News, Vision & Voice for the Advisory Community
After a lot of waiting around FSI calls this news 'the real thing'
February 24, 2015 — 8:31 PM UTC by Lisa Shidler
Brooke’s Note: It’s coming at a time of other Obama political Hail Mary passes that might just get results: Opening relations with Cuba, closing Guantanamo, reforming immigration and setting aside land for national parks that frackers want to drill. Right up there on that besta-luck list is having rules requiring financial advisors to authentically put their clients first. But guess what, President Obama is giving it a go and talking in almost NAPFA-like parlance.
“There are a whole lot of financial advisors that do put their clients first. There are a whole lot of hard working men and women in the field who got into the field to help people.”
Those words were not spoken by Ron Rhoades, Harold Evensky or Knut Rostad.
Rather, they were delivered by President Barack Obama at AARP headquarters in Washington, D.C. as he announced stricter rules on financial advisors who manage retirement savings accounts. See: Why Obama and the DOL are all wet when it comes to the proposed fiduciary rule
Obama drove home the point repeatedly, adding: “It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first. You can’t have a conflict of interest.” See: The White House puts its best Obamacare minds behind cleaning up the 401(k) business — starting by issuing a withering memo.
Sentiments like those and ones like them (Obama referred to “selling snake oil”) passing the lips of the world’s most powerful politician were taken as a positive, if surreal, sign of serious progress on the fiduciary front.
Yet the brokerage establishment sees these comments as fighting words. See: The White House puts its best Obamacare minds behind cleaning up the 401(k) business — starting by issuing a withering memo.
When a hammer would do…
The Financial Services Roundtable, which represents companies in banking and insurance, with a combined $92.7 trillion in assets, argues that Obama is showing callous disregard for poorer people.
“While concerns about improper actions by investment advisors should certainly be addressed, an overly broad proposal could price professional financial advice beyond the reach of many modest income families,” says Tim Pawlenty, president and chief executive of the group in a statement. See: Borzi: Exemptions from conflict of interest will be part of new fiduciary proposal.
The former governor of Minnesota added: “A sledgehammer is not needed where a regular hammer would fix the problem without causing unintended damage.”
Labor Secretary Thomas Perez on Monday also spoke to the friendly audience of the AARP, and pulled no punches.
“Lawyers and doctors have an obligation to look out for what is best for you,” he says. “If you have a serious illness, you don’t want your doctor to tell you what is suitable for you — at least I don’t. You want to tell them what is best for you and what is going to save your life. When it comes to financial advice, conflicts of interest can lead to bad advice, hidden fees that all too often keep us from getting the investment advice that is in our best interest. The cohesive power of fine print, hidden fees and conflicted advice can eat away like a chronic illness at people’s hard earned retirement savings. This isn’t right and we have an obligation to fix it.” See: The suitability standard, defined.
No rule yet
But what may have gotten lost in the political crossfire is that the actual proposed rule has not yet been released at this time. That leaked White House memo from January painted a picture of a fairly strict rule that cause outraged by many in the brokerage industry.
But not having access to the actual rule didn’t prevent lobbyists to begin a hard sell in favor of and against this rule.
One of the war cries from the groups opposing this rule is it is no different than the one they fought off back in 2010. See: The story of FINRA’s implacable drift from its founding ideals to a pallid 'no-lying baseline’.
After posturing for years about the rule by the White House, it is a matter of months before it is released to the public. The Office of Management and Budget evaluates rules on average about four months before they are released to the public. It is likely the rule will be available to the public to view by summer.
But summer could come by spring, according to Jason Roberts, chief executive of Pension Resource Institute LLC of Los Angeles.
“While the OMB’s review process can typically take up to 90 days, we anticipate that this proposal may get fast-tracked. Our belief is largely due to the fact that the rule appears to have broad support from the White House.”
Prepare for a fight
The Financial Services Institute president and chief executive officer Dale Brown in a statement that the five years that this issue has simmered should be left on the burner even longer.
“With the revelations last week that not all SEC Commissioners have been formally engaged by DOL, combined with the 200 bi-partisan, bi-cameral members of Congress who have weighed in over the last four years, we expect this process will take as long as necessary to ensure that any final rule avoids serious unintended consequences for Main Street investors.”
