Anger Turns to Resignation in Face of DOL Rule

By Cyril Tuohy

When the U.S. Department of Labor came out with its long-awaited conflict-of-interest rule in April, some advisors, agents and broker-dealers feared the worst.

Why us, they asked? What is it about what we do that regulators want to change the way we go about our professional lives?

Months and many public hearings later, during which industry representatives have had the opportunity to vent their spleen, anger has mellowed into grudging resignation. That appears to be giving way to the new reality: those non-fiduciaries who sell financial products into retirement plans are simply going to have to adapt.

“In this business you learn to live with whatever regulators may do,” said A. Raymond Benton, owner of Benton & Co., a fee and commission-based planner in Denver, in an interview with InsuranceNewsNet.

“As with anything, you go through stages,” said Juli McNeely, owner and president of McNeely Financial Services in Spencer, Wis., and immediate past president of the National Association of Insurance and Financial Advisors in Falls Church, Va. “I’ve got less anger now and more sadness that I’m going to have to change.”

In the past seven months, the tens of thousands of comments for and against the proposed rule that have poured into the DOL are enough to fill the equivalent of a football stadium.

Government regulators and consumer groups maintain that retirement investors are best served when everyone dealing in financial products is held to a best-interest or fiduciary standard. That standard means they are duty-bound to serve the interest of the client first and foremost.

The DOL said bad advice costs clients $17 billion annually, a number the industry disputes.

Benton takes a philosophical approach and boils down attempts at circumscribing the behavior of the client-advisor relationship to “an ingrained prejudice” to the act of selling.

“Part of it is a real in-born hatred of sales,” he said. “They claim they would never sell something and don’t want anything sold to them to the degree that it’s kind of silly. There’s an ingrained prejudice to any sales process.”

William J. Schretter, a senior financial planner for Key Private Bank and owner of Life Legacy Services in Lebanon, Ohio, said that since the publication of the DOL proposal, agents and broker-dealers have found themselves on the defensive.

They “don’t want to be demonized. Ninety-nine percent of advisors are honest and working within the structure of making a living,” said Schretter, a past president of the southwestern Ohio chapter of the Financial Planning Association and a supporter of many parts of the DOL proposal.

Opponents of the proposed rules insist the overwhelming majority of agents, broker-dealers and advisors meet such a standard to begin with, even if they are legally bound to follow a suitability standard. Thousands of small investors will suffer if they are dropped them as clients, they say.

They see only more requirements, more compliance, more paperwork, more expenses, more responsibility foisted on the back office.

Beyond the sturm and drang whipped up in comment letters, financial representatives — many of whom are dually registered and set up to collect commission and fee income — say they aren’t worried about losing income.

Meanwhile, in the regulatory factory of one of the nation’s most powerful agencies, a hive of undersecretaries, assistant secretaries, department heads and analysts — all armed with gold-plated resumes — churn out language designed to protect retirement investments of the many.

But in the rule-making process, where are the advisors themselves? Where’s the commission or fee-based proprietor who grew his or business from a one-person shop to a 10-person company before selling it and moving on to something new?

Where in the regulatory agencies are the people with real-word experience at implementing rule-laden binders, and who within those agencies can translate what that means to the spreadsheet that reflects a small financial advisory business’s profit and loss?

This is what seems to irk industry representatives the most: regulatory agencies with little connection to the day-to-day realities of running an advisory business yet aren’t shy about imposing fundamental changes in the way agents and broker-dealers are expected to relate to clients.

“The ones I’ve talked to are more confused than anything else,” said Patrick C. DiCarlo, an expert in the Employee Retirement Income Security Income Act (ERISA) law with Alston & Bird LLP in Atlanta. “The proposed rules and exemptions are very complicated. How it all works – there’s lots of uncertainty.”

DOL is expected to release the final version of its rule sometime in the first half of next year and the Securities and Exchange Commission will issue a separate rule on fiduciary standards next October, with a final version likely to come in 2017.

By the time the SEC’s final rule is published, the two-year period from 2015 to 2017 will likely amount to the most far-reaching changes in how advisors conduct their business in decades, perhaps even since the adoption of the Investment Advisers Act of 1940.

Advisors, agents and broker-dealers say they’ve adapted before and that they will adapt again, now that the industry has had its say.

“I’m preparing my practice to be a fee-only practice,” McNeely said. “It just makes me sad that consumers will not be able to find that advice and that’s not why regulators should be changing things. It’s counterproductive.”

And who knows, the DOL has also signaled a willingness to listen and adapt, and the final rule may not be quite so onerous after all.

In the meantime, fee-only advisors are thankful for the fiduciary proposal.

“Personally, I am elated and hope the fiduciary rule goes through,” said Sterling Raskie, a fee-only advisor and partner with Blankenship Financial Planning in New Berlin, Ill. “As a fee-only planner, I don't receive commissions as I don't sell anything.”

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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].