Jeff Zients and Tom Perez come out swinging for a new fiduciary era

Brooke’s Note: Commissions, 12(b)-1 fees and even kickbacks known as revenue sharing are all still allowed. But the SIFMA/FSI/FINRA crowd is wailing. They are expressing pain over a clause that made its way officially today into the new federal definition of “fiduciary” — namely that customer interests get put ahead of product providers. SIFMA has a good response — that putting client interests first will hurt clients. Steve Winks tackles that issue point for point below. The fiduciary ball is rolling, on a parallel course with progress on Cuba and that tells you something. Here’s what Secretary of Labor Tom Perez and Jeff Zients, director of the National Economic Council and assistant to the president for economic policy, have to say.

Today, we are taking the next step in President Obama’s historic push for the strongest consumer protections in America’s history. As the president called for in February, the Department of Labor is proposing to update rules to protect Americans saving for retirement and crack down on conflicts of interest in retirement advice that are costing middle class and working families billions of dollars every year. See: How to gird clients for the approaching $500K tsunami of college costs without killing their retirement dreams.

The president takes a backseat to no one when it comes to strengthening consumer protections. That’s why he fought to create the Consumer Financial Protection Bureau (CFPB), an independent watchdog that has already enhanced safeguards across mortgage, credit card, debt collection and student loan servicing markets, while putting more than $5 billion back in the pockets of more than 15 million wronged consumers through enforcement actions. Recently, the CFPB took an important step toward cracking down on abusive practices in payday lending, yet another example of how this critical consumer watchdog is delivering for the American people. See: How 10 top groups define 'fiduciary’.

The Department of Labor’s proposed rule adds to those protections, by reflecting a simple, commonsense principle: retirement advisors should put their clients first and give advice that is in their clients’ best interest. See: One-Man Think Tank: Being a fiduciary is suddenly in style, even as lawmakers dance around the issue.

Too often today, that’s not the case. Retirement advisors and Wall Street brokers can direct their customers to products with higher costs and lower returns simply because they get backdoor payments or hidden fees, often buried in fine print, that encourage them to recommend these bad investments. As hard as it may be to believe, under the current rules advisors can recommend products that are good for their bottom line but not as good for their clients. See: What RIAs must know about hidden, and excessive, fees in serving as fiduciaries to a 401(k) plan.

Change must come

That’s because the safeguards in this area have fallen woefully behind the way people save for retirement. When the rules were last overhauled almost 40 years ago, Individual Retirement Accounts (IRAs) had just been created and employer-based 401(k)s did not even exist. Today, American workers have more than $7 trillion invested in IRAs and more than $4 trillion in 401(k)-type plans. For that reason, getting workers good advice is more important than ever.

To be clear, many advisors are hardworking women and men who got into this line of work to help families achieve retirement security, and already provide high-quality advice that is in their clients’ best interest. Nonetheless, the losses to some middle class and working families from the existing loopholes are huge. Poor investment advice stemming from conflicts of interest saps about 1 percentage point of returns every year, and—like compounding interest—these compounding losses mount over time.

Over the course of 35 years, a person getting conflicted advice could lose more than a quarter of their expected savings relative to someone getting advice in their best interest. In other words, instead of a $10,000 retirement investment growing to more than $38,000 over that period after adjusting for inflation, it would be just over $27,500.

That’s unacceptable and it has to change.

Today’s proposed rule would ensure that the people providing you with retirement investment advice are working in your best interest. And it includes streamlined, flexible ways to comply with that goal, for example by allowing advisors to enter into a new and enforceable best interest contract before they can receive any payments that might bias their advice. It’s a straightforward agreement so you know you’ll get advice on investing your retirement savings that puts your interests first. See: An attorney explains where the 'trail goes cold’ in PBS’ 'Retirement Gamble’.

The many advisors already putting their customers’ best interest first deserve the level playing field for offering quality advice that this rule will provide. In 2010, the Department of Labor put forward a draft of a rule to attempt to create that level playing field—but after significant feedback on how the proposed rule would impact the market for retirement advice, DOL withdrew that proposal and went back to the drawing board. Since then, we’ve worked with industry, consumer groups, retirement advocates, academics, and the public to gather feedback and rework the rule. See: Which three of DOL’s new 401(k) rules represent the biggest land mines for financial advisors and plan sponsors.

Stronger rule

Today’s proposal, through enhancements like the best interest contract exemption, makes major strides toward addressing the concerns that were raised. We look forward to receiving additional feedback over the 75-day comment period that will help shape a better, stronger rule that minimizes burdens for those giving good advice. We are committed to getting it right.

But while we expect plenty of good faith input from all manner of commenters, for some special interests and their allies in Congress, the only good rule would be no rule at all. We want to make very clear that inaction is not an acceptable outcome of this process. We believe that any advisor acting in their clients’ best interest should support this rulemaking. And those who aren’t already committed to those same high standards will have to start putting their clients best interest first. See: What Tony Robbins should remember when he talks 'fiduciary’.

