By: Barbara Roper, CFA Director of Investor Protection
Last week, the comment period closed on the Department of Labor’s proposed advice rule, which was strongly opposed by groups representing workers, retirees, and investors concerned that it decreases the likelihood financial professionals will be held to a fiduciary standard when providing retirement investment advice and dramatically weakens the standard when it does apply. In short, it is precisely the rule for which broker-dealers and insurers have been lobbying for years.
Instead of taking a victory lap, however, these industry groups are apparently enraged that the DOL didn’t actually restore all the ways they were able to rip off retirement savers in the past. Their beef is that DOL has left open the possibility that they might, under certain very limited circumstances, be considered fiduciaries when making investment recommendations to retirement savers. Their claim, as one industry attorney put it, is that this modest expansion “would effectively reinstate” the Obama-era fiduciary rule and “thus severely harm the ability of millions of Americans to access investment assistance.”
This argument is so clearly false, one is left to wonder whether the real intent is to set up the classic Goldilocks defense. If industry groups claim the rule is “too hot,” and advocates for retirement savers argue the rule is “too cold,” DOL is likely to claim that they must have gotten it “just right.” (They did not.) But a closer read of their comment letters suggests that, despite having been given 99.9% of what they asked for, brokers and insurers are genuinely outraged over that missing 0.1%.
Reopening the Loopholes
Although the groups have lots of suggestions for how to “improve” (further gut) the standard itself, their primary issue involves the DOL’s decision as part of this regulatory package to reinstate (and reinterpret) the 1975 regulatory definition of fiduciary investment advice. Under that definition, retirement investment advice must be provided on a regular basis, and subject to a mutual agreement between the client and the adviser that the advice will form a primary basis for the individual’s investment decision, for the advice to be held to a fiduciary standard.
Brokers and insurers are clearly delighted to see that outdated definition reinstated, since it served for years to ensure that their recommendations were never held to a fiduciary standard, even when they marketed those services as trusted advice and retirement savers relied on them accordingly.
They are very disturbed, however, by indications from DOL that, going forward, it might not always interpret that definition exactly as it has in the past, particularly as it applies to rollover recommendations (recommendations to pull money out of a workplace retirement plan or pension and roll it into an IRA). For example, DOL did not reinstate a 2005 policy that took the patently absurd position that rollover recommendations by someone who is otherwise not a fiduciary would not be considered fiduciary investment advice under ERISA.
Whether the standard applies to rollover recommendations is critically important, because such recommendations are among the most consequential decisions workers make and come with huge incentives for the financial firms to recommend the rollover regardless of the worker’s best interests.
Insurers, in particular, seem to view the failure to restore a blanket exemption for their rollovers as a betrayal of the first order, even though the Department simultaneously made clear that one-time recommendations to roll money out of a retirement plan or pension to purchase an annuity would still typically not be considered fiduciary advice.
DOL did, however, indicate that rollovers as part of an ongoing advisory relationship might be considered fiduciary advice, that it might not be enough to provide a disclaimer in six-point type to evade the standard, and that firms really ought to expect that retirement savers generally are relying on their recommendations as a primary basis for their decisions.
Based on this analysis, the DOL seemed to suggest that rollover recommendations by brokers often would be captured by the definition. This clearly came as a nasty shock to members of the brokerage industry, who had convinced the SEC not to hold them to a fiduciary standard by arguing that they offer episodic, rather than ongoing, advice.
Watering Down the Standard
If the DOL were applying a rigorous fiduciary standard to such recommendations, brokers’ and insurers’ outrage might be more understandable, if no more admirable. But the proposed new exemption is anything but.
Under the proposed exemption, brokers and insurers whose recommendations fall within the definition of fiduciary investment advice would still to be permitted to engage all their usual conflicts of interest and to do so subject only to the non-fiduciary standards imposed under the Securities and Exchange Commission’s (SEC’s) recently implemented Regulation Best Interest (Reg. BI) and the National Association of Insurance Commissioners’ (NAIC’s) updated suitability standard for annuities sales.
Those are standards that brokers and insurers have strongly supported, precisely because they permit firms to operate with a minimum of “disruption” to the practices that have been so profitable to them, if not their customers, for years. So why is the prospect that DOL might hold their retirement investment advice to these same standards setting off alarm bells?
A review of industry comment letters suggests that the culprit may the requirement that financial professionals document their basis for concluding that a recommended rollover is in the retirement saver’s best interest. Neither the SEC nor NAIC imposes a similar documentation requirement, suggesting it only as a “best practice.”
That feature of the DOL proposal was suggested for elimination in virtually every letter submitted on behalf of brokers and insurers. Clearly they don’t want to have to show that analysis, even in the cursory manner anticipated by the DOL.
If that’s the explanation, we should be concerned by how desperately brokers and insurers seem to want to avoid any accountability for their rollover recommendations. Their adamant opposition suggests that the bad old days of routine inappropriate rollover recommendations could be making a comeback, despite the new SEC and NAIC rules.
But it also appears to be a gross over-reaction. With best interest undefined in the SEC and DOL rules, and defined as a suitability standard by NAIC, firms are likely to be able to get away with any minimally plausible explanation with regulators who have shown themselves extremely reluctant to second-guess such recommendations. And retirement savers are likely to see few if any benefits.
That makes the intensity of the industry’s opposition to such a weak and watered down rule something of a mystery.
Time to Start Over
After a review of the comments, however, one thing is crystal clear: DOL’s decision to reinstate the 1975 definition as a final rule, without any consideration of whether a different approach is warranted, was entirely inappropriate. The Department should withdraw the rule immediately and issue a revised proposal, one that truly closes loopholes in the definition, with adequate opportunity for all interested parties to provide input.
Failing that, Congress should step in and solve the problem for them by adopting new legislation that closes loopholes in the regulatory definition once and for all and ensures that all the recommendations retirement savers reasonably rely on a trusted investment advice, including all rollover recommendations, are held to a high fiduciary standard.