Mercer Bullard: Think DOL’s Fiduciary Rule Is Too Strict? Blame SEC

Had Securities and Exchange Commission Chair Mary Jo White succeeded in passing a fiduciary standard rule, the Department of Labor’s fiduciary rule would likely be less stringent. So says Mercer Bullard, law professor at the University of Mississippi Law School. In a candid interview with ThinkAdvisor, the investor watchdog provided a withering assessment of Chair White’s performance.

For two decades, Bullard, a former SEC attorney, has been an influential shareholder voice on investing issues. He has testified more than 20 times before Congress and led petition drives resulting in heightened regulatory oversight. For the DOL’s rule, his input focused largely on payment grids, in addition to advocating for the inclusion of fixed indexed annuities under the rule.

He has served on the SEC’s Investment Advisory Committee and is founder of Fund Democracy, a group advocating for mutual fund reform.

A surprising item on his curriculum vitae is a seven-year stint at a financial planning firm, which ended in January of this year.

ThinkAdvisor recently spoke by phone with Bullard, who discussed the DOL rule, the Dodd-Frank Act, what Social Security is and isn’t and his idea for a standardized annuity to avert elder financial exploitation. Here are excerpts:

How do you rate Securities and Exchange Commission chair Mary Jo White’s job performance?

She’s been such a bad SEC chair for investors that there isn’t much room to go backwards. She repeatedly made promises to get fiduciary rulemaking done, though failed to get it through the Commission. But that turned out to bite the industry because the rule she would have done probably would have been a much watered-down version of the DOL’s fiduciary rule.

Do you expect President-elect Donald J. Trump to ease or repeal the DOL rule?

That’s certainly on the table. His circle of advisors seems to be consistent with wanting to repeal it. He clearly has the authority to effectively repeal it.

Many financial advisors will be happy if the DOL rule is repealed. Ultimately, though, the fiduciary rule stands to benefit clients. Shouldn’t FAs be thinking about that?

They’re thinking about their bottom line.

Are you a Democrat?

I’m an independent, and I agree with Republicans on a lot of issues. But I don’t advocate on those issues because the industry can certainly accomplish that.

In an interview with me for Research Magazine in 2003, you said that “The Securities Industry Association [now Securities Industry and Financial Markets Association (SIFMA)] is well known for attacking anything that smells of investor protection.” Still think so?

That’s certainly true and has been proven many times over in connection with the DOL rulemaking. I have never seen a lobbying campaign characterized by so many outright lies in the financial services arena as I saw in connection with the DOL rulemaking.

Mr. Trump repeatedly said, when campaigning, that he would repeal the Dodd-Frank Act. Do you expect that will happen?

It would require statutory amendments, which means the Senate would have to go along. So, depending on whether a filibuster survives, it would be hard to get major changes to it or anything else that [needs] Senate approval. What do you think will happen with the Consumer Financial Protection Bureau now that Mr. Trump will have direct oversight of it?

The virtual absence of customer protection by banking regulators was long an obscene omission in the law. It’s really unfortunate that the CFPB may be under fire.

Consumer protection doesn’t seem to be a priority for the president-elect.

It’s hard to predict what he’s going to do because there’s a populist angle that includes a bit of anti-Wall Street sentiment, which suggests that he would support investor protection. On the other hand, [his] insider appointments are generally anti-regulation, which would suggest that he would be [as well].

How will the DOL rule chiefly affect financial services firms?

The problem for firms that have brokers who are more susceptible to financial conflicts is that the rule will reduce their revenues. The firms that haven’t relied on sales motivated by differential compensation will do better in the new DOL environment.

How will the rule affect FAs’ commissions?

Within the category of mutual funds, for instance, the advisor’s commissions will be flattened, but the firm’s compensation doesn’t have to be. And that’s one of the gross misrepresentations that the industry has made about the rule. It argues that it would prevent the payment of commissions. In fact, not only does it allow payment of commissions, it allows firms to continue to get exactly the same differential compensation they’ve been getting, as long as there’s separation between the firm and its revenues and the compensation its advisors receive.

As a contributor to the book “Exploring Advice,” by PiEtech president Kevin Knull, you wrote that “only a fiduciary standard can provide an effective counter to differential compensation … and to financial incentives that encourage advice … driven by the advisor’s self-interest.” What are some of the most significant differentials?

The multiples of compensation advisors get for selling a stock fund over a short-term bond fund, for example. Typically a stock fund pays a commission that’s three or more times as much as the commission on a short-term bond fund. So advisors have an enormous financial incentive to recommend a higher allocation of stock funds because it will substantially increase their compensation.

You wrote too that “The fiduciary standard goes to an advisor’s standard of conduct, whereas financial advice goes to the quality of the advisor’s services” but that these are “closely related.” Please explain.

One element of giving good advice is ensuring that it’s not conflicted. Some of the compensation conflicts are so extreme that it’s hard to believe advice given in certain circumstances is not painted by the advisors’ financial incentives. For example, it’s hard to argue that it’s suitable advice when the advice to invest in a stock fund is given in the shadow of a multiplier with respect to the compensation received.

What else do you think Chair White failed at but which needed to be done?

It’s a no-brainer that there are fundamental structural flaws in ETFs that are a threat to the industry. But she has simply not addressed them. You wrote that an effective financial plan matches the liquidity of a client’s assets with the client’s potential liquidity needs. Don’t most plans do that?

Financial plans that include variable annuities frequently do not, and that’s been the way in which variable annuities have been most abused. That is, selling annuities to those who have liquidity needs that are inconsistent with what, essentially, should be treated as illiquid investments.

Is there a place for fixed annuities in a retirement portfolio?