America’s families are losing $17 billion of their hard-earned retirement savings annually—representing tens of thousands of dollars for many individual families over the course of a lifetime of saving. We should all agree that financial advisors should always act in their clients’ best interest. Today marks an important milestone toward that change.

FSI responds

Chris Paulitz, senior vice president of the Financial Services Institute responded with a statement.

We are currently studying the rule and will comment about the specifics once we have given it a thorough review and fully understand the impact on our members and small and mid-size investors.

We are disappointed that OMB only took 50 days to review this highly controversial rule that could negatively impact millions of investors. On average, Department of Labor rules are reviewed by OMB for 117 days.

Over 200 bipartisan members of Congress have told the DOL and the administration to carefully consider the impact of the proposal on investor access to retirement advice, products and services — and most expected the OMB would take as long as necessary to ensure that any final rule avoids serious unintended consequences for Main Street investors. We have serious concerns that could have happened in only 50 days.

Steve Winks weighs in

Steve Winks: By broker-dealers not acknowledging
or supporting fiduciary responsibility to act
in the consumer’s best interest, the
trust and confidence of the investing
public has been lost.

Fiduciary consultant Steve Winks, managing director of OverlayViews, addressed SIFMA on this issue.

The SIFMA position on the proposed DOL regulation, which holds brokers to their fiduciary duty, maintains it could:

(1) limit investor choice
(2) cause inconsistencies as different regulators would apply different standards to the same retirement accounts,
(3) prohibit access to investor guidance, and
(4) raise the costs of saving for retirement. None of these reasons prove to be true.

1. Limit investor choice: Investors have no choice today—their best interests are not being served, as required by the statute of advisors. The SIFMA maintains that brokers do not intend, imply or render advice. Brokers simply make consumers aware of their investment alternatives, it is up to the consumer to determine investment merit on their own regardless of how limited the investment knowledge and experience of the consumer may be. By broker-dealers not acknowledging or supporting fiduciary responsibility to act in the consumer’s best interest, the trust and confidence of the investing public has been lost. How does the SIFMA explain this as a good thing? See: New York conference: SIFMA wants members to be like RIAs — minus the same rules of accountability.

2. Inconsistency of regulators applying different standards to the same activities: The presumption that brokers and advisors do the same thing is inaccurate. The activity of a broker who does not make recommendations (render advice) and has no ongoing responsibilities for recommendations is materially different from that of advisors who are accountable for their recommendations and have significant on going responsibilities in acting in the consumer’s best interest as required by statute. If the SIFMA would acknowledge that brokers are rendering advice and accountable for their recommendations and act in the best interest of the investing public the industry would look much different today. (i) Technology would be in place that allows a broker to make recommendations in the context of all a client’s holdings so it is possible to determine if a recommendation enhanced overall portfolio returns, reduced risk or enhanced tax efficiency, liquidity, cost structure, etc. on the client’s holdings as a whole. (ii) Technology would be in place that facilitates “continuous, comprehensive counsel” as required by statute, which would manage real time client holdings data (presently utilized by a coterie of top private trust banks) as good stewards. (iii) Prudent process in the consumer’s best interest would become the industry’s compliance protocol. (iv) By brokers engaging in a series of disjointed unrelated transactions where the industry offers no reference point from which one can determine whether value is added or not—is not a good thing. In this day and age of technology and transparency, how does the SIFMA explain it is a good thing not to act in the best interest of the investing public and why its policies cripple the broker in doing so and the technological advancement of the industry?

3. Prohibit access to investor guidance: Brokers, by design of their legal defense, do not render guidance that could be construed as being investment advice. This avoids fiduciary liability. By a broker giving an investor three choices for an investment decision, the broker technically and in fact is off the hook for a recommendation, as the consumer ultimately makes the investment decision. Unless the consumer does everything a broker recommends the broker cannot not be held responsible for performance. By the broker simply posing investment alternatives, it is up to the consumer to determine investment merit on their own regardless how limited their investment knowledge and experience may be. This SIFMA defense against brokers actually being accountable for their recommendations has been up held for decades in countless arbitration proceedings adjudicating client disputes. If brokers were accountable for their recommendations, the industry would have to look much different as noted above. The supporting resources necessary to render advisory services in the consumer’s best interest would be in place establishing professional fiduciary standing for the broker (based on objective, non-negotiable fiduciary criteria of statute, case law and regulatory opinion letters). How does the SIFMA explain their contention that brokers do not render advice? Every broker in America disagrees, but that is the industry’s defense. See: Eight things necessary to keep RIAs from answering to SIFMA.

4. Cost of retirement savings: Research tells us as much as 40% of earnings on retirement savings are lost to Wall Street commissions, fees and administrative cost. Cost is not a criteria consideration under a suitability standard but is under a fiduciary standard. That is why so much of retirement earnings are lost in fees, commissions and administrative cost under a See: The suitability standard, defined. bility standard. See: A refresher on how an advisor should approach the needs of clients as they near retirement.