Support for the Labor Department's Conflict of Interest Rule
From Consumer Groups and Advocates
“Putting the customer first is a core TIAA value, and we believe adhering to a best interest standard under the Department’s new regulation is an important way to help more people build financial well-being…Based on our preliminary analysis, it appears the Department has gone a long way toward making the best interest standard the industry standard. TIAA supports this direction, and we look forward to reviewing the full rule.”
“My attitude is we live in the real world and while perfection would be terrific, I think substantively this is extraordinarily important and powerful…”
“Clearly, we are supportive of a uniform fiduciary standard. This raises the bar in terms of doing right by the client and as a result, may curb certain sales practices.”
“I’ve seen first-hand that the wheels of government can move slowly – especially when there are thousands of lobbyists and many millions in campaign contributions working against progress. But the new fiduciary role from the Department of Labor is a big step in the right direction. The financial industry is one of the least trusted in America – for some very good reasons. Too often, conflicts of interest lead to a 'heads I win, tails you lose' game where people’s very livelihoods are on the line.”
“Overall, we think it’s a very good day for consumers. We know how important retirement security is to our members. They have tremendous economic anxiety and the step that is being taken today is going to relieve them of that anxiety. They can know they are getting advice that is the best for them and not for the person selling them their products.”
“From our point of view, a rule that preserves the core protections but is easier for industry to implement is a win for everyone. We want financial firms to be able to operate under the best interest contract exemption. The changes that the DOL has made to make the contract easier to implement…really should address some of the industry’s biggest complaints about the workability of the rule.”
“While we will carefully review the details of the rule in the coming days, our initial assessment is that it will at long last require all financial professionals who provide retirement investment advice to put their clients’ best interests ahead of their own financial interests. By taking this essential step, the rule will help all Americans — many of whom are responsible for making their own decisions about how best to invest their retirement savings — keep more of their hard-earned savings so they can enjoy a more financially secure and independent retirement.”
In the News
In finalizing this rule, the Department pursued an undeniably thorough, thoughtful, and transparent process. It conducted hundreds of meetings and provided the American public nearly six months to weigh in on its draft proposal. We believe the Department's product reflects the thoughtful input received during the process.
The Department's proposal will help to ensure that hardworking Americans, who conscientiously set aside money for retirement throughout their entire careers, don't outlive what they saved. These Americans may not have much experience in managing investment portfolios, so they place their faith and their financial futures in the hands of their financial advisors.
We believe it is reasonable for these Americans to have complete confidence that their advisors will not prioritize higher compensation over their best interest. That is the promise of the fiduciary standard, and it is what the Department of Labor's "conflict of interest" rule delivers.
Bank of America Corp's Merrill Lynch wealth management chief John Thiel said a Department of Labor rule aimed at protecting financial advisory clients addresses many practical concerns raised by the financial services industry.
"We are pleased that Secretary Perez and the Department of Labor staff have worked to address many of the practical concerns raised during the comment period," Thiel said in a statement sent by a spokeswoman for the bank. Secretary Perez refers to Secretary of Labor Thomas Perez.
The rule, requiring broker-dealers who provide advice to follow a "fiduciary standard," will take full effect on Jan. 1, 2018, according to the Labor Department.
Upon initial review of the Department of Labor fiduciary rule, LPL Financial is pleased by what appears to be positive changes implemented in the rule and appreciates the Department of Labor’s willingness to listen to concerns about protecting choice for investors. In particular, we are encouraged by the increased time frame for implementation, the ability to easily enter into the Best Interest Contract with our existing clients, and the freedom to recommend any assets that are appropriate to help investors save for retirement.
While our review is still in progress, with the rule in hand, we now have greater clarity and can begin quickly implementing solutions that will help investors retain access to the objective financial guidance they need. As a result of LPL’s preparation over the past year, the firm has already announced several changes to position LPL and its advisors for growth by offering choice and flexibility to serve a range of investors seeking both ongoing and occasional advice. We look forward to introducing additional capabilities over time that will empower LPL advisors to support even more investors with this fundamental need.
The new fiduciary rule announced Wednesday by the Department of Labor is a major coup for investors, said Jon Stein, founder and CEO of the robo-advisor Betterment.
