Three takeaways from the DOL fiduciary rule hearings

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 08/19/15

Three takeaways from the DOL fiduciary rule hearings

Dozens of representatives from the financial services industry, advisory firms, consumer groups, and academic institutions testified over four days in Washington, D.C., on the pros and cons of the Department of Labor’s proposed fiduciary rule.

The proposed rule would require that financial advisors who offer retirement advice follow a fiduciary standard — putting their clients’ best interest before their own profits — when making retirement planning recommendations.

Some 75 participants provided testimony in a series of 25 panel discussions. Participants included broker-dealer firms, asset managers, insurance companies, retirement providers, consumer groups such as the AARP, academic institutions, and industry organizations such as the Investment Company Institute and the Securities Industry and Financial Markets Association. Prior to the hearings, more than 2,500 comments were submitted during the comment period that started several months ago.

Opening the door to discussion about a regime that dates back to the 1970s, the testimony featured a variety of opinions, both for and against the proposed rule.

Several portions of the testimony garnered significant attention. Here are three key takeaways:

1. Concern over the proposed "Best Interest Contract" While the panelists widely supported a standard of care as acting in the customer's best interest, there was concern among industry officials (especially broker-dealers and insurance companies) who voiced opposition to the mechanics of the Best Interests Contract. The opponents questioned how practical the contract would be in an actual client situation. Many felt the rule was "unworkable" in its present form, considering the operational hurdles, the new disclosures and data requirements, and the potential for increased liability. Based on some of the dialogue, it appeared that the Department of Labor (DOL) was generally open to some suggestions on how to improve the process. For example, a suggestion was made not to require the contract be executed at the initial point of contact with a prospect, but rather, incorporate the contract at the point of sale instead. Some broker dealers also contended that requiring a Best Interest Contact on commission-based IRAs would confuse clients who hold multiple accounts. These clients regard all of their accounts, including taxable accounts as well as IRAs, in the broad context of making decisions on their portfolios. Having different rules and processes applying to these accounts could be confusing.

For more background, read the DOL's details on the proposed Best Interest Contract.

2. Defining the line between education and advice Many retirement providers expressed concern about the broad definition of advice within the proposal. For example, interactions between call center representatives and plan participants today, which are generally viewed as guidance, would be interpreted instead as advice in the new, proposed regime and would trigger fiduciary status. Panelists contended that service levels to participants in retirement plans would suffer, especially when it comes to broadly explaining asset allocation and discussing available investment options offered by the plan. The new proposal considers general asset allocation conversations as education but states that, if specific investment choices within the plan are mentioned in connection with an asset allocation model, this would be considered a recommendation, not education. Retirement providers generally commented that the fiduciary advice standard would be easily triggered under the new rule.

3. Limiting the availability of commission-based products Though DOL officials repeatedly stated during the hearings that it was not their intention to limit the availability of commission-based products, many panelists commented that the proposal as is would force more customers into a fee-based arrangement or restrict them from advice altogether. Many broker-dealers took issue with the DOL on what they perceived as a preference toward fee-based pricing. These panelists argued that consumers should have a choice and that for many — especially "buy and hold" clients — a commission product would be more appropriate over the long-term. Also, insurance company representatives voiced concern that this new rule would significantly limit the availability of lifetime income products to consumers.

The next steps in the rule-making process The recordings of the public hearings and links to comment letters are available on the DOL site. Once the DOL releases transcripts of the proceedings, an additional two-week comment period will be held. The DOL hopes to implement a final rule sometime in 2016. However, there has also been some momentum in Congress to delay the process and require that the DOL harmonize a fiduciary standard with the Securities and Exchange Commission.