Brooke’s Note: If any group of financial advisors has the reputation for wearing the halos of fiduciary care, it’s the ones who pay dues to NAPFA. So nothing could point up the complexity of imposing a formal fiduciary standard on retirement accounts more than resistance from this group against Department of Labor’s efforts to put a strict one in place. See: Which three of DOL’s new 401(k) rules represent the biggest land mines for financial advisors and plan sponsors. That appears to be the situation at hand. Still, fiduciary advocates like Knut Rostad aren’t entirely impressed with NAPFA’s concerns.
Trade groups like NAPFA and FPA support the general issue of advisors being held to a single fiduciary standard, but as the battle heats up again, they’ve discovered common ground with an unlikely group — the Financial Services Institute Inc.
It comes as no surprise that the FSI, whose members are mostly from independent broker-dealers such as LPL Financial, are waging war against this proposal. Last fall, the non-profit trade organization fought hard against the rule and had more than 5,000 advisors send personalized letters protesting the proposal. See: Eavesdropping on FSI OneVoice: An industry under pressure, but looking for the opportunity.
Under the Dodd-Frank, signed into law in July 2010, it mandates that the SEC work on the fiduciary standard and the Department of Labor then began updating the Employee Retirement Income Security Act of 1974 to create a uniform fiduciary rule for brokers and advisors serving retirement plans. In September, the DOL withdrew its proposal and said it expected to submit another early this year. See: Report of a possible delay in DOL’s fee disclosure rule sparks apprehension among advisors and industry observers.
However, this issue has been moved to the forefront because on Wednesday Department of Labor Secretary Hilda Solis answered questions from members of the House Education and Workforce Committee regarding the status of the fiduciary rule. Solis told them that her department is trying to protect Americans savings.
Now, FSI has ramped up its lobbying efforts, arguing now that the proposal would have severe consequences for individual retirement account holders — particularly those with about $25,000 in assets — because it would be too expensive for them to pay for fees for advice. In an unusual twist, leaders of National Association of Personal Financial Advisors and the Financial Planning Association also share some of the same concerns about the DOL’s proposal for fiduciary status.
“It appears we may be on the same page for once,” says NAPFA’s national chairperson, Susan M. John, president of Financial Focus Inc. of Wolfeboro, N.H. “This is just one of those odd circumstances where we all realize this wouldn’t work for the public. Right now under the rules, I think it’s going to be very difficult for even NAPFA members to comply with the standards, and it is making it more difficult for individuals to get advice.” See: The dark side of the 'good’ regulatory changes get scrutinized at MarketCounsel Summit 2011.
The FPA has similar worries about smaller IRA account balances, says Daniel Barry, managing director of government relations and public policy.
“We’re concerned that the costs and risks associated with ERISA compliance could make it cost-prohibitive to advise those investors and leave them to fend for themselves, unless the department can find a way to craft exemptions to address that concern,” Barry says.
But the industry’s staunch fiduciary supporters have little sympathy for these concerns.
The complaints relating to small retirement accounts have number of flaws, says Knut Rostad, president of the Institute for the Fiduciary Standard and a regulatory and compliance officer at Rembert Pendleton Jackson, an RIA in Falls Church, Va. He believes fiduciary advocates need to do a better job responding to some of the “blatantly unfair or inaccurate criticisms.”
Rostad feels that advisors could easily craft a way to offer cost-effective advice to the masses. “Man walked on the moon in 1969, and Jack Bogle launched the index fund in 1976. To believe we can’t leverage new technologies to vastly reduce costs and provide fiduciary services to small accounts is absolute nonsense,” he says.
Rostad feels that unless a specific fiduciary standard is outlined, clients’ best interests won’t be a priority. “Clients’ interests by law don’t have to be a priority and don’t have to be first under the suitability standard, and that’s what the whole industry wants to distract us from.”
Bracing for change
Blaine F. Aikin, chief executive of Fiduciary360, says retirement accounts should always receive the fiduciary standard of care.