"We support this rule for a lot of reasons. We've actually been engaged and involved with the Department of Labor and the OMB for awhile supporting this rule," Stein told CNBC's "Closing Bell" on Wednesday. "It's an unambiguous public good. This is one of the most exciting things to happen for investors in 40 years."
By holding investment professionals to what is called a "fiduciary standard," the rule is intended to change the way people get advice on how to invest that money.
The Labor Department, which regulates tax-advantaged savings accounts, is bringing more investment advisors under an already existing rule known as the "fiduciary standard," which requires financial advisors to put their clients' best interests ahead of their own profits.
As of now, only financial professionals and firms registered as investment advisors with the Securities and Exchange Commission or individual states follow that rule. Brokers, insurance agents and most other financial professionals are held to a "suitability standard" which gives them significant wiggle room. That means they only need to make investment recommendations that are suitable for their clients, but not necessarily the best option.
While the new rule appears "sound" in theory, its implementation may not necessarily benefit investors, said Gregory Sichenzia, a securities lawyer with Sichenzia Ross Friedman Ference.
"Overall, there's going to be a huge regulatory cost to this which we believe is going to be passed on ultimately to the consumer," said Sichenzia in the same "Closing Bell" segment.
Still, Stein said that having consumers' interests aligned with their investment advisors' will reduce costs over time and even help restore confidence in the financial system.
"If you can trust anyone who holds themself to be an advisor, if you can trust them to be acting in your best interest, that's great for everyone seeking financial advice."
Six years in the making, rules to force financial advisers to do what's best for their clients — rather than themselves — are finally a reality, and they could potentially save investors $40 billion over 10 years, according to the Labor Department.
The department on Wednesday unveiled its new rules designed to protect owners of retirement accounts — including for the first time IRAs — from stockbrokers, insurance agents and other types of financial advisers who "put their own profits ahead of their clients' best interest.”
The rules — which are set to go into effect starting next April — require retirement advisers to meet a higher "fiduciary" standard when selling investments (mutual funds) and products (variable annuities) to retirement account owners. In the past, many advisers had to abide only by a suitability standard.
"The DOL has indeed taken a major step toward a more secure and dignified retirement for millions of Americans," says Harold Evensky, chairman of Evensky & Katz/ Foldes Financial. "It seems that the Department of Labor's years of effort will be a major win for investors."
Under the Labor Department’s definition, any person — be they a broker, registered investment adviser or insurance agent — paid to give advice to a plan sponsor (an employer with a retirement plan, for instance), plan participant or IRA owner is a now considered fiduciary. The new rule would also apply to advisers who help workers decide whether to roll over their money from an employer-sponsored retirement plan, such as a 401(k) or 403(b), to an IRA.
Proponents have praised the new rule but suggest it might take some time for investors (and advisers, too) to understand the consequences. “The key issue is that the Labor Department rule puts investors in charge, but investors may not yet know it,” says Knut Rostad, president of the Institute for the Fiduciary Standard.
Meanwhile, opponents of the new rule, including Rep. Scott Garrett, R-N.J., weren't pleased. Critics say the cost of advice will rise and that there will be fewer advisers serving an ever-growing number of people who need help with their investments and retirement plans. "Washington doesn’t need to put another roadblock between people and their financial goals," Garrett said in a statement. "By ignoring the advice of the SEC and Congress, the DOL’s rule will increase the cost of retirement advice for lower- and middle-income Americans while creating a preferred class of rich investors."
Breaking it all down: Fast facts for investors on rule change
Proponents, however, say the new rule will change the advice industry/profession for the better. Robo-advisers will likely start to serve the needs of investors who want low-cost advice that complies with the new fiduciary rules and who aren’t necessarily being served by advisers today. Brokerage firms will likely launch more fee-based accounts and start selling no-load variable annuities. Plus, it’s likely advisers who largely earn a living by not acting in their client’s best interest will exit the business.
Exemptions exist. According to the Labor Department, being a fiduciary simply means that the adviser must provide impartial advice in their client's best interest and cannot accept any payments creating conflicts of interest unless they qualify for an exemption intended to assure that the customer is adequately protected.
