Fiduciary ‘ambiguity’ is primary concern for advisers

The Department of Labor’s proposed definition of fiduciary advice remains worrisomely broad, according to financial and legal experts who are calling upon the industry to flood the DOL with letters of concern about the rule’s possible implications.

The DOL in April released its proposal to amend the regulation governing ERISA’s fiduciary definition. The proposed fiduciary rule aims to expand fiduciary duties to those who provide investment advice.

The definition is so broad, according to Steven Saxson, chairman of the Groom Law Group, it seems to cover all routine sales activities. He told attendees of the Insured Retirement Institute’s Government Legal & Regulatory Conference in Washington, D.C. Monday to file comments of concern about the implications of the rule before the July 21 comment period ends.

“We can’t just rely on the trade groups to do so. The Labor Department needs to see the entire industry in full force,” he said.

See also: DOL proposed fiduciary rule: What advisers need to know

Richard Turner, vice president and deputy general counsel of AIG Life and Retirement, agrees there is enough ambiguity in the DOL’s proposed definition to call into question the fiduciary obligation of almost every interaction an adviser or broker has with a plan sponsor or plan participant.

Under current regulations, he says, “most interactions between a financial adviser or customer service person in a customer service unit with a plan sponsor or participant are outside of the scope of fiduciary advice unless the parties affirmatively elect for the fiduciary requirement to apply. If they do elect for it to apply, then there is no question. Many are not considered fiduciary advice.”

Under the proposed new definition, he adds, there “is a flip of the presumption.”

Many interactions, if not most, would now be considered fiduciary advice unless there is an exception or opt-out.

“It seems to me the DOL thinks there is a hurdle you have to get over to reach the definition of advice,” says Abigail Pancoast, chief counsel, retirement plan services, Lincoln Financial Group. “But, everything is advice unless you meet one of the carve-outs. I don’t think the DOL thought that was what the interpretation would be, but it’s what the industry agrees on.”

Although she suggests there may be hope the DOL will consider the confused interpretation and narrow it in a future revision, Saxon is not so sure.

“If they can hold onto this broad definition, it will be beneficial for them for years,” he says. “The idea that almost any conversation you have could be fiduciary is outrageous. The DOL expects us to push back, but I think they will hold the line.”

Best interest contract exemption

Mark Quinn, director of regulatory affairs at Cetera Financial Group, suggests advisers working in the retail space should assume they’ll have to “rely on the best interest contract exemption.”

The DOL’s proposed best interest contract exemption allows firms to continue to set their own compensation practices so long as they, among other things, “commit to putting their client's best interest first and disclose any conflicts that may prevent them from doing so.”

See also: Contract exemption could be as important as DOL fiduciary rule

To qualify for the new best interest contract exemption, the company and individual adviser providing retirement investment advice must enter into a contract with its clients that, according to the DOL:

Commits the firm and adviser to providing advice in the client's best interest. Committing to a best interest standard requires the adviser and the company to act with the care, skill, prudence and diligence that a prudent person would exercise based on the current circumstances. In addition, both the firm and the adviser must avoid misleading statements about fees and conflicts of interest. These are well-established standards in the law, simplifying compliance.

Warrants that the firm has adopted policies and procedures designed to mitigate conflicts of interest. Specifically, the firm must warrant that it has identified material conflicts of interest and compensation structures that would encourage individual advisers to make recommendations that are not in clients' best interests and has adopted measures to mitigate any harmful impact on savers from those conflicts of interest. Under the exemption, advisers will be able to continue receiving common types of compensation.

Clearly and prominently discloses any conflicts of interest, like hidden fees often buried in the fine print or backdoor payments, that might prevent the adviser from providing advice in the client's best interest. The contract must also direct the customer to a webpage disclosing the compensation arrangements entered into by the adviser and firm and make customers aware of their right to complete information on the fees charged.

Ambiguity about the best interest contract exemption also causes some concern for advisers, Quinn says.

“At what point does the contract enact? When does the contract need to be executed? A lot of us assume that operating in the securities, nothing happens until point of sale,” he says, but adds there is no clarification for that in the proposed rule.