SIFMA cries foul on the basis that such regulations would reduce people's access to retirement plans

March 3, 2010 — 7:16 AM UTC by Sara Hansard


Brooke’s Note: This article is about the potential for a big-time setback for securities brokers from a regulatory development in Washington. For years wirehouses have maneuvered past various SEC threats to getting paid for providing advice that didn’t meet strict fiduciary standards. Now it appears that a new less foreseen threat — new DOL regulations — could shrink the potential assets that brokers employed by big firms advise on. This article elucidates how independent advisors — and in a separate development index funds — may be well-positioned to capitalize on this potential upheaval.

At first glance, the aspects of the regulations proposed by the Department of Labor that apply to the 401(k) market don’t change the picture much for RIAs. The rules are aimed at eliminating advisors’ conflicts of interest, and would apply to brokers, including hybrid advisors, who give advice to 401(k) plans and earn any commissions from companies whose products are held in the retirement accounts.

It would also effect IRAs. Read: IRA assets could be ripped from the grasp of brokers if DOL has its way

But some independent advisors say the complex rules may benefit them in the long run if more advisors affiliated with big companies — who are the most apt to have such conflicts of interest — opt out of the $2.7 trillion market.

The regulations – which are already under fire by broker-dealer and investor advocate groups – require investment advisors and money managers to base investment advice on objective computer models or to give advice on what’s called a level-fee basis, meaning that their compensation does not vary based on the investments in the account.

Prohibit steering

The regulations are designed to keep advisors from steering plan participants into funds with which the advisers or money managers or their companies are affiliated, or from which they are receiving a commission.

Grandfather clause

The DOL proposal, however, may take a while for its impact to be felt, even if is eventually approved. It contains what is essentially a grandfather clause, meaning that brokers and hybrid advisors that already advise 401(k) plans may continue their existing arrangements, according to Lou Harvey, president of Boston-based DALBAR, a firm that audits financial service firms.

These grandfathered advisors will also be able to continue collecting fees from the companies that produce investment products and continue to operate without the use of computer models.

The proposed regulations also call for an independent audit each year of a plan’s investment arrangements.

The Securities Industry and Financial Markets Association is objecting to the proposed regulations.

“The proposed regulation, if approved, will do little to expand American’s access to investment advice,” Elizabeth Varley, managing director of government affairs for SIFMA, said in a statement. “Americans are seeking the best paths to saving and investing for their retirement and deserve rules that allow them to do so.” The DOL proposal “will hurt participants and investors, not help.”

If more big-company advisors opt out of the market, however, more independent advisors may opt in.

Step forward in the evolution of the business

“It leads to a new industry potentially of independent investment advisers willing to give investment advice, not simply at the plan sponsor level but also to participants in the plans,” says Mark Davis, a vice president and financial adviser for CapFinancial Partners LLC in Los Angeles who manages $1.3 billion in 401(k) assets at companies with whom he works. “It’s potentially a significant step forward in the evolution of the business.”

Davis is on the board of the American Society of Pension Professionals and Actuaries, which represents investment advisers, attorneys, accountants, actuaries, third party administrators and financial service companies involved with 401(k) plans. ASPPA has supported independent advice models for 401(k)s.

“There are investment adviser firms that are working on efficient models of delivering advice,” Davis says.

Ed Ferrigno, vice president of Washington affairs for the Profit Sharing/401(k) Council of America, which represents employers who offer defined contribution plans like 401(k)s, says it’s unclear how the regulations will affect the market for advisory services.

“It’s still extremely muddled whether or not anyone is ever going to provide advice services under this [proposed] model,” Ferrigno said.

Will affect 16,000 firms

Comments on the proposed regulations are due by the end of the day May 5. The time frame for final approval is not set. DOL estimates that the regulation will affect 16,000 investment advisory firms including broker-dealers.

Investment advisors are closely following the way the proposal treats computer-generated investment advice. The proposal, which requires that the computer models be certified as objective, argues against basing computer recommendations too heavily on historical performance.

“A computer model shall be designed and operated to avoid investment recommendations that inappropriately distinguish among investment options within a single asset class on the basis of a factor that cannot confidently be expected to persist in the future,” the proposal says.

“While some differences between investment options within a single asset class, such as differences in fees and expenses or management style, are likely to persist in the future and therefore to constitute appropriate criteria for asset allocation, other differences, such as differences in historical performance, are less likely to persist and therefore less likely to constitute appropriate criteria for asset allocation. Asset classes, in contrast, can more often be distinguished from one another on the basis of differences in their historical risk and return characteristics.”