In essence, advisers when selling commission products and investments must document to clients that they are acting in their best interest.
Carve-outs. The new rule carves out education from the definition of retirement investment advice. That means advisers and plan sponsors can continue to provide general education on retirement saving across employment-based plans and IRAs without triggering fiduciary duties.
What new investing rules mean for consumers
Recourse available. If advisers and firms don’t adhere to the standards, the Labor Department says, retirement investors will be able to hold them accountable — either through a breach of contract claim or under the provisions of ERISA.
Resistance likely. The new conflict-of-interest/fiduciary rule will face resistance in the form of lawsuits and legislation designed to block it from becoming a reality. Critics say the cost of advice will rise and that there will be fewer advisers serving an ever-growing number of people who need help with their investments and retirement plans.
Change for the better. That may be true, but proponents also say it’s possible the new rule will change the advice industry/profession for the better. Robo-advisers will likely start to serve the needs of investors who want low-cost advice that complies with the new fiduciary rules and who aren’t necessarily being served by advisers today. Brokerage firms will likely launch more fee-based accounts and start selling no-load variable annuities. Plus, it’s likely advisers who largely earn a living by not acting in their client’s best interest will exit the business.
WASHINGTON—The Obama administration on Wednesday rolled out a long-anticipated new rule aimed at transforming the way the financial industry delivers retirement-savings advice—but offered significant concessions to critics that some brokerages and asset managers welcomed.
The fiduciary rule is aimed at curbing billions of dollars in fees paid annually by small savers who transfer money out of 401(k)s—which are required to operate in their best interests—and into individual retirement accounts, which aren’t currently bound by such protections. There, savers may be working with financial-product salespeople who earn more selling certain products and don’t have to put their clients’ interests before their own.
Cetera Financial Group, an independent broker-dealer that works with more than 9,000 financial advisers and originally opposed the rule, said the final rule shows that the Labor Department has listened to some of the brokerage industry’s early criticisms. Initially, the broker-dealer had opposed the rule, saying in a comment letter in July that the initial draft was “unwarranted” and would “lead to a number of negative unintended consequences.”
The Labor Department’s final rule was formally announced Wednesday morning at the Center for American Progress, a liberal think tank with close ties to the Obama administration.
“Today’s rule ensures putting the clients first is no longer a marketing slogan,” said Labor Secretary Thomas Perez. “It’s now the law.”
The event was attended by roughly 200 people, including a handful of Democratic members of Congress and those representing consumer groups, in addition to Labor Department staffers.
“Sometimes government works for the people and today was one of those days,” said Sen. Elizabeth Warren (D., Mass.), who has been an ardent supporter of the regulation. Ms. Warren said the new rule’s benefits are already felt by investors, noting that some financial companies have started lowering fees in anticipation.
Among them, she said, was LPL Financial Holdings Inc., a large company made up of independent financial advisers, which cut account fees by up to 30% last month.
“It’s an enormous victory for hardworking Americans,” Ms. Warren said.
LPL, which provides brokerage services to more than 14,000 independent advisers, said it was pleased with the Labor Department’s changes to the rule. “In particular, we are encouraged by the increased time frame for implementation, the ability to easily enter into the best interest contract with our existing clients, and the freedom to recommend any assets that are appropriate to help investors save for retirement,” it said.
The original proposal had called for an eight-month implementation period, a timeline that many in the financial industry had decried as being too short. The final rule requires firms to be compliant on several broader provisions by April 2017 and fully compliant by Jan. 1, 2018.
Jeff Masom, co-head of sales for asset manager Legg Mason Inc. said the Labor Department had “certainly made a lot of concessions” including giving firms more time to comply and grandfathering in existing investments.
The Democratic lawmakers at Wednesday’s announcement said they expected Republicans to make more attempts to undermine the rule, possibly by attaching a provision to unrelated legislation. They pledged to fight against such efforts.
Meanwhile, Labor Department officials said they were ready to combat possible legal challenges from the industry. “We are confident that we have put together a rule that will survive all challenges,” Phyllis Borzi, an assistant labor secretary who spearheaded the rule-making, told The Wall Street Journal.
