What We Heard at the DOL Fiduciary Hearing

After four days, 75 speakers, and 27 hours of testimony featuring thousands upon thousands of words devoted to the vagaries of financial planning, the Department of Labor closed its public hearing today.

The next steps are likely to provide some interesting political theater -- more on that in a moment. Officially, the DOL will publish a transcript of the hearings in about a month. After that will follow a second, two-week public comment period.

But the hearing was clearly main event in this process. It drew industry heavyweights from across the country eager to debate the DOL’s proposal to expand the fiduciary rule to cover broker-dealers.

Here’s a few quick takes from our vantage point:

• Plenty of emphasis on the holding to a standard of acting in the “best interest” of clients, which the DOL and witnesses attached exclusively to the fiduciary standard. But FINRA already requires advisors under the suitability standard to uphold the best interest of their clients, as spelled out in Regulatory Note 12-25.
• What is “advice” and what is “sales,” and are they distinguishable in typical offices? DOL officials returned to this point repeatedly.
• Will the DOL consider amending the rule to grant an exemption allowing advisors and broker-dealers to assist with retirement plan rollovers?

The DOL mixed most of the panels, so reps from firms such as Janney Montgomery Scott and Fidelity Investments testified alongside consumer groups such as the Americans for Financial Reform.

The result was a predictable mixed bag of information and debate, and passion and policy, with a whole lot of gray areas in between. Timothy Hauser, an assistant secretary of the DOL, led the sessions, revealing a dry sense of humor at various times.

Hauser drew chuckles Tuesday when he allowed Ron Bird of the U.S. Chamber of Commerce to keep speaking, feigning fear at being compared to the Leviathan image Bird had previously referenced while making a point.

Bird seized on the opening to reinforce his point on heavy-handed government.

“Hobbes was promoting the idea of the government as an overweening power to restrain things,” he said. “The important thing is that power has to be used with discretion.”

The metaphor was somewhat ironic given the DOL’s soft touch throughout the four days. Labor Secretary Thomas Perez has said the agency expects to make changes based on industry feedback, and even the most steadfast critics say the government is earnest in that stance.

Still, the underlying disagreement is real. The DOL seeks to separate broker-dealers from the commission-based business, a change the industry says will devastate both small savers as well as broker-dealers themselves.

As the hearing played out, both sides dug in while preparing for the next battle. As opponents won more support from Democratic lawmakers, Perez issued a letter firmly stating “we will move forward.”

While we await the next steps in the process, back to those takeaways.

The DOL signaled flexibility on the best interest contract exemption (BICE) from day one, when Hauser asked if the industry would accept a BICE that only required an up-front commitment to clients’ best interests and subscribed only to recommendations as defined by FINRA.

Hauser stressed several times that the DOL rule change does not prohibit commission or other popular industry business models as long as advisers and brokers serving retirement investors make up-front disclosures and vow to act in their clients' best interest in a formal, legally binding contract.

That led to several lengthy exchanges that frustrated Hauser and his respondent. During one such encounter this morning, Ron Kruszewski, chairman and CEO of Stifel Financial Corp., agreed with the best interest concept, the two couldn’t agree on language.

“The way it works is it’s an objective test from a person who has expertise in such matters,” Hauser said. “Does that comfort you at all?”

“I’d like to use you as an expert witness when I get sued,” Kreuszewski quipped.

Interestingly, FINRA guidelines state that “a broker’s recommendations must be consistent with his customer’s best interest” under current suitability standards.

Hauser’s second-favorite question concerned the difference between “advice” and “sales” conversations.

“We think that participants can distinguish between a sales presentation and advice,” said Charles Nelson, CEO of Retirement at Voya Financial.

“Why do you think those are two different things, really?” Hauser replied. “Aren’t both things happening?”

The distinction gets to the heart of the argument put forth by the Obama administration: that retirees lack the sophistication to make investment decisions.

Barbara Roper, director of investor protection for the Consumer Federation of America, echoed that claim in her appearance Monday. Studies show most seniors don’t know if they are dealing with a broker or an advisor, let alone what the standards are for each, she said.

Carl Wilkerson, vice president and chief counsel, securities and litigation for the American Council of Life Insurers, said costly asset management and wrap fees will likely replace commissions if the rule is enacted. In addition, he pointed to problems in the United Kingdom after commissions were eliminated.

Maurice L. Stewart, a retired agent of 63 years with Penn Mutual Life Insurance Company, said the industry needs the leeway to spend time with clients.

“You just can’t sell them something and then leave them alone,” Stewart said. “You must be with them throughout their lifetime, helping them through the inevitable changes we all go through.”

The DOL has stated repeatedly its willingness to amend the rule if good suggestions are received. Marcy Supovitz, president-elect of the American Retirement Association, brought one to her session.

Supovitz suggested the DOL create a new exemption amending the definition of fiduciary on retirement accounts.

That way, plan advisors won’t be prohibited from helping participants with rollovers. The BICE will discourage plan advisors from working with participants on rollovers, she added.

“It isn’t clear that the BICE is available for rollover transactions, but assuming it is, it still would not be available for this rollover transaction because the BICE doesn’t extend to discretionary investment management,” Supovitz said.

She suggested the creation of an exemption to BICE known as the “level-to-level compensation exemption.” Supovitz echoed the request of Democratic senators in an Aug. 7 letter to Perez.

The letter states that “the level of compensation received from the IRA would be higher than that received from the plan if the advisor concludes that he will need to provide a higher level of service for the IRA.” As a result, it “would subject the advisor to the same difficult BICE exemption requirements faced by variable fee advisors.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.