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National Association of Personal Financial Advisors (NAPFA) – strongly supports the DOL’s proposed rule to amend the outdated definition of “fiduciary” under the Employee Retirement Income Security Act (ERISA).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:
- 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.
- 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.
- 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.