“I think recognizing that someone is a fiduciary is significant, because when it comes to individuals’ planning for retirement, they’re not in the position to have the same level and skills as a professional. It needs to be clear if a person is acting as a fiduciary, and we need to hold them to that.”
He is looking forward to the final rule being released soon and feels the industry needs to brace for changes. Rather than spending its efforts fighting the issue, he hopes to see new products that will work better under a fiduciary standard.
Trust in free enterprise
“I think there’s a transition period the industry needs to go through,” Aikin says. “The industry is afraid to change products. It just takes time for new products to be restructured. I have confidence in the free-enterprise system to come up with products which will offer economic advice that’s not conflicted.”
The intent of the proposal was fine, says Rick Meigs, president of 401khelpcenter.com., but he acknowledges it could be tweaked a bit. “But I think the delay more than anything is to allow the marketplace to absorb it. They’re still going to put out a proposal and I don’t think FSI and others will be happy with it.”
There’s no question that unintended consequences typically occur with all new rules, acknowledges Donald B. Trone, CEO of 3Ethos, a fiduciary organization in Mystic, Conn.
“If you’re going to apply fiduciary standards to an investment process, a simple calculation of times and charges will show you it is difficult to deliver the fiduciary standard to smaller accounts. But it’s not impossible.”
Problems with current proposal
John points out that the current proposal from the DOL would have called for stiff penalties if an advisor violates the fiduciary rules. “I just think the definitions are really flawed.”
She is worried that the DOL will release a similar rule and not offer a comment period.
“If they bring this rule back the way it was before, I think there are some real problems with it,” John says. She is worried that some of the stiff penalties involved if an advisor makes a mistake will cause advisors to steer away from offering fiduciary advice simply to avoid potential fines.
For its part, the FSI has every intention of continuing to fight against this proposal, because advisors are still angry and worried about clients, says Christopher J. Paulitz, managing director of marketing and communications.
His group’s analysis shows the average IRA account balance is $25,000 and that 19 million people in the United States have IRAs.
“Our advisors will survive and they’ll turn to the wealthy for clients and they’ll make it. This is really a fight about for hard working Americans to be able to get advice. Our members are so irate about this because they’re concerned for their clients,” he says. “We’re not just going to go away. We are going to keep talking about this.”
For its part, the Labor Department says the regulation is a high priority and the department is making progress but wants the time to “get this right,” Jason Surbey, a spokesman, wrote in an e-mail.
“Our objective is to ensure that we craft a clear and workable regulation that provides the strongest possible consumer protections to business owners who sponsor retirement plans for their workers and individual retirement savers in plans and IRAs,” he says.
It’s important to update this 38-year-old regulation, which is filled with potential conflicts of interest among advisors who could compromise the quality of investment advice in retirement savings, he adds.
Surbey says the Labor Department is also working to ensure that there won’t be “unjustified costs and burdens.”
He says the agency is anticipating that revisions to the rule may include exemptions addressing concerns about the impact of the new regulation on current fee practices of brokers and advisors.
“It is important to recognize that the consumer is already paying for conflicted investment advice,” Surbey adds. “The fees currently paid to consultants and brokers in the form of revenue-sharing and other indirect charges ultimately come out of the customers’ pockets. We believe that, with appropriate regulation, the benefits of reducing conflicts of interest will outweigh any costs.”
While the FSI hasn’t commissioned a study to evaluate the costs of the fiduciary proposal as it currently stands, Paulitz points out a study recently completed by the consulting firm Oliver Wyman which found that nearly 1 million fewer new IRAs would be opened each year if the rules were put in place. In addition, small businesses would stop setting up new 401(k)s. This will lead to $240 billion in lost retirement savings over the next 20 years, the research indicates.
However, fiduciary advocates criticize the Wyman study because raw data haven’t been released, and they point to a study released this month by Michael S. Finke on behalf of Texas Tech University and the University of Missouri at Columbia.
It reviewed a sample of advisors in states that have no fiduciary standard and a sample of advisors who are in states with strict fiduciary standards and found there are no statistical differences in the ability and costs of servicing lower-income and high-net-worth clients.