March 16, 2015 Washington Wire

Two Conflicting Studies Cited In Fiduciary Issue

WASHINGTON – The White House used flawed economic reasoning to justify tightening the rules governing the investment advice provided to owners of retirement accounts.

This is the finding of a study commissioned by the Securities Industry and Financial Markets Association (SIFMA), which reviewed a recent White House report on “The Effects of Conflicted Investment Advice on Retirement Savings.” The study was prepared by economists from National Economic Research Associates (NERA).

The study cites a report from the President’s Council of Economic Advisers (CEA) and contends that the CEA report does not attempt to quantify the benefits provided by financial advisors in the form of customer service, broader diversification, risk reduction and other intangible benefits.

The CEA report “lays out evidence” that 1.) consumer protections for investment advice to the retail and small plan markets are inadequate, and 2.) the current regulatory environment “creates perverse incentives that ultimately cost savers billions of dollars a year.”

But the report by SIMFA says the CEA does not consider the possibility that advisors may encourage their clients to save more than they otherwise would, as this is in the interests of both the advisor and the client.

“While the report does acknowledge that the brokers deserve fair compensation for their services, the discussion that follows is inapposite,” the SIFMA study found. For example, “the report does not consider the possibility that the benefits received by consumers may exceed the fees, thereby nullifying the apparent underperformance.”

The SIFMA study also found that a “substantial shortcoming” of the CEA study is that it does not lay out a clear alternative to the present regulatory scheme.

The CEA study also found that U.S. investors, in the aggregate, bear large costs because of the services provided by advisors who act in their own best interests.

“As such, it is impossible to weigh the costs and benefits of whatever alternative is being proposed,” the SIFMA study said. “This is a fundamental point. Whatever the situation is now, one needs to know the proposed alternative because cost and benefits are assessed by difference between the current situation and the proposed one.”

The SIMFA report touches on another issue cited by critics of the fiduciary standard initiative. The report said the Obama administration, in giving the go-ahead for the Department of Labor to submit the proposal to the Office of Management and Budget for review, ignores what happened when the United Kingdom imposed similar regulations.

The report said that a sizeable number of low-balance clients lost their advisors in the wake of the U.K. changing the rules. The SIMFA report cites a study by Europe Economics that found that in the first three months of 2014, about 310,000 clients stopped being served by their advisors because their wealth was too small for the advisors to advise profitably.

An additional 60,000 investors were not accepted as new clients by advisors for the same reason (low-balance) over the same three months, the report said.

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at arthur.postal@innfeedback.com.