Author Archives: Carolyn Sofman

Financial Planning Coalition Testifies In Support of Re-Proposed Fiduciary Rule, Urges Prompt Action

DOL fiduciary rule is overdue, needed and workable with modifications

The 40 year-old definition of “fiduciary” under the Employee Retirement Income Security Act (ERISA) for retirement investors is outdated and needs to be amended now, according to testimony given today by representatives of the Financial Planning Coalition, which is comprised of Certified Financial Planner Board of Standards, Inc. (CFP Board), the Financial Planning Association® (FPA®) and the National Association of Personal Financial Advisors (NAPFA).

Marilyn Mohrman-Gillis, CFP Board Managing Director of Public Policy and Communications, and Ray Ferrara, CFP®, Chairman and CEO of ProVise Management Group LLC, former chair of the Board of Directors of CFP Board and former FPA Board Director, stated in testimony at a hearing today held by the Employee Benefits Security Administration of the U.S. Department of Labor (DOL) that the Coalition strongly supports the DOL’s re-proposed rule – with important modifications to make it more workable across business models – and encouraged the agency to move forward with the rulemaking process.

In keeping with the Coalition’s efforts to advocate for policy measures that ensure financial planning services are delivered under a fiduciary standard, Mohrman-Gillis noted why the rule is urgently needed and beneficial for consumers.

“Retirement investors face a perfect storm in today’s financial services marketplace. With ever-increasing responsibility for their own retirements and the need to choose from an increasingly complex set of financial products and services, retirement investors more than ever need competent financial advice that is in their best interest,” Mohrman-Gillis said in prepared testimony. “Yet the current regulatory framework allows advisers’ interests to be misaligned with the interests of retirement investors resulting in the loss of billions of dollars in savings.”

The Coalition’s testimony also reflected its unique perspective drawn from CFP Board’s experience in establishing a fiduciary standard for CFP® professionals in 2007. Back then, firms and industry organizations made arguments similar to those being made regarding the DOL rule today, maintaining “that CFP Board’s fiduciary requirement was unworkable with their business models and that CFP® professionals would be forced to rescind their certification if required to operate under a fiduciary standard.”

Mohrman-Gillis remarked that, “contrary to those predictions, the number of CFP® professionals has grown by more than 30 percent to over 72,000 since CFP Board established a fiduciary standard. And many firms, to their credit, are recognizing the value of competent and ethical advice and are supporting CFP® certification for their advisers.”

Ferrara’s testimony underscored the workability of the rule, drawing on his more than 30 years of experience providing fiduciary-level advice across business models as a CFP® professional and small business owner of an independent financial services firm.

“Many in the industry say the re-proposed rule is unworkable, too costly and will force advisers to abandon middle-class clients. Based on our firm’s actual experience, we don’t share these views,” Ferrara said. He added that “the argument that this rule will diminish the availability of services to middle-class Americans is simply not credible. ProVise has successfully served middle-class clients under a fiduciary standard for years. The re-proposed rule still allows us, and everyone else to, provide advice using a commission or fee model. For anyone claiming that they are unable to serve middle-class clients under the re-proposed rule, ProVise and scores of CFP® professionals and FPA and NAPFA members across the country would be happy to help fill the gap.”

The Coalition outlined its full support in a 35-page comment letter submitted to the DOL on July 21, 2015.

Financial Planning Coalition Voices Strong Support for the Department of Labor’s Re-Proposed Fiduciary Rule in Comment Letter

Rule Is Overdue and Needed for Retirement Investors, Workable for Financial Advisers and Firms

Overdue, needed and workable. This is how the Financial Planning Coalition describes the Department of Labor’s (DOL) re-proposed fiduciary standard rule, which would protect retirement investors, realign the rules for advice to retirement assets and better reflect today’s reality, in which Americans are responsible for their own retirement security.

The Coalition – comprising Certified Financial Planner Board of Standards, Inc. (CFP Board), the Financial Planning Association® (FPA®) and the National Association of Personal Financial Advisors (NAPFA) – strongly supports the DOL’s proposed rule to amend the outdated definition of “fiduciary” under the Employee Retirement Income Security Act (ERISA). The Coalition outlined its support in a 35-page comment letter submitted to the DOL today.

