIC exemption is enforced. Rather, financial institutions using the sales professional exemption would be required to undergo third-party annual audits.

‘Fiduciary Advice Is Expensive’

Critics of the fiduciary rule claim it overwhelmingly favors the fee-based compensation structure registered advisors charge over front-load commissions on sales of investments.

Few dispute that.

Labor crafted the BIC exemption as a way to permit commission-based sales, but many firms have indicated investors will be moved to fee-based accounts in order to avoid having to deploy the BIC.

The consequence for many retirement investors will be higher costs, argues Harvey in his comment letter.

Moreover, restricting sales activity on securities will impair capital formation and appreciation, two bedrocks of the country’s retirement security prospects.

Harvey provides modeling in Dalbar’s comment letter that compares the compensation structures for hypothetical investors over 25 years.

Buy-and-hold investors, both small and large, pay substantially more in advisory fees over 25 years than they would in commissions.

An investor with $1,000 would pay $557 in fees over that time, compared with $170 in commissions.

An investor with $1 million would pay over $360,000 in fees, compared with $138,000 in commissions, according to Dalbar’s modeling.

Harvey’s point, and the ultimate justification for his sales professional exemption: Fiduciary advice is expensive, be it for an investor who benefits from it, or one who may not need the extent of services fiduciaries offer.

“For a lot of retirement investors, it is very hard to justify why compensation should be based on a fee on assets,” said Harvey.

News that the Labor Department has proposed an 18-month delay of the Jan. 1, 2018, implementation date of the fiduciary rule as it crafts new exemptions suggests Harvey’s idea is likely to get consideration from regulators.

In recent discussions, Labor has shown some interest in Harvey’s idea, he says.

“I give some form of sales exemption a 75% chance of emerging in changes to the rule,” said Harvey. “The SEC has recently weighed in on the fact that the BIC does not recognize sales activities. I put the odds at 50/50 that some of our proposals make it into a final sales exemption.”

— Related on ThinkAdvisor: