Fiduciary Standard for Advisors Sparks Contentious Debate

Applying a stricter standard is either a necessary safeguard or a needless burden and expense

By Stephen Miller, CEBS Jun 19, 2015
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Proponents and opponents of the Department of Labor’s (DOL’s) proposed rule to apply the fiduciary standard to professionals offering investment advice to retirement plan participants faced off at a hearing before the House Subcommittee on Health, Employment, Labor and Pensions on June 17, 2015.

Under the DOL’s proposed rule, issued for comment on April 14, professionals providing participants in 401(k) and similar workplace defined contribution plans with investment advice, as well as those advising holders of individual retirement accounts (IRAs), would be required to follow the so-called fiduciary standard by only offering advice that can be shown to be in clients’ “best interest,” and by disclosing any potential conflicts of interest. Currently, many retirement plan advisors associated with mutual fund and brokerage firms that administer 401(k) and similar plans are held to a lower “suitability” standard, under which they can recommend investment products that are deemed to be broadly “suitable” but may reward the advisors more than competing, lower-fee investment funds.

“Some financial advisors commit to serve your best interests. But others operate under no such commitment, and there’s nothing stopping them from getting backdoor payments at their client’s expense,” Secretary of Labor Thomas Perez testified before the subcommittee. “The corrosive power of fine print and buried fees can eat away like a chronic illness at a person’s savings.”

The proposal, he added, “will close the loopholes in the 1975 DOL rule that today make it possible for advisors to exclude from protection the kind of advice relationships that are common now for 401(k) and IRA holders.”

Among others defending the proposal was Dennis M. Kelleher, president and CEO of Better Markets, a nonprofit that advocates for transparency, oversight, and accountability in the financial markets. “It is simply inappropriate that any financial advisor in this country is allowed to provide retirement investment advice to a worker or retiree that does not put the best interest of the client first. Yet that is what the current DOL rules have allowed for 40 years,” he said. “As a result, advice is too often driven by conflicts of interest. Those conflicts are fundamentally unfair, they are not what investors expect or deserve from their advisors, and they are intensifying what already looms as a retirement crisis in this country.”

Higher Fees Feared

But others claimed that broadly imposing the fiduciary standard will increase the cost of providing investment advice to 401(k) participants. “We cannot—in any way— make it harder for workers, retirees, and small business owners to receive the financial advice they may need,” said Rep. Phil Roe, R-Tenn., the subcommittee’s chairman.

“Yet that is precisely what this regulatory proposal would do. Offering some of the most basic assistance would be prohibited [for nonfiduciaries], such as advice on rolling over funds from a 401(k) to an IRA,” Roe said. “Financial advisors would no longer be able to assist individuals in how to manage their funds upon retirement. And small business owners would be denied help in selecting the right investment options for their workforce, which will lead to fewer employees enrolled in a retirement plan.”

Added Dean Harman, founder and managing director of Harman Wealth Management Inc., an advisory firm, “The proposal is premised on a belief that retirement investors are unprotected by the current regulatory system. This is simply not true.”

Harman described how his business is heavily regulated by the Securities and Exchange Commission, the Financial Industry Regulatory Authority, and 50 state securities regulators. “Adding new levels of regulatory requirements and legal burdens on to this structure, as this proposal does, will not further protect investors,” he said. “Instead, it will drive up compliance costs on financial advisors and, ultimately, drive up the costs of retirement advice for investors.”

Extended Deadline for Comments

Recognizing how controversial this proposal has been, in May the DOL extended the original comment period deadline of July 6 by 15 days, until July 21. The DOL will then hold its own public hearings the week of Aug. 10, to be followed by another comment period. In total, there will be 140 days of comment on the proposal before a final rule is issued.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

Related SHRM Articles:

DOL Seeks Comments on Proposed Retirement Advice Rule, SHRM Online Benefits, April 2015

DOL to Re-Propose Fiduciary Rule for Retirement Advisors, SHRM Online Benefits, February 2015

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