About $14 trillion in retirement savings could be affected by the rule, which requires stockbrokers providing retirement advice to act as “fiduciaries” who will serve their clients’ “best interest.” That is stricter than the current standard, which only says they need to offer “suitable” recommendations, a standard that critics say has encouraged some advisers to charge excessive fees or favor investments that offer hidden commissions.
Still, reflecting intense lobbying from the financial industry, which has fought the regulation since it was first proposed six years ago, the final version includes a number of modifications.
Among them: extending the implementation period of the rule beyond the end of the current administration; giving advisers more flexibility to keep touting their firm’s own mutual funds and other products; and curbing the paperwork and disclosure requirements.
Still, the changes, rather than mollifying critics, could give opposing companies and skeptical lawmakers more time to try to dilute the rule further or even try to kill it altogether under the new administration.
One of the fiduciary rule’s most vocal opponents said it has concerns about the final draft. The Securities Industry and Financial Markets Association, an industry trade group, said it remains “concerned that the DOL’s rule could force significant changes to current relationships, which may leave clients without the help they need to prepare for retirement, at a time when we all agree that more can and should be done.”
After the Labor Department released the preliminary version of the rule last April, it received more than 3,000 public comments. “With every meeting we took, every comment letter we read…we got smarter and we listened, we learned and we adjusted,” Mr. Perez said on a conference call with reporters this week before the rule was announced. “You’ll find that reflected in the final rule.”
The new rule will be the centerpiece of President Barack Obama’s efforts to help middle-class families build retirement savings in an era when few have guaranteed pension benefits. The administration says retirement advice offered by conflicted financial advisers costs American families $17 billion a year, and pushes down the annual returns on their retirement savings by one percentage point—figures that financial-industry leaders say are greatly inflated.
The broad agenda is shaping up to be a legacy issue for the president, with the implementation of steps such as the launch of a no-frills savings program called “MyRA” and beefing up state-based retirement plans.
“With the finalization of this rule, we are putting in place a fundamental principle of consumer protection into the American retirement landscape,” Mr. Perez said.
A core part of the rule says that if advisers want to continue receiving commissions and other types of compensation for selling specific products, they and their clients need to sign a “best interest contract” in which the adviser pledges to put the client’s interests first.
But the final version eases the limits around that provision a bit. Among the concessions is a new road map providing a way for firms to sell a limited lineup of their own products.
Mr. Perez said, for example, that an employee of MetLife Inc. wouldn’t be obligated to advise clients about offerings from a competitor, like New York Life, so long as the adviser has a reasonable basis to believe that MetLife’s own products are in the best interests of the clients.
To cut down on paperwork that industry officials said would be too burdensome, the new version of the rule only requires that firms sign one best-interest contract with clients when they open an account. Large asset managers had complained that, under the original rule, individual advisers and customer-service representatives at call centers would have to sign a new contract each time they talked to the customer.
The final rule also makes it easier for firms to deal with existing clients. Companies can simply send a notice to existing clients telling them about the firm’s new obligations without requiring them to sign a new contract, Mr. Perez said.
The latest rule also clarifies that brokers and others can continue offering a wide range of guidance without having to clear the “fiduciary” bar for “advice.” It specifies that investor education isn’t considered advice, allowing companies to continue providing general education on retirement savings.
Also excluded from the advice category are general circulation newsletters, media talk shows and commentaries as well as general marketing materials.
While the government made concessions in some areas, it actually tightened rules for one key sector that could make regulations more burdensome on insurers. The earlier version of the policy allowed advisers and insurance agents to sell certain types of annuities without having to sign the best-interest contract. But the final version adds so-called fixed-indexed annuities to the pool of products that now would require a signed contract before sale.
Wirehouse and regional B-D executives are expressing confidence in the amended fiduciary rule, but some advisors are questioning the wisdom behind the new regulations.
Executives and compliance experts are still parsing the amended rule's hundreds of pages. But based on his initial review, Merrill Lynch's John Thiel was pleased the new regulation addresses several "practical concerns" made during the comment period.
Thiel also reiterated his firm's support for "a consistent, higher standard for all professionals who advise the American people on their investments."
His comments were picked up later on Wednesday by Secretary of Labor Tom Perez, who cited them at an event unveiling details of the rule.
