There’s a distinction in the benefits industry between fee-based and commission-based benefit advisers, and the DOL’s proposed fiduciary rule favors fee-based brokers and likely would push some commission-based brokers out of the retirement market altogether, says JuIi McNeely, president of the National Association of Insurance and Financial Advisors.

McNeely testified during yesterday’s DOL fiduciary hearings that the proposed rule would have less impact on fee-based advisers and may even bring them new business as commission-based brokers drop out of the market.

“The fee-based advisers win with this proposal,” she said. “They win because they will continue to operate in the manner they always have.”

“The fee-based advisers really seem to be in favor of this proposal,” McNeely told EBA in an interview ahead of her testimony. “In my perspective, they have a chance of gaining something out of this proposal, because it’s likely that some commission-based advisers won’t continue in the retirement market.”

See also: SourceMedia’s complete coverage of the DOL’s fiduciary hearing

Fee-based advisers, she reiterated in her testimony, “will continue to operate in the same manner as usual. The extra burden is really on the commission-based advisers through the best interest contract exemption.”

Under the proposed regulation and the new Best Interest Contract Exemption (the BIC exemption) advisers would be able to receive commissions, revenue sharing, 12(b)1 fees and some other forms of “conflicted compensation” under stringent conditions. The BIC exemption requires a contract between the adviser, the financial institution and the client in which the financial institution and the adviser commit to a best interests standard requiring that the adviser act with the care, skill, prudence and diligence that a prudent person would exercise.

“Every one of my clients will have to sign a contract under the BIC. In my opinion it’s an unworkable solution and it’s going to be a costly and time-consuming solution. It’s never easy to get people to sign new paperwork, especially something as strongly named as a contract,” she said. “I believe I will have some clients that have no interest in signing it.”

Gregory McShea, general counsel for the advisory firm Janney Montgomery Scott LLC agreed, testifying during the same panel that the DOL’s proposed rule “eliminates investor choice and increases cost.”

“We offer our clients a choice of either working with adviser on a fee-based or commission-based model,” he said, adding that the two legal contracts provide different levels of service.

“As written, the proposal jeopardizes our ability to provide commission-based services to IRA clients when that might be the preferred model for them,” he said.

The other problematic piece about the BIC, she said, is the requirement these contracts be signed before advisers speak about any products.

“We can be educating the client up to a certain point, but as soon as we start speaking about a product, a contract needs to be signed. I think it would be better stated if it were to be signed at the time of sale, if in fact we do have to have a contract,” McNeely said.

The BIC also raises the potential for increased litigation, she testified.

‘Cost of lost advice’

McNeely also testified that the cost to comply with the proposed rule would be significant for advisers and cautioned that whenever costs are incurred “advisers have to pass them on to their clients in some way.”

“It’s also important to note that fee-based advisers work with a lot of wealthy individuals who usually have a high minimum account and most of those wealthy individuals can afford to pay those significant upfront fees, startup fees or planning fees. Smaller accounts of middle-America clients are not going to be able to do that,” she said.

“The bigger cost is the lost cost of advice,” McNeely said. “If somebody has a $5,000 balance in a 401(k) from a former employer and they don’t have somebody to talk to and get advice from, they likely will cash it out. That’s a huge cost with the penalties, the taxes, and now the person has no assets saved for retirement. There’s a significant cost for the loss of advice on those smaller accounts.”

Overall, the DOL’s proposed rule “will result in fewer employer plans, fewer participants in employer accounts and lower savings. I don’t think that’s what the Department of Labor has intended this rule to do. Their intention was to protect consumers, especially those middle-America consumers, and this will be counterproductive,” McNeely said.

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