Former Labor Department official Phyllis Borzi. Former Labor Department official Phyllis Borzi. (Photo via Labor Department)

The author of the Labor Department’s fiduciary standard, now vacated by a federal court, believes the Securities and Exchange Commission’s best-interest initiatives are “terrific” steps forward in protecting investors. But Phyllis Borzi also worries about the “virtual tsunami” of retirees who are rolling over their ERISA-protected 401(k) assets while regulators determine the best way to protect those investors.

“It concerns me that the SEC is not addressing rollovers” in its deliberations, Borzi said, adding that consumers who “know best” their retirement plan recordkeepers, many of which have proprietary products, may not be making the most informed choices on where to roll over their retirement assets.

Moreover, she worries that financial services providers who had been “far along in complying” with Labor’s fiduciary standard “have started to roll back” those fiduciary-friendly approaches to the possible detriment of consumers.

Borzi was speaking at a virtual press conference called by the Institute for the Fiduciary Standard, whose speakers included institute co-founder Knut Rostad, Geof Brown of the National Association of Personal Financial Planners and Jim Allen, head of capital markets policy for the Americas at the CFA Institute.

Rostad highlighted findings of The Retail Market for Investment Advice, a study released in October by the SEC’s Office of the Investor Advocate (OIAD) and the Rand Corporation. That study, which included consumer focus groups and a survey, focused on whether investors understood the differences between brokers and investment advisors, and what consumers expected from those advice givers, particularly when it came to their compensation and potential conflicts of interest.

The issue of “investor confusion” over the retail advice market has been raised by both sides in the debate over whether all advisors should be subject to a fiduciary standard that puts the interests of consumers first when providing retirement advice.

Rostad reported that the consumer survey found that 51% of investors answered that it was “important” or “very important” that their financial professional receive “all his/her compensation from you directly.” Twenty-two percent said it was not important, while 28% were unsure of the importance.

Rostad argued that the finding “sharply disagreed” with the “established view of industry, brokers and regulators in key instances” that advisor compensation from fees or commissions “is all the same.” The study’s findings, he said, supports the institute’s view that commissions, especially “hidden” ones, are “inherently far more conflictual and more harmful” than compensation paid to advisors by clients alone. Moreover, Rostad said that “making investor confusion the rallying cry” to inform the SEC’s proposed Regulation Best Interest is “misplaced at the very least” and “just wrong.”

One example of Reg BI’s flawed approach, Rostad said, it that it “suggests a limited menu of proprietary products is assumed” to be acceptable to consumers choosing retirement vehicles, but “investors beg to differ,” citing the OIAD/RAND study. Instead, that study showed that “all other things being equal,” he said, consumers would “choose the lower priced option,” but such a practice is “not encouraged by Reg BI.”

Borzi said that the OIAD/RAND research findingsare consistent with the great body of DOL research” that formed the underpinnings of Labor’s fiduciary rule.

She said that while the differences between brokers and investment advisors “have been muddied over the years,” their “conduct is virtually indistinguishable,” which is why “they should have the same standard.” However, Borzi argued that proper disclosure can reduce any investor confusion, which she said was “a symptom, not the problem.” The actual problem, she said, was that “conflicts of interest may change an advisor’s recommendation.”

What she found “most interesting” about the OIAD/RAND study is “the strong investor preference” that payment for advice goes directly from an investor to the advisor. With commissions, “consumers believe some recommendations will be made based on third-party payments” to the advisor. That finding, Borzi said, “illustrates that all compensation is not the same; fee-based compensation inspires the greatest level of trust among consumers.”

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