But some advisors remained skeptical that the rule would upset business relationships.
"I think it's a pain in the neck. A thorn in one's side. I'm shocked it got approved," says an advisor with Morgan Stanley, who asked not to be named because he did not have the firm's permission to speak publically.
"If your client wants to buy a stock and believes it's going to go higher, it's nice to have IRA money to do that, purely on a transactional basis," says the advisor, whose business is only 1%-2% transactional.
"Isn't it foolish?" he asks. "It seems they want to strip that away."
Branch managers and other executives set out to address similar concerns voiced by advisors.
One manager at a large regional brokerage, who asked not to be named because he also was speaking without permission from his firm, said some of his brokers were "dinosaurs" because they were strongly committed to a commission-based model.
However, some industry watchers disagreed with the characterization that brokers holding on to commissions were behind the times. Recruiter Danny Sarch says many advisors still work on commissions in the best interest of their clients.
"The idea that every client is the victim of the preying, shrewd broker is an awful stereotype. It makes me nauseous," recruiter Sarch, president of Leitner Sarch Consultants, says.
Raymond James Complex Manager Tom Hirsch wasn't going to delay reaching out to his advisors. Hirsch, anticipating the rule's announcement this week, sat down with more than two dozen advisors to meet with Scott Stolz, the firm's president of insurance groups, and with representatives from the asset management team.
"I'm applauding the new rule. It will be good for clients. It will be good for the firms, and I think a place like Raymond James will come out a winner," he says.
A Raymond James spokeswoman says the firm had suggested improvements to the original proposal. Like its competitors, Raymond James is now reviewing the final regulation to see how it can best support its advisors and keep costs down for clients.
"We believe that carefully studying the rule will take time," she says, "but are hopeful that a thoughtful response will yield the best outcome for clients and their advisors."
Merrill Lynch attempted to allay advisor concerns and asked them to identify clients who may be affected by the new rule, an advisor said after receiving an internal corporate email with the information.
"Honestly, I think it's a good thing," said the advisor. He requested anonymity because he wasn't authorized by the firm to speak to the press.
"You want to protect the people. In some cases, it makes more sense to keep things in a retirement account," the advisor said. "Yeah, it hurts the industry, but it is what it is."
Today the Department of Labor announced its long-anticipated fiduciary rule, designed to encourage investment firms to offer superior financial advice to families at lower cost. As a strong advocate in favor of these changes, Personal Capital re-affirms its commitment to the rule.
Personal Capital CEO, Bill Harris, was invited to Washington DC for the official launch of the fiduciary rule, along with Department of Labor Secretary Tom Perez and Senators Cory Booker and Elizabeth Warren.
What the ruling will require
Today, Americans hold $3.1 trillion in traditional pension plans, $5.3 trillion in 401(k)-type plans and $7.2 trillion in IRA accounts*. The new rule will legally require any financial adviser who advises clients on retirement accounts -- primarily 401(k)'s and IRA's -- to act as a true fiduciary, providing financial advice that is in their clients' best interest. Prior standards enabled advisers to recommend investments or products that were just considered "suitable" for an investor's needs. That means advisers can recommend the funds that pay them the biggest kickback, not necessarily the ones that are in the client's best interest. Bill Harris comments:
"This rule will be effective. For too long, many people have relied on brokers rather than advisors. Brokers are salespeople, who can sell whatever products make them and their firms the most money. A true advisor recommends solutions that are best for you, rather than them - working as a true fiduciary. Brokers and advisors can't act in someone's best interest unless they know what those interests are. That means taking the time to get to know the customer, learn their financial histories as well as their long-term goals."
Since inception, Personal Capital has acted as a fiduciary to its clients. As a Registered Investment Advisor, Personal Capital not only follows the fiduciary standard but embraces it as part of its mission to provide conflict-free financial advice.
What the ruling will mean for the future
At a time when over half over US adults (51%) feel overwhelmed when they think about the amount of money they need to save for retirement, it's critical that Americans can count on honest financial advice that will help them prepare for a secure retirement. While Personal Capital anticipates minimal, if any, changes to their business model due to the new rule, traditional financial institutions, as well as robo-advisors, will likely have to adapt.
