After NARAB II, Broker Groups Prep For Fiduciary Standards Battle

By Cyril Tuohy

InsuranceNewsNet

Fresh off the producer-licensing win in Washington this month, insurance broker groups are gearing for their next big legislative battle around fiduciary standards and the responsibilities of financial advisors toward their clients.

Last week, the National Association of Registered Agents and Brokers Reform Act of 2013, also known as NARAB II, cleared a key committee and is off to the Senate for a full vote. NARAB II will create a national clearinghouse for insurance agents and brokers to obtain approval to operate in multiple states so that agents only have to pass licensing requirements in their home state and once for NARAB.

Now, there’s plenty of behind-the-scenes action as agent and broker groups prepare testimony to be delivered before the U.S. Department of Labor and the Securities and Exchange Commission (SEC).

First up is the industry’s opposition to the Labor Department’s proposed changes to the fiduciary rule under the Employee Retirement Income Security Act (ERISA).

Phyllis Borzi, assistant secretary of labor for employee benefits, is adamant about protecting consumer interests first and foremost.

A consumer, she said recently, has an “absolute right to believe” his or her interests come first. What that means in terms of expanding fiduciary standards definitions, the industry will have to wait until fall to see.

Currently only fee-based independent Registered Investment Advisors are required to act in a fiduciary capacity toward their clients.

Agents or financial advisors working for broker-dealers or an insurance company are held to the lower “suitability” standard, in which they are required to match clients with investment products that merely suit clients’ needs.

The bulk of a financial advisor’s income is commission-based. Critics of the model say it is tempting for advisers to steer clients to products on which they earn a commission, thereby subverting the spirit of working in the best interest of clients.

But that’s not quite the whole story, according to the National Association of Insurance and Financial Advisors (NAIFA) and other groups opposed to fiduciary rule changes, because it ignores what consumers can realistically afford.

NAIFA has argued that imposing a fiduciary standard on advisors is more expensive and isn’t the right fit for NAIFA’s Main Street clientele, 58 percent of whom earn less than $100,000 a year.

NAIFA isn’t alone in its opposition to the fiduciary rule.

“At the end of the day, we think this proposal would increase costs to participants, and we believe this would mean less choice,” said Lee Covington, senior vice president and general counsel of the Insured Retirement Institute, which will revisit the issue at its legal and regulatory conference June 17-18 in Washington.

“We think fees would be more costly for investors, and we think advisors would not provide that advice at that fee level. We believe some advice is better than no advice,” Covington told InsuranceNewsNet in a telephone interview.

The Congressional Black Caucus also has warned that new fiduciary rule definitions could cause advisers to flee the market if they run afoul of ERISA’s prohibitions on third-party compensation, said U.S. Rep. Maxine Waters, D-Calif., who addressed the issue along with seven other Democratic lawmakers, in a letter to the Labor Department earlier this year.

As industry intermediaries prepare for the Labor Department proposal, lobbyists also are polishing their final drafts to submit to the Securities and Exchange Commission, which is conducting its own fiduciary standards review.

The SEC, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, is looking to create a “harmonized regulatory regime for investment advisers and broker-leaders when providing the same or substantially similar services, to better protect investors.”

SEC requests for information on the different approaches to fiduciary standards of care are expected by July 5, but reviewing the comments and the data is likely to take months, and the SEC isn’t expected to act before later this year at the earliest.

Broker-dealers and financial advisors are regulated differently and subject to different standards with regard to retail investors, but investors often are unaware that such differences even exist, and of the legal implications of such differences, according to the SEC’s Study on Investment Advisors and Broker-Dealers issued more than two years ago.

NAIFA has again cited the costs to Main Street investors as a potential issue with the SEC’s review of a fiduciary harmonization process. Higher costs are likely to restrict access to investment guidance for small investors, NAIFA said, noting that the sweeping financial reforms contained in the Dodd-Frank reform law protect commissions and propriety products.

So far there has not been adequate evidence of consumer harm to justify requiring fiduciary status, nor has there been any economic analysis to determine the impact of fiduciary standards on middle-market consumers, according to NAIFA.

But a coalition of organizations — which includes the Certified Financial Planner Board of Standards, the Financial Planning Association, the Investment Advisor Association and the National Association of Personal Financial Advisors — in a letter to SEC Chairwoman Mary Jo White urged the agency to establish a uniform fiduciary standard for broker-dealers and investment advisors that is “no less stringent” than the one under which registered investment advisors operate, which is to say a fiduciary standard.

Ultimately the question is how high a standard the government is willing to impose on financial advisors in the name of protecting investors. Cadillac advice is always available at a Cadillac price, but in the end, not all investors need or even want to drive a Caddy.

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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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].