Why have wealth managers so strenuously opposed the Department of Labor’s fiduciary rule?
After all, the wealth management industry has consistently and unequivocally supported an enhanced regulatory standard of care for advisers who provide personalized financial advice to individuals. They have backed the standard, provided that:
· allows clients access to the same products and services they get today;
· allows them to use whatever adviser they choose; and
· allows them to choose how they pay for that advice, with fees or commissions.
I personally testified before Congress on behalf of our industry in support of what became Section 913 of the Dodd-Frank Act, which gave the SEC the authority to write such a standard.
So why ― ever since the Labor Department jumped in front of the SEC and wrote their own rule ― have wealth managers opposed it?
Because the Labor Department's rule is badly constructed policy. Because it flunks all the tests of client access and client choice. Because, written as it was by ERISA-focused bureaucrats who know little about the working of the capital markets, it conflicts with existing securities regulations created and enforced by the SEC and FINRA. Because, applying as it does only to retirement accounts, it further complicates and fragments an already confusing regulatory regime that consumers can’t and don’t even begin to understand. Because it effectively outsources and delegates enforcement of the rule to plaintiffs' attorneys by giving them the almost unconstrained ability to bring class action lawsuits against individual advisers and wealth management firms.
But, most important, the rule will hurt, not help, individual clients, particularly those in the middle class.
Already, in anticipation of the rule taking effect this year, we have seen firms:
· eliminate commission-based IRAs;
· eliminate access in IRAs to certain products, like mutual funds;
· restrict the ability of advisers to offer advice; and
· raise the minimums on assets required to maintain a relationship with their adviser.
In the UK, where a similar rule has been in place for several years, an estimated 60,000 investors have lost access to financial advice.
The wealth management industry doesn’t oppose a fiduciary standard. Every professional who manages money on a discretionary basis for their clients operates as a fiduciary. Most major wealth management firms operate not just as brokerage firms but as registered investment advisers and derive the majority of their revenues from fiduciary activities. Wealth managers know well and fully understand what it means to be a fiduciary.
What we oppose is the Labor Department's flawed and unworkable version of a fiduciary standard, which applies only to IRAs. And which makes it all but impossible to continue to offer the commission-based accounts preferred by 98% of individuals with less than $25,000 to invest.
IN THE BEST INTEREST
The issues created by the fiduciary rule make it clear just how complicated applying a fiduciary standard is to commission-based accounts. Those same complications have hindered the SEC's efforts for the past seven years to write their fiduciary rule.
Wealth managers support and are advocating for a uniform best interest standard that enhances investor protection by raising the bar from the existing “suitability” standard to a more robust “best interest” standard.
We continue to advocate for the SEC to take the lead in crafting such a standard and knowledgeably applying it to products, services and activities that have never before been subject to a best interest standard.
We continue to advocate for a standard that is transparent and which everyone can understand. This standard would be aligned with and complement existing fiduciary requirements for investment advisers, and apply to all advisers and all the assets in all the accounts they help manage for their clients.
There is a retirement savings crisis in America. Savers who work with advisers end up with 58% more in savings after six years than those who don’t, according to a 2012 study by Cirano, a research organization. We should be empowering advisers to add value and help their clients figure out how to manage their finances so they don’t run out of money.
A best interest standard that does so has always had, and will continue to have our support. A DoL rule that restricts client access to advice and limits their choices never has and never will.
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