Brokers Violating DOL Rule by Shifting Clients to Fee Accounts: Roper

The Consumer Federation of America is urging regulators to investigate incidences of broker-dealers shifting retirement savers into fee-based accounts from less expensive commission accounts, which violates the Department of Labor’s fiduciary rule.

Since Labor’s rule was finalized, “industry lobbyists have repeatedly claimed that brokerage firms are responding to the rule by shifting retirement savers into fee accounts when they would be better off in commission accounts, exposing them to increased costs in the process,” wrote Barbara Roper, director of investor protection, and Micah Hauptman, the federation’s financial services counsel, in letters to Securities and Exchange Commission Chairman Jay Clayton, Financial Industry Regulatory CEO Robert Cook and Labor Secretary Alexander Acosta.

Roper and Hauptman urged FINRA, SEC and the Labor Department “to take quick and forceful action to protect investors from any firms found to be exploiting the DOL rule to profit unfairly at their customers’ expense.”

If brokers are steering customers to higher-cost fee accounts, “that would be a clear violation of the DOL rule provisions, as well as parallel requirements under SEC and FINRA standards, requiring firms that offer both fee and commission accounts to recommend the type of account that is best for the customer,” Roper said.

Such a practice would also “clearly violate” the fiduciary rule’s requirement that compensation for fee and commission accounts alike be reasonable in light of services offered, the two said.

“It’s possible that industry lobbyists are simply engaging in their all too familiar misrepresentations of the rule’s impact, and it is important to note that those making this claim have failed to provide concrete evidence to back it up,” said Roper.

But Kent Mason, an attorney with Davis & Harman in Washington and a fiduciary rule opponent, said that he was “disappointed” with the federation’s assertion, adding that “with the mountains of evidence building about the adverse effects of the DOL fiduciary rule, it was our hope that the entire community could move past by the political rhetoric and posturing, and examine how we can all work together to modify the fiduciary rule.”

Commission-based accounts, Mason argued, “are risky and costly under the fiduciary rule. There are numerous surveys and reports – real facts, not rhetoric – that show that, because of these risks and costs, many financial institutions and advisors are either withdrawing from the commission-based market or are restricting access to commission-based accounts.”

Just as the industry told Labor, Mason continued, “this is happening solely because of the costs and risks imposed by the DOL rule. That means that many investors have lost access to commission-based accounts. These investors are not ‘being steered’ toward fee-based accounts; rather, because of the DOL rule, these are the only accounts available to many of them. In fact, those with access to fee-based accounts are the lucky ones; they get fiduciary-protected personalized advice at reasonable fees for the enhanced advisory services provided to fee-based accounts. Millions of investors do not have enough assets to qualify for fee-based accounts, so they will be left with no personalized advice at all because of the fiduciary rule.”

But Roper argued in her letter that contrary to lobbyists’ assertions, “the vast majority of firms have chosen to continue offering commission accounts under the rule.”