With the new rule demanding transparency between financial advisers and clients, Harris sees technology as the only way forward. Advisers will be required to provide advice in the best interest of their clients, and the only way to assess their best interests is by having a view of their entire financial advice, which is made possible by the power of technology.
About Personal Capital
Personal Capital is a next generation financial advisor. The company melds technology with professional advisors to help households manage their wealth. Personal Capital's free app is available for iPhone, iPad and Android.
Executives in the $10-billion-a-year nontraded real estate investment trust industry likely were doing handstands Wednesday morning after the Department of Labor released its streamlined final version of a regulation that would raise investment advice standards for retirement accounts.
In the DOL's initial proposal in April 2015, it named certain asset classes that could be included in retirement accounts. Nontraded REITS were not on the list, effectively precluding brokers from using them in individual retirement accounts. Brokers have long sold nontraded REITs to retirees as a way for clients to create an income stream, which was much needed in recent years as interest rates hovered near zero.
In the final version of the fiduciary rule, the DOL has eliminated its list of asset classes, opening the door for nontraded REITS to continue to be placed in those accounts.
Indeed, nontraded REITs were mentioned specifically in the White House fact sheet on the final DOL rule: “Commenters asked the department to expand the proposed exemption to apply to products not listed in the exemption (such as listed options and nontraded REITs), and to permit recommendations to sponsors of participant directed plans like 401(k)s.”
Sales of nontraded REITs are allowed under the “best interest contract” exemption. “Advisers recommending any asset – not just those on an asset list included in the proposal – can take advantage of the [best interest contract] exemption to continue receiving most common forms of compensation,” according to the White House fact sheet.
In a chart showing the differences between the DOL's 2015 fiduciary rule proposal and the final rule, the DOL made this distinction clear. Under the heading, "What critics said about the proposal," it said, “By listing only certain asset classes to be covered by the BICE, the proposal limits investor choice." Under the heading "What the DOL did in the final," it stated, “The department has eliminated the list so that advice to invest in all asset classes is covered by the BICE.”
Sales of nontraded REITs, a high-commission product that typically pays brokers a 7% sales commission, slumped by almost 33% in 2015 compared with a year earlier.
Now, 2016 could wind up being a better year for nontraded REITs.
Executives in the nontraded REIT industry were not about to declare a full-blown victory Wednesday morning, as the White House had issued only a truncated fact sheet and the final rule was not to be published until close to noon. But they clearly liked what they saw.
“We are certainly pleased that the DOL incorporated input from a variety of sources in order to put forth a rule they believe is workable,” said Mark Goldberg, president of investment management for W.P. Carey Inc., a listed REIT that also manages and sponsors nontraded REITs. “Most importantly, from our perspective, it's a rule that incorporates choices of various asset classes for use in the BIC exemption.”
“It is a very positive day for the [Investment Program Association] and its members,” said Anthony Chereso, the CEO and president of the IPA, a trade group for the direct investment industry, which includes nontraded REITs, nontraded business development companies and private placements. “We put forth a strong argument and our position was well-represented by a coalition of members. The IPA's initial ask of removal of the [asset class] list was accommodated, based on the preliminary information. Essentially, it's asset neutral.”
“Our assessment all along was that there was a 50-50 chance that the industry would get relief from the earlier proposal,” said Kevin Gannon, president and managing director of Robert A. Stanger & Co. Inc., an investment bank that focuses on nontraded REITs. “It's a good outcome all around for the space. The DOL didn't exclude nontraded REITs. We think that's good and rational.”
The Labor Department announced new rules Wednesday that are expected to have a big effect on how Americans save for retirement. The regulation extends to individual retirement accounts a revamped version of the “fiduciary” standard that governs corporate retirement plans like 401(k)s.
Advisers generally will have to act in the best interest of their clients when providing investment guidance. Previously, brokers’ recommendations were only required to be “suitable”—a standard that critics say has encouraged some advisers to sell high-fee products that pay them high commissions.
Here are reactions from industry firms and associations, analysts, politicians and others on the final version of the regulation.