“Retirement Investors face a perfect storm in the financial services marketplace,” the Coalition stated in its letter. With ever-increasing responsibility for their own retirements and the need to choose from an increasingly complex set of financial products and services, Retirement Investors more than ever need competent financial advice that is in their best interest. Yet the current regulatory framework allows Advisers’ interests to be misaligned with the interests of Retirement Investors; it does not require Advisers to clearly and openly disclose the standard of conduct under which they operate or their actual or potential conflicts of interest; and it permits market practices under which Retirement Investors are simply unable to distinguish Advisers who provide fiduciary-level services from those who do not.”

The letter covers three key areas:

  1. The DOL’s Re-Proposed Rule Represents Long-Overdue and Needed Consumer Protections. The re-proposed rule is needed to realign the current regulatory framework that allows for the misalignment of advisers’ interests with those of retirement investors. By requiring fiduciary accountability for all advice related to retirement assets, the rule will provide much needed protections to help retirement investors navigate the complex and confusing financial services marketplace.
  2. Arguments Against the Re-Proposed Rule Are Misplaced. Opposition arguments against the re-proposed rule do not adequately reflect the changes from the original rule proposal, are unsupported or rebutted by empirical research, and are inconsistent with the Coalition’s experience in establishing a fiduciary obligation for its stakeholders.
  3. Modifications Recommended by the Coalition Will Make the Final Rule Stronger. The Coalition suggests modifications, clarifications and changes that it believes will only strengthen an already comprehensive rule proposal, ensuring protections for retirement investors while providing advisers and financial institutions flexibility in implementing the final rule.

“While many in the financial services industry claim that they support a best interest standard, they argue that the re-proposed rule is unworkable. The Coalition believes, based on its experience applying the fiduciary standard to Certified Financial Planner™ professionals across business models, that the rule is both workable and essential to protect America’s retirement savers. Importantly, the DOL has demonstrated its willingness to work with the industry to develop a rule that will increase fiduciary protection for tax-preferred retirement assets that works across the varied financial services business models.”

Highlights of the Coalition’s Letter:

The DOL Rule Is Needed to Provide Long Overdue Consumer Protections

  • There are more than $14.4 trillion of retirement assets in 401(k) plans and Individual Retirement Accounts (IRAs); it is vitally important that fiduciary-level advice be provided when Americans rollover their 401(k) plan assets into IRAs. For many Americans, whether to rollover and how to invest their retirement nest egg is one of the most important financial decisions they will make. Under the current regulatory framework, all advisers are not required to make rollover IRA recommendations in their clients’ best interest, leaving Americans subject to conflicted advice related to their retirement savings.
  • Consumers want advice that is in their best interest. A 2010 InfoGroup study found more than 97 percent of Americans agree with the statement that “when you receive investment advice from a financial professional, the person providing the advice should put your interests ahead of theirs and should have to tell you upfront about any fees or commissions they earn and any conflicts of interest that potentially could influence that advice.”
  • Retirement investors are harmed – primarily in the form of higher costs and lower retirement savings – when they receive conflicted advice that puts the adviser’s interest ahead their own.
  • The DOL’s re-proposed rule would close loopholes in its current regulations that allow for conflicted advice by non-fiduciary advisers related to retirement assets.