Indeed, Roberts says the ramifications for RIAs and broker-dealers are consequential.
“Contrary to widespread rhetoric, it is important to keep in mind that this rule will not only affect broker-dealers; it could impact any RIA affiliated with a broker-dealer or retirement plan service provider,” he says. “Even fee-only RIAs may have to adapt their business models — particularly to the extent if they serve as or rely upon solicitors for investment managers — as the initial proposal sought to expand the definition of “fiduciary” under ERISA to recommendations or advice concerning the management of securities. Under the current definition, and absent discretion, only recommendations or advice concerning the “value of or advisability of investing in securities or other property” would trigger fiduciary status under ERISA. Investment manager are neither securities nor property.”
It is also expected that the DOL will seek to modify its position on IRA rollovers. In a 2005 Advisory Opinion, it cautioned against: i) using the authority that makes one a fiduciary; ii) to 'cause a participant to take a distribution; and iii) coupled with a recommendation to invest the proceeds (from the distribution) in a way that results in greater compensation paid to the individual advisor (and/or his/her affiliates). Given that the SEC and FINRA have already thrown their hats into the IRA rollover arena, we anticipate that it will not get any easier to assist plan participants in this regard.
The FSI represents more than 100 independent broker-dealers and more than 35,000 advisors.
Even though no one knows yet what the new rule exactly says, FSI spokesman Chris Paulitz says his agency has an idea based on comments from the White House.
“It is eminent and it’s significant development. This is the first real thing that’s happened with this and the DOL for years and the president is supporting it. This is real news. We’re responding to things we hear the president say. We’re also responding to the leaked White House memo. If it looks like what was in the 2010-rule there will be serious consequences for small and mid-sized investors. If the rule watches that rhetoric, we’ve got to wait and see.”
The political juxtaposition is to be expected, says Rick Meigs, president of the 401khelpcenter.com LLC in Portland, Ore. “It is politics and not surprising. The 'anti’ groups are waging a strong lobbing campaign and the 'pro’ groups have responded.”
Two groups that represent brokers and financial planners in roughly equal measure — Certified Financial Planner Board of Standards Inc. and Denver, Colo.-based Financial Planning Association, showed support for President Obama.
CFP Board authorizes more than 71,000 individuals to use those marks in the United States.
“As a fervent advocate for strong fiduciary standards in the provision of investment advice, CFP Board is pleased to see the White House and Department of Labor take a critical step toward protecting American investors and their retirement savings through a fiduciary rule under ERISA,” the agency stated in a release. See: Lauren Schadle shows mettle as FPA stakes out turf in skirmish with CFP Board at its national conference in Orlando.
The FPA, which counts RIAs and brokerage advisors as its members, favors the new rule as well.
“The Financial Planning Association is pleased Obama is taking the necessary steps to ensure investor protection by supporting an update of the fiduciary rule under the Employee Retirement Income Security Act (ERISA). We look forward to reviewing the proposed rule and hope OMB will prioritize this accordingly. FPA supports a fiduciary standard for all who provide investment advice and those who work to secure the financial future of millions of American workers,” says 2015 FPA president Edward W. Gjertsen II, in a statement. See: How the FPA’s national conference is nudging large firms toward fiduciary care.
He added that the fiduciary rule is necessary.
“All financial advisers, including those offering advice and guidance to 401(k) plan participants, should be required by law to follow an authentic fiduciary standard at all times in client engagement. We hope the OMB will act swiftly in reviewing the proposed rule and so we can provide our own evaluation to help protect American investors who seek investment advice.”
It’s no surprise the fiduciary leaders are lauding the new rules — but reminding that the principles involved are age old.
“The Institute for the Fiduciary Standard applauds the president’s forceful statement stressing the urgency of enforcing centuries-old fiduciary law,” says Knut Rostad, president of the Institute for the Fiduciary Standard based in Falls Church, Va. “Conflicts of interest harms’ are clear and rightly the focus of the DOL rule. The opportunity is also clear. It is to re-imagine all financial advice as objective and truly reflecting what is best for investors.”
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