Many individuals who have testified before the Department of Labor during its fiduciary hearings last week took issue with the Best Interest Contract exemption, which would allow retirement plan brokers and advisers to continue to set their own compensation practices as long as they commit to putting their clients best interests first and reveal any conflicts that may prevent them from doing that.
Marcy Supovitz, principal at Boulay Donnelly & Supovitz Consulting Group Inc. in Worcester, Mass., and president-elect of the American Retirement Association, worries that the best interest contract exemption would put impediments in the way of advisers who want to work with small businesses.
The ARAs real concern with the fiduciary proposal is how it relates to rollovers in connection with employer-sponsored plans.
Our concern is that the proposed rule will discourage plan advisers from working with participants on rollovers even in situations where they are receiving level compensation on both sides of the transaction. The reason is, a rollover coming out of a workplace plan into an IRA will likely increase an advisers compensation, she said. Under the rules, increasing compensation by the fiduciary would be a prohibited transaction unless an exemption applies. It is not clear that exemption exists. Therein lies our concern. The BIC exemption, we are not sure it is available for rollover transactions.
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The ARA suggests that the Department of Labor adopt a separate exemption for advisers who provide levelized compensation advice. The rules as proposed cover advisers who receive variable compensation, not level compensation. Advisers who use a levelized compensation model already provide conflict-free advice, so making them comply with the BIC exemption would add unnecessary costs to be ultimately borned by the participant/investor, the organization said in its comment letter to the DOL.
A streamlined level compensation exemption would encourage plan advisers to continue to work with participants to and through retirement, maintaining these trusted and conflict-free relationships between advisers and participants that choose to receive their retirement income through personal IRA accounts, the ARA said. Advice that is free from conflicts of interest works for the participant and can flourish in the marketplace with a carefully created level-to-level exemption.
In order to use this new exemption, advisers would have to meet some simple core conditions, Supovitz said. There would have to be level compensation on both sides of the transaction and a written agreement between the participant and adviser about the level compensation arrangement, Supovitz said. The adviser would also need to disclose his compensation at the plan level and the IRA level and there should be documentation outlining why the rollover transaction is in the best interest of the participant.
Representatives of the DOL asked her why advisers needed to receive compensation in the form of commissions.
The example I gave is if they are dealing with a startup plan, a brand new plan for a company, it has no assets. There is no money in there to base an advisers level of compensation on, she said. If advice is not available to small participant level plans, there will no longer be advisers to serve the small market and certainly the small plan market.
Bartlett Naylor, financial policy advocate for Public Citizen in Washington, D.C., said that his organization is enthusiastically supportive of the basic contours of this rule. We think that where an insurance or securities sales person intersects with a tax-privileged account like an IRA or 401(k), they should be held to a fiduciary standard that is serving the best interests of customers.
The consumer rights advocacy groups biggest complaint against the proposed rule is that should a salesperson enter into a best interest contract with a client, they can include a mandatory arbitration clause in the contract, eliminating the [individuals] Sixth Amendment right to have a court adjudicate their complaint, Naylor said.
He argues that forced arbitration may not be economical for a victim who was scammed out of $100 or $500. Class action lawsuits make it much more efficient, he said.
Naylor points out that the industry is very clear that it makes money through commissions and sales quotas by steering customers to products that may be suitable but not in their best interest, given other products that achieve similar investment results but lead to a smaller commission to the salesperson, he said. It is inevitable the salesman will steer the customer to something that makes them better compensated.
The hearings and the fight over the proposed fiduciary rule are an exercise in political muscle and Obama Administration fortitude. There are people of good faith in the DOL, with the personal support of the president, that want to protect savers from self-interested salespeople on Wall Street, Naylor said. But the political reality is that Wall Street has enormous power in Washington and the hearings, followed by a comment period, are a necessary exercise, but where the context will be most fierce will be from Congress and Wall Street sympathizers in Congress who will deploy any number of initiatives to block this through the appropriations process, by starving the DOL of funds to force the DOL to suspend its attention until the SEC addresses it.
Terry Dunne, senior vice president and managing director of the Rollover Solutions Group at Millennium Trust, said that the proposed fiduciary rule will have little impact on his company, which is a self-directed IRA shop.
We primarily work with RIAs who already meet the definition of a fiduciary as opposed to us working with advisers who would be concerned about taking on that fiduciary responsibility because they are offering investment advice, he said. We have talked to inside and outside legal counsel and, fortunately for us, it is not that big of a factor, but of course it will affect the entire investment or financial services marketplace and were totally connected with everybody else.
Dunne listened in on the DOL hearings and said the biggest issue he heard is that when you make something 90 pages, or very complex, it creates a lot of anxiety to people, and so I appreciate that a lot of people have concerns, he said. There also were quite a few people in the hearings who were basically full steam ahead, lets keep this moving. Those were the people who represented the participants, the individual investors, in a substantial way. They felt anything that was a benefit to the participant was a good idea.
Also see: DOL hearings a regulatory tug of war
As far as whether advisers already act in the best interest of their clients, Dunne said he believes they do.
I think the reality is that the financial planning industry is very interested in helping people make better decisions and, of course, there are going to be a couple of bad apples, but overall, I think advisers, financial planners and retirement planners do a great job to help people, Dunne said. If there is a way to make sure, to regulate, that they are not charging too much, that is probably a good thing.
Paula Aven Gladych is a freelance writer in Denver.
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