Banking & Finance and Government

Proposed fiduciary rule enters into final review stretch

Regulation would address ‘best interests’ for investors and require fee and cost explanations.

March 11, 2016
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A proposed regulation affecting the financial industry is one step closer to finalization amid heated opposition.

Since the U.S. Department of Labor sent a finalized proposal to the Office of Management and Budget for up to a 90-day review process earlier this year, a final rule updating the fiduciary standard for the investment industry could be made public as early as the end of this month or in April.

The “conflicts of interest” rule and accompanying “best interest contract exemption” was introduced in April 2015 when the DOL proposed a regulation that would impact financial professionals and potentially protect 401(k) and IRA investors.

The White House Council of Economic Advisers released a report, The Effects of Conflicted Investment Advice on Retirement Savings, in February 2015, indicating the conflicts of interest result in an annual loss of about 1 percentage point for investors, or a total of $17 billion each year.

The proposed rule not only would update a nearly 40-year-old regulation and increase the number of individuals who are subject to fiduciary best interest standards, but also includes “a package of proposed exemptions” allowing advisers to continue receiving payments that could create conflicts of interest by acknowledging fiduciary status and clearly explaining fees, costs and revenue sharing to clients, according to a DOL press release.

However, the proposal was met with some pushback from trade associations, market participants and members of Congress. During the public comment period from April through September 2015, more than 3,000 statements were submitted to the DOL from a variety of stakeholders.

Organizations represented included the U.S. Small Business Administration Office of Advocacy, Financial Industry Regulatory Authority, CFA Institute, Securities Industry and Financial Markets Association, John Hancock Financial Services, Morgan Stanley and AARP.

Washington D.C.-based Money Management Institute indicated in a July 2015 letter it “supports appropriate efforts to protect investors as well as efforts to preserve current business models and investor choice,” but is concerned the DOL’s proposed regulation “might have the unintended consequences of ultimately harming investors saving for, approaching, or in retirement.”

A public relations representative from Edward Jones stated in an email that, while the firm doesn’t have specific comments on “a proposal that has not yet been made public,” the concern is that “any such rule must not limit investors’ access to investment advice.”

“At Edward Jones, we strive to always act in our clients’ best interests, and we support a uniform fiduciary standard that is carefully crafted, puts the investors’ interests first and does not limit how they choose to access the markets and pay for advice,” stated the email.

Fred Iacovoni, managing principal at Grand Rapids-based Synergy Wealth Management LLC, said “rumblings” about the fiduciary and suitability standard issue have been going on for quite some time but really came to the forefront last year.

“The investment industry is fighting it tooth and nail because it is going to decimate a lot of firms, and this is because there are so many kickbacks going on behind the scenes,” said Iacovoni. “I think it services clients better because it puts their interest first and foremost. It explains clearly both implicit and explicit costs, how things are being managed and what is going on.”

Iacovoni indicated the argument opposing the proposed fiduciary rule is that it would become cost prohibitive for small to medium-size investors.

“The reasoning from the industry is, if you pay a commission, the advisor or broker is going to get paid something up front. They will do a little more work for you, they get a trail on the backend so they get paid to service the account, but it is going to be less expensive over the long run,” said Iacovoni. “Our reasoning is, when you really look at these costs, those actually add up quickly.”

SIFMA, the U.S. regional member of the Global Financial Markets Association, urged the department to use “the FINRA best interest standard, which requires that one put one’s client’s interest ahead of one’s own,” in its September 2015 comment.

SIFMA also indicated if the DOL proceeded to a final rule, “it must work with the industry on reasonable transition rules and effective dates” and it will lead to terminating small accounts.

Although the revised proposal is under review at the OMB, the House of Representatives has already passed a bill to delay the rule and two more bills have been passed in committees with alternatives, according to Julia Slingsby, an aide to House Speaker Paul Ryan.

Iacovoni said while there are many on the other side of the table who are fighting the rule, he thinks something will be passed.

“They have to do a revision or two yet because there is some pretty strong language in the actual ruling,” said Iacovoni. “I think this is going to cost the industry millions, if not billions, of dollars.”

If the finalized proposal is approved by the OMB, the rule will be published in the Federal Register, according to Iacovoni. As an industry “built on trust and marketed that way,” he said one of the problems is investors may not have a clear understanding of what they are buying.

“If you purchase a home, you know what your realtor’s commissions are, and you know what your closing fees are,” said Iacovoni. “In our industry, nobody does know what they are buying in terms of where their money is invested. The water is very muddy.”

To add to the confusion, he said it is “next to impossible” to distinguish between an adviser and a broker, and the financing professional doesn’t have to explain how they are working.

“Many brokers are telling people, ‘Yes, I do get paid a commission,’ or ‘I am a representative of this company,’ but at the end of the day, this ruling is intended to change all of that,” said Iacovoni in reference to differentiating between adviser and broker.

“People need to understand whether they are working with a broker, an adviser, or a combination of both; what they are investing in; how their money is being invested; and what they are paying for,” added Iacovoni.

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