Push toward index funds

Most experts believe that language would push computer model generated investment advice toward index funds, which generally have lower fees than actively managed funds. Matthew Hutcheson, an independent retirement fiduciary in Eagle, Idaho, who hires investment advisers for retirement plans, thinks that’s a good thing.

The emphasis should be on the underlying economic characteristics of asset classes rather than on historical performance returns of particular funds, Hutcheson says.

“There’s too much debate whether that was luck or skill,” he said. “So just focus on the economic characteristics of the asset class and that should be adequate.”

Editor’s note: This story was updated at about 1 p.m. Eastern Time to better describe which brokers and advisors would be affected by the proposed regulations.

Share your thoughts and opinions with the author or other readers.


Jacob Wagner said:

March 3, 2010 — 10:19 PM UTC

The Obama administration has this one right in its intent to allow employers to get unbiased financial advice to American workers. The problem is finding a real solution to deliver advice that is truly conflict-free, transparent, affordable and accessible to the average American, versus just the wealthy. Certified Financial Planners who are Registered Investment Advisors are regulated under the securities administrations, CFP Board of Standards and the Pension Protection Act, and must act as “fiduciary advisors.” This means that they must legally work in the interests of their clients before their own. Fees paid by the investments they recommend can skew that, so it’s important to find advisors who will provide advice for a fee which the consumer pays to remove the conflicts.

The company we have spent eight years building has put all of these requirements and fully vetted advisors on one website to allow consumers to work with fiduciary advisors on a flat-fee basis. What the administration wants for the public DOES exist! Check it out and then tell me what you think:



Scott Revare said:

March 3, 2010 — 11:13 PM UTC

It now seems inevitable that advice provided to retirement plan employee’s will be provided by an adviser or team of advisers that have no conflicts of interest. Combined with regulatory and legislative activity around fiduciary duties, regulations like this can play a major role in raising public awareness of the possibility of getting conflict-free advice for retirement plan participants.

Now that the cat is out of the bag and the goal of conflict free advice is in the public and regulator’s eye’s, advisers will need to make decisions regarding the business they want to be in. Of the three typical adviser related roles required for employer sponsored retirement plans – plan level adviser, participant level adviser, and adviser to rollover assets – it will become more and more difficult to fill more than one or two of them, as fiduciaries. To protect themselves and remain conflict free, advisers will look to outsource the roles that are least important to their business. Firms like mine, – a participant only adviser with no interest in rollover assets, are designed to provide outsourced participant advice services on a conflict free basis, while complementing the role of the plan level adviser.



VG said:

March 5, 2010 — 4:26 PM UTC

Well, gee, if the government wants models of index funds, then why doesn’t it just develop 5 or 6 “adequate” models and pass a law requiring us all to invest in them. If you get to a point where you can only give state-approved advice – these asset classes in these percentages in these index funds, then what’s the point. And gee, while we’re at it, if low cost indexing is the way to go then Vanguard is a fraud. That’s right. Their index funds cost 40% more than index funds from Fidelity. I would not want to sign on as a fiduciary in these litigious times.


PGE said:

June 1, 2010 — 4:46 PM UTC

Well, the government has that plan… the Thrift Savings Plan. Of course, no one but a federal employee has access to this tax-payor subsidized plan; but what’s good for them must be good for us.


James Gordon said:

May 4, 2011 — 1:01 PM UTC

FYI: when reporters pen stories referencing the Federal Thrift Plan, they do not seem to understand, and never acknowledge or include a HUGE Factor: Offsets for the “Massive” OVERHEAD Expenses (Human Resources (Gvt EE’s) including Gvt Pensions, other generous benefits, Office Rent, etc., etc., etc. – These are real costs that should be factored in.
Comparisons, using Gvt Thrift as an ideal benchmark are no different than certain vendors that have been know to say things like “plan administration is FREE” because those costs are embedded; buried.

Ref PGE comment re:”“Well, the government has that plan… the Thrift Savings Plan. Of course, no one but a federal employee has access to this tax-payor subsidized plan; but what’s good for them must be good for us.”“


Mark P said:

September 7, 2011 — 2:13 PM UTC

Seriously, I love the RIA’s bidding for all this business saying a Registered Representative can’t give impartial advice because of how they are paid. Dig into how an RR gets paid vs a RIA and you will find the RIA get paid far more over time than an RR. The trail commission that a fee only financial planner gets is 4-5 times the trail commission a RR receives. Besides, I have met plenty of unethical “investment advisors” and RR’s – you cannot regulate integrity into a person. JW above, what a blatent sales pitch to “come look at my website.”

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