By Cyril Tuohy
New rules surrounding fiduciary standards will have to wait, and wait, and wait some more as financial advisors last week learned that the U.S. Department of Labor has pushed back yet again its proposals to amend the definition of a fiduciary.
But is anyone all that surprised?
House Republicans and Senate Democrats over the summer lobbied to delay the fiduciary amendment proposal until after the Securities and Exchange Commission (SEC) decides to issue its own proposal related to fiduciary standards.
New rules under consideration by the Labor Department’s Employee Benefits Security Administration would broaden the definition of a fiduciary to include advisors handling Individual Retirement Accounts, which contain more than $5.4 trillion in assets. Broker-dealers, financial advisors and IRA advisors would be held to a uniform standard of disclosure under the DOL rule.
In the Senate, Sen. Jon Tester, D-Mont., chairman of the Senate Banking Subcommittee on Securities, Insurance and Investments, Sen. Mark Warner, D-Va., and Sen. Kay Hagan, D-N.C., feared that ”uncoordinated efforts” between the DOL and the SEC could limit investor access to education and raise costs for Main Street investors.
The lawmakers argued that the DOL should wait for a separate SEC ruling that would raise and clarify investment advice standards for broker-dealers. The SEC, however, isn’t expected to make any kind of decision until next year at the earliest.
Meanwhile, DOL officials have vowed to take their time. “The point of working on the re-proposal is to get it right,” said Phyiis Borzi, assistant secretary of labor for the Employee Benefits Security Administration, during a question-and-answer session at the Financial Services Institute’s Advisor Summit in Washington last week. “We are trying very hard to make sure we’ve crossed all the T’s and dotted all the I’s.”
Borzi, an ardent advocate of fiduciary standards, declined to say when the DOL would issue its proposal, but there were already rumblings earlier this summer that the DOL’s fiduciary rule proposal would be delayed beyond October.
It was, but not before 32 liberal Democratic representatives urged Labor officials to reconsider the plan in a letter to then-acting Secretary of Labor Seth Harris. The letter to Harris, according to media reports, was written by Robert Lewis, a lobbyist for the investment advisory industry-backed Financial Services Institute.
The 32 lawmakers were the recipient of more than $80,000 in contributions from the securities industry over the past election cycle, according to a story in Mother Jones.
So advisors wait as lobbyists for both sides continue to influence lawmakers, and as the massive pool of retirement assets grows by as much as 10 percent a year. Retail investors, however, are more confused than ever about the fiduciary threshold a financial advisor, a registered investment advisor and a broker-dealer or registered representative is legally required to meet under the Employee Retirement Income Security Act (ERISA).
The heated public relations campaign took another turn on Sept. 10, when AARP released its latest survey on what Americans want from their financial advisors.
More than nine out of 10 American workers (93 percent) participating in a 401(k)-type retirement plan favor advice that meets a fiduciary standard, AARP said. More than three out of four (77 percent) respondents said they were either “very concerned” or “somewhat concerned” by the fact that 401(k) or 403(b) plan advice is not required to be in the best interest of participants, the survey also found.
“The stunning results in our study show that the average American wants to see required what they already often mistakenly believe, that the advice they receive from their financial advisor needs to be in their best interest, and not in the best interest of the advisor,” said Cristina Firvida, AARP’s director of financial security and consumer affairs.
Congress should allow the DOL to move forward on its own and update the fiduciary rule to provide a “consistent high standard of protection,” the AARP said.
Backers of the fiduciary standard argue that retail investors deserve no less from their financial advisors, and that advisors operating under a fiduciary standard by definition steer clear of conflicts of interests with regard to commission-based sales.
Though a fiduciary standard is considered a higher standard than the “suitability standard” followed by many advisors, not all retail investors want, need or can even afford the more expensive advice offered by advisors who meet fiduciary standards.
Many Main Street investors, mindful of tighter wallets, are perfectly happy with advisors who meet the lower “suitability standard” threshold, according to the National Association of Insurance and Financial Advisors (NAIFA).
NAIFA, which represents commission and fee-only advisors, claims that the fiduciary standard will raise the cost of doing business and that its advisors will restrict the number of products for sale to investors or simply drop lower-income clients altogether.
Investors with access to advice, even if deemed merely suitable, are better off than if they had no advice at all, NAIFA said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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