Middle-Income Americans Will Have Access to Advice

  • It is simply not credible that advisers and their firms will stop serving middle-income Americans and walk away from providing services to retirement investors who have a collective $14.4 trillion in 401(k) plans and IRAs.
  • There are individual advisers, as well as existing and emerging business models, that successfully provide low-cost service to middle-income Americans under a fiduciary standard of conduct. Today, there are thousands of CFP® professionals and FPA and NAPFA members across the country who provide advice to consumers with no or very low minimum requirements for assets under management (AUM).
  • Opponents’ claim that the re-proposed rule will drive advisers out of business is inconsistent with the Coalition’s experience. While CFP Board heard these same arguments in 2007 when it established a fiduciary standard for CFP® professionals when providing financial planning services, the number of CFP® professionals has grown by more than 30 percent since then.
  • The re-proposed rule is business-model neutral, preserves consumer choice and ensures – through the Best Interest Contract (BIC) Exemption – that financial services firms and their advisers can still receivesales-based compensation for advice and comply with the ERISA fiduciary standard.
  • Studies have shown that financial advisers who have switched from a suitability standard to a fiduciary standard of conduct or who operate under both standards reported an increase or no change in the number of clients served – including no change in middle-income clients – when delivering services to their customers under a fiduciary standard.

Coalition Supports Closing Loopholes, Revising Definitions and Requirements

  • Advisers who provide “one-time” investment advice should be required to provide advice that is in the best interest of the client. The Coalition supports removing the current requirement that advice be provided “on a regular basis” to trigger a fiduciary obligation.
  • The Coalition supports the DOL’s proposal to remove the “mutual understanding” requirement in its current rule. Under the re-proposed rule, advisers will not be able to escape their fiduciary obligations by claiming that the advice provided was “solely incidental” to the recommendation or not the “primary basis” for the retirement investor’s decision-making.
  • The fiduciary standard should be extended to IRA owners so that advice related to the rollover of assets from employer-sponsored retirement plans to IRAs (including both the rollover decision and the allocation of assets in the IRA) would be provided at a fiduciary level.
  • Requiring a binding and enforceable contract through which retirement investors can hold advisers accountable to provide advice in their best interests is another important consumer protection that will provide a strong incentive for advisers and financial institutions to meet their fiduciary obligations and establish policies and procedures to mitigate conflicted advice.
  • The Principal Transaction Exemption as proposed by the DOL is needed and strikes an appropriate balance between providing advisers with the opportunity to sell products (for commission-based compensation) from their own inventory and protecting retirement investors from conflicted advice.

Coalition Proposes Modifications to Make the Rule More Workable Across Business Models

  • The Coalition suggests that the DOL either retain the eight-month implementation date for the re-proposed rule or allow a limited extension to no more than 12 months after the final rule is released. The Coalition believes that retaining a tight implementation timetable will address the immediate need for protection of retirement investors. To allow flexibility for full industry implementation of all the requirements, the Coalition further suggests that the DOL consider establishing phased-in enforcement deadlines for specific requirements (e.g., disclosure and record keeping requirements under the BIC Exemption).
  • The Coalition urges the DOL to explicitly recognize that certain marketing and promotion activities by advisers to attract new clients not be considered advice that triggers fiduciary obligations under ERISA unless the communications include advice that is individualized to or specifically directed to the recipient for consideration in making an investment decision.
  • The Coalition requests the DOL to establish a tailored prohibited transaction exemption (PTE) for AUM advisers under certain limited circumstances. As a general rule, advisers who charge fees for services (AUM, flat retainer, project fee or hourly fee) do not receive variable compensation and therefore do not need the protection of a PTE to provide advice under ERISA. However, under very limited circumstances – when an adviser who receives AUM makes a rollover recommendation that would increase the adviser’s AUM – an AUM adviser’s recommendation would be considered conflicted advice that would require a PTE. Given that an AUM adviser is generally already subject to a fiduciary standard, the Coalition requests that the DOL consider a streamlined sister exemption to the BIC Exemption, which it is calling “AUM Adviser Rollover Exemption.”
  • The Coalition is making a number of recommendations to allow for more flexibility with regard to the timing of the execution of the BIC Exemption contract tailored for the client type (existing or new) and tailored for an adviser’s business model. Recommendations include not requiring existing clients to sign the BIC Exemption contract and allowing new clients to sign the contract at the same time the client is required to sign account opening agreements.
  • The Coalition recommends that the DOL remove some of the disclosure requirements in the rule while still providing the retirement investor with important information about costs and services. For example, the Coalition recommends limiting the point of sale disclosure requirement for projected costs for one-, five-, and 10-year periods to costs that are known or reasonably known at the time of the transaction and narrowing the types of website disclosures that are required.

