The new DOL Fiduciary Regulations continue to give a black eye … to the retirement industry, particularly to the insurance industry that dominates portions of the retirement industry.
- The lawsuit filed June 1st claims that the Fiduciary Rule “limits consumer choice (to) only (those willing to enter) a fiduciary relationship.” That’s correct … but why would consumers work with advisors NOT willing to be a fiduciary and take responsibility? See my point? Even if they win the lawsuit and the DOL doesn’t require an advisor to be a fiduciary, the consumer should.
- The lawsuit claims that the DOL rule hurts small businesses. But actually it helps small businesses if it forces insurance brokers out of the ERISA arena. Large employers are more likely to be served by retirement plan advisors who specialize in serving only plans, while smaller businesses are more likely to be served by financial advisors who don’t specialize in plan consulting. It would be a good thing if that expertise moved down into the smaller market.
- The suit claims that “the SEC … (was) specifically charged by Congress with … adopting a uniform fiduciary standard.” Also true, but the SEC had their opportunity to issue new guidance and reform the retirement plan industry and they’ve been on the fence for years. The DOL accomplished what the SEC could not (but probably should have). Was the SEC in a stalemate because of the insurance lobby?
- The suit claims that the new Rule imposes costly burdens because of the additional “disclosure requirement.” This would be sad if true (and it may be) that the predatory practices of the industry require costly provisions that may now hurt consumers it intended to protect.
- The suit claims that the DOL banned “transaction-based compensation” (i.e., 12b-1 insurance commissions) to “force financial services providers to accept the terms of the BIC exemption.” Perhaps … or perhaps the “intentions” of the DOL were less nefarious and more straight-forward; perhaps the intentions were to simply remove the conflicts of interest of the commission world and encourage the clean, fully-disclosed and straight-forward approach utilized in the RIA world with a flat advisory fee.
- And the lawsuit claims that the DOL “overstated the benefits” and “failed to consider substantial and obvious costs.” But based on my interpretation of the Rule and my conversation with US Department of Labor Assistant Secretary Phyllis Borzi (who oversees the Employee Benefits Security Administration), I don’t believe that this is true. The Labor Department understands that if a person rolls their account out of a 401(k) into an IRA (moving their money from an account collectively worth millions to an account that in total is valued much less) that it probably will come with higher fees. The DOL considered this and doesn't necessarily oppose this in certain situations. On the one hand, consumers might be wise in most cases to not do a rollover. But on the other hand, there are situations where rolling into an IRA might make sense ... and yet if the plan advisor stands to profit how can they possibly make that recommendation without a conflict of interest? If I’m the plan advisor and I’m charging a flat fee to serve the entire plan I can give unbiased advice about whether to stay in the plan or roll out of the plan. And if another advisor charges them higher fees in the IRA that might even be justifiable, as it may well cost the individual more to receive the service in a retail environment that they were receiving in an institutional environment. But if the plan advisor and the IRA advisor are the same (i.e., if the advisor stands to profit from recommending that rollover) a conflict of interest exists. And we shouldn’t have needed a new Fiduciary Rule to recognize that!
I’m NOT an attorney. I don't pretend to be one, and my sincere apologies if I've butchered or oversimplified the legal arguments. This was not intended to be a legal review of the merits of their case. As a non-attorney I have no idea if this lawsuit will stand or not.
My point is that the damage is done whether or not they win the lawsuit. The average consumer (rightfully) assumed that our industry had always been acting in their best interest, and the public is shocked that regulations were required to force this issue.
The public needs to know that the retirement plan industry will act in their best interest (as ERISA always required) and financial advisors need to pick which side of the fence they want to play on (the side of plan advisor or the side of individual advisor to avoid the conflicts of interest) and start acting responsibly, in a fiduciary capacity, regardless of the “letter of the law.” The attorneys may get some of the letters of the law changed or amended, but the spirit of the law (to act in the best interest of our clients) has always been the same.
While I'm apologizing to those with a JD after their name I might as well also apologize to those with an insurance license who make an honest living helping individuals with financial planning. When I say that advisors should pick which side of the fence they want to play on, I don't mean to imply that either side is better than the other. I do mean to say that each is a specialty and each should be delivered with the trust of the consumer and without the conflicts of interest from the other side of the fence. I'm a plan advisor. If an individual needs help with their financial planning I refer them to the specialists on the other side of the fence. I honestly don't believe the DOL is at war with financial advisors on either side of the fence. I just think they'd like to discourage "dabblers" from either side dabbling in an arena outside of their expertise, particularly when they are unwilling to take fiduciary responsibility for those services and act in the best interest of the public.
