Article first published on AdvisorPerspectives
On October 31, the Department of Labor (DOL) proposed a new definition for an investment advice fiduciary. This proposal includes holding advisors, brokers and insurance agents to the fiduciary standard when consumers “rollover” their funds from a 401(k) to an IRA.
This is the third attempt by the DOL to enforce fiduciary advice. It tried in 2010 and 2016. The 2010 attempt was thwarted by the securities industry and the proposal was withdrawn by the DOL, and the 2016 attempt could not withstand legal challenges.
Will fiduciary advocates follow the same strategy used in the past or adopt new tactics?
Will history repeat in 2023?
This proposal is different, however. Its scope is narrower than the 2016 rule. It also applies the legal reasoning of law professor Arthur Laby to include rollover recommendations. If you say you offer trusted advice, according to Laby, you should be held to it.
The proposal is part of President Biden’s efforts to minimize “junk fees” charged to consumers.
President Biden’s economic policy advisor, Lael Brainard, noted, “When a retirement saver pays for trusted advice that is actually not in their best interest and comes at a hidden cost to their lifetime savings, that’s a junk fee.”
The Council of Economic Advisors (CEA) says Americans rolled over some $779 billion in 2022 from defined-contribution plans to IRAs.
The CEA estimates that a best interest standard “can increase retirement savers’ returns by between .2% and 1.20% per year,” and that conflicts associated with fixed-index annuities “may cost savers $5 billion per year.”
The finance and insurance (“fin-surance”) industries will fight the rule vigorously. Bloomberg’s Austin Ramsey set up the coming battle. The battle will pit consumer advocates – including the Consumer Federation of America (CFA) and the AARP, who have coalesced to form the Save Our Retirement Coalition – against securities industry lobbyists and groups such as the Financial Services Institute (FSI) and the Chamber of Commerce.
FSI President and CEO Dale Brown asserted the rule will limit “access to financial advice.” He also claimed it’s imperative that the rule “harmonize with Reg BI.” Regulation Best Interest (Reg BI) was passed in 2019 as an alternative to a true fiduciary standard, but its consumer protections are essentially the same as the suitability rule that governed the securities industry for many decades.
Meanwhile, SIFMA CEO, Ken Bentsen, claimed the DOL rule is not needed. Why? The SEC’s Reg BI is “robust and expansive.”
The U.S. Chamber of Commerce said it is “disappointed.” The proposed rule “does nothing to promote retirement security and savings,” while making it more difficult to receive investment advice.
Not to be outdone, Wayne Chopus, CEO of the Insured Retirement Institute, offered a zinger to fa-mag.com. The proposal, he said, “Actually worsens the existing retirement insecurity of millions …”
Fiduciary duties are either unneeded or harmful, according to the opponents of the DOL rule. The message? In their view, the finance and insurance industries have already achieved perfection.
Academic evidence doesn’t matter. Nor does research by Hearts and Wallets on customers seeking transparency, clarity and simplicity. . That research showed that the number-one concern among consumers is fee transparency.
The criticism against the DOL rule in 2023 is just as wrong as in the prior two iterations.
Fiduciary advocates must ignore the criticism, but not the critics.
Focus on the assumptions behind the criticisms. Highlight and magnify in blunt, plain language what they mean.
There are three assumptions behind the criticism of the DOL rule, each demonstrably false. Each offers opportunities to expose to investors in plain language what the industry seeks:
- The SEC’s Reg BI is like a strong fiduciary standard for broker-dealers.
- The conflicts of interest embedded in the broker-dealer business model are irrelevant.
- There is no difference between commissioned product sales with opaque incentives and real fiduciary advice with transparent fees. Conflicts and opaqueness are of no consequence.
Criticism of the DOL rule seeks to undermine fiduciary law and the norms of loyalty and care, legal precedent, research, transparency, and basic common sense. Expose the faulty and absurd rationales and explanations in the public square in plain and blunt language.
Fiduciary and consumer advocates can make history by educating the consumers about the DOL rule who will live with it.
Article first published on AdvisorPerspectives