Financial Planning Coalition: Department of Labor Proposed Fiduciary Rule Long Overdue, Provides Important Consumer Protections

The Financial Planning Coalition issued the following statement in support of the Department of Labor’s (DOL) rule to amend the outdated definition of “fiduciary” under the Employee Retirement Income Security Act (ERISA):

“Secretary Perez and the Department of Labor have developed a comprehensive, carefully constructed fiduciary rule that will secure critical protections for American retirement savers and preserve financial advisers’ flexibility and adaptability, regardless of business model. This proposal to update a 40 year-old rule is long overdue, especially given significant, historical changes to retirement planning, requiring Americans to be more responsible than ever for making complex retirement saving and financial decisions.

“While the Coalition partners believe there are areas in the proposed rule that can be clarified or modified to improve its application across business models – as the Coalition will outline in its comment letter – the DOL has made it clear that it wants input on particular ways to better operationalize the rule. The DOL clearly listened to many of the concerns articulated by firms, industry organizations and consumer and public interest organizations in response to 2010’s proposed fiduciary rule and the Coalition is confident it will do the same with the re-proposed rule.

“A secure retirement is an essential part of American life – often the result of years of hard work and saving. Any financial advice Americans receive related to their retirement savings should be squarely in their best interests. The DOL’s proposed fiduciary rule will significantly benefit and protect retirement savers, and should be allowed to proceed to full and open public evaluation and comment and then to implementation, without further delay or obstruction.”

Coalition Summary of the DOL’s Re-Proposed Fiduciary Rule

The Coalition has developed the following summary of the Department of Labor’s proposed fiduciary rule for stakeholders seeking to understand the proposal and its impact. A downloadable version is available here.

I. Who Is a Fiduciary Adviser Under ERISA?

Under the Department of Labor (DOL)’s proposed definition, a “fiduciary adviser” is any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor (e.g., an employer with a retirement plan), plan participant, or IRA owner for consideration in making a retirement investment decision.

Such decisions can include, but are not limited to, what assets to purchase or sell and whether to rollover from an employer-based plan to an IRA. The fiduciary adviser can be a broker, registered investment adviser, insurance agent, or other type of adviser. It is important to note that the DOL will determine who is a fiduciary based not on the adviser’s title, but rather on the advice provided to the client.

II. Activities That Do Not Trigger Fiduciary Obligation

  • General education on retirement savings: The DOL proposal excludes education from the definition of retirement investment advice so that advisers and plan sponsors can continue to provide general education on retirement saving for employment-based plans and IRAs without triggering fiduciary duties.
  • Order-taking: The proposed rule distinguishes “order-taking” as a non-fiduciary activity.
  • Seller’s carve-out: Brokers who pitch to large plans with a degree of sophistication are not deemed to be fiduciaries.

III. Proposed Rule Accommodates a Broad Range of Business Practices

The DOL’s proposed rule includes new, broad, principles-based Prohibited Transaction Exemptions (PTEs) that can accommodate a range of evolving business models. For example:

  • Best Interest Contract Exemption: To qualify for the “best interest contract exemption” advisers and firms must enter into a contract with their clients that:
    • commits the firm and adviser to providing advice in the client’s best interest;
    • warrants that the firm has adopted policies and procedures designed to mitigate conflicts of interest; and
    • clearly and prominently discloses any conflicts of interest that may prevent the adviser from providing advice in the client’s best interests.

The exemption would allow firms to continue to set their own compensation practices so long as they, among other things, commit to acting in their client’s best interest first and disclosing any conflicts that may prevent them from doing so. Common forms of compensation in use today in the financial services industry, such as commissions and revenue sharing, would be permitted under this exemption.

  • Principal Transaction Exemption: This exemption would allow advisers to recommend certain securities and sell them to the customer directly from the adviser’s own inventory, as long as the adviser adheres to the exemption’s consumer-protective conditions.
  • Pre-existing Transaction Exemption: This exemption would allow advisers to receive on-going compensation payments in connection with a prohibited transaction that was completed before the enactment of the proposed rule, as long as the adviser does not provide additional advice to the plan or IRA regarding the same asset after enactment of the proposed rule.

Additionally, the proposal asks for comment on whether the final package should include a new streamlined “low-fee exemption” that would allow firms to accept payments that might otherwise be deemed “conflicted” when recommending the lowest-fee products in a given product class.

IV. Enforcement of Proposed Rule

Under the proposed rule, enforcement actions could include:

  • DOL: The agency could bring enforcement actions against fiduciary advisers to plan sponsors and plan participants who do not provide advice in their clients’ best interest.
  • IRS: For IRA accounts, the IRS could impose excise taxes on conflicted advice transactions that are not eligible for an exemption.
  • Consumers: A plan sponsor or plan participant harmed by bad advice could bring an action against a fiduciary adviser, per current law. Under the “best interest contract exemption,” customers (both plan participants and IRA owners) could hold fiduciary advisers accountable through a private right of action for breach of contract. The proposed rule would expand the scope of enforcement from current regulations under which neither the DOL nor the client can hold an adviser accountable for advice to IRA owners.

A contract can require that individual disputes be handled through arbitration but must give clients the right to bring class action lawsuits in court if a group of people is harmed.

V. Rulemaking Process Going Forward

The DOL encourages stakeholders from all perspectives to submit comments during the 75-day comment period which ends on July 6, or during a public hearing that will be scheduled shortly after the end of the comment period. The DOL will review public and determine whether any modifications should be made to the proposed rule. The DOL will publish the final rule in the Federal Register.

Questions or comments? Contact the Financial Planning Coalition:

Coalition Statement on Release of DOL’s Proposed Fiduciary Rule for Public Comment

The Financial Planning Coalition issued the following statement in advance of the release for public comment of the Department of Labor’s (DOL) long-anticipated rule to amend the definition of “fiduciary” under the Employee Retirement Income Security Act (ERISA):

“Today’s release of the DOL’s fiduciary rule for public comment is an important step forward in updating a 40 year-old law to provide greater protections for Americans and their retirement nest eggs. A secure retirement is an essential part of American life, often built on many years of hard work and saving. The financial advice Americans are given related to their retirement savings should always be squarely in their best interest, and should not undermine their efforts to meet financial goals. The DOL’s rulemaking should proceed without further delay or obstruction to full and open public evaluation and comment. The Coalition partners look forward to reviewing and providing perspective on this important rule.”

Coalition Statement on SEC Chair Mary Jo White’s Testimony Before the House Financial Services Committee

The Financial Planning Coalition applauds Securities and Exchange Commission (SEC) Chair Mary Jo White’s decision to direct SEC staff to develop a rule to establish a uniform fiduciary standard of conduct for broker-dealers consistent with the current standard for registered investment advisers:

“A uniform fiduciary standard of conduct for broker-dealers is a long overdue investor protection, and will close the harmful gap between advice provided by investment advisers under a fiduciary standard and the merely ‘suitable’ advice currently required from broker-dealers. We urge the SEC to act swiftly to move forward with this well-researched proposal, which will protect Americans from potentially detrimental investment advice not delivered in their best interest.”

Congress authorized the SEC to adopt a uniform fiduciary standard under the Dodd-Frank Act nearly five years ago, and SEC staff first recommended the adoption of a fiduciary standard four years ago, allowing for ample research and careful consideration of this investor protection measure. Regarding Chair White’s request that SEC staff also prepare recommendations on third-party examinations to supplement the Commission’s existing examination program, the Coalition believes:

“New proposals regarding investment adviser oversight, specifically third-party examinations, have yet to undergo the level of thorough discussion and scrutiny that informed Chair White’s decision to move forward with fiduciary rulemaking. We encourage Chair White and the SEC to carefully consider all of the options for making necessary improvements to adviser oversight – including user fees – before proceeding. Oversight and examinations are a critical part of the SEC’s investor protection mission, and measures for improving this program merit further research.”