Cetera Financial Group, an independent broker-dealer that works with more than 9,000 financial advisers, said that while it has been training its advisers to prepare them for the initial draft of the rule, the final rule shows that the Labor Department has listened to some of the brokerage industry’s early criticisms. “It appears the rule includes modifications that indicate the DOL has considered some of the industry’s concerns,” said Adam Antoniades, president of Cetera. “We will be studying the newly released details...and will announce a number of our initiatives to support advisers in this area in the coming weeks.” Initially, the broker-dealer had been opposed to the rule, and said in a comment letter to the Labor Department in July that the initial draft was “unwarranted” and would “lead to a number of negative unintended consequences.”
“We are pleased that Secretary Perez and the Department of Labor staff have worked to address many of the practical concerns raised during the comment period,” said John Thiel, head of Bank of America Corp.’s Merrill Lynch unit. “Most important, we support a consistent, higher standard for all professionals who advise the American people on their investments. As we study the details of the final rule, we hope to continue what has been a constructive dialogue with the Department about how to implement a best interest standard effectively and efficiently for the benefit of our clients, advisers and shareholders.”
One of the fiduciary rule’s most vocal opponents said it still has concerns about the Labor Department’s final draft. The Securities Industry and Financial Markets Association, an industry trade group, said it remains “concerned that the DOL’s rule could force significant changes to current relationships, which may leave clients without the help they need to prepare for retirement, at a time when we all agree that more can and should be done.” The group, known as Sifma, has spoken out against the rule on numerous occasions since it was proposed last year, saying it was a costly burden on firms and would curtail small-balance retirement savers’ access to financial advice. Sifma said it was still reviewing the final rule to gauge its impact.
LPL Financial Holdings Inc., which provides brokerage services to more than 14,000 independent advisers, said it was pleased with the Labor Department’s changes to the fiduciary rule. “In particular, we are encouraged by the increased time frame for implementation, the ability to easily enter into the best interest contract with our existing clients, and the freedom to recommend any assets that are appropriate to help investors save for retirement,” LPL said. The firm has generally supported the Labor Department’s efforts, saying its proposal last year was an improvement over the department’s initial draft in 2011. But its chief executive, Mark Casady, had said the rule’s initial requirements around the best interest contract, such as projecting costs, were too onerous for firms to implement. LPL added it plans to quickly implement changes required under the rule.
The Labor Department’s fiduciary rule is an important step in providing more disclosure to investors, but “this should really be viewed as a step one,” says Terry Siman, a lawyer and a managing director with wealth-management firm United Capital Financial Advisers LLC who has supported the rule. “It takes a long time to make the cultural shifts” of moving the industry toward providing greater transparency, he said. Mr. Siman added the new rule would give retirement savers a boost by putting their interests ahead of advisers, while also empowering them to ask for more information around costs and conflicts of interest. “The consumer ultimately will benefit, it’s just going to be first and foremost the responsible consumers who know” to ask their advisers for that additional information,” said Mr. Siman.
Matt Sommer, vice president of the retirement strategy group at Janus Capital Group who works with advisers to 401(k) plans, said he was surprised the Labor Department delayed the implementation of the new rule until Jan. 1, 2018, and eliminated certain disclosure requirements. Still, he added, “the framework remains largely in place. Thematically, the goal was to put clients’ interests ahead of those of advisers and nothing has changed with respect to that.”
Jeff Masom, co-head of sales for asset manager Legg Mason Inc. said the Labor Department had “certainly made a lot of concessions” including giving firms more time to comply and grandfathering in existing investments. While the rule is likely to require “a lot of time and expense” from intermediaries, Mr. Masom said Legg Mason is optimistic about the impact of the rule on its business. He said the firm benefits from not offering retirement plan record-keeping services and being a “pure” investment manager with a mix of products, some of which are low-cost. “Competing with passive has always been on the table. Active managers always has to justify their fees. Nothing has changed on that front,” Mr. Masom said.
Scott Cooley, direct of policy research at investment-research and investment-management firm Morningstar Inc., said: “One of my fears was that people who had already had paid a commission on their retirement accounts would be moved into fee-based accounts and then have to pay 1% of assets a year after they had already paid a commission.” But the DOL has “indicated that it would have to be in the best interest of the client to shift them to a fee-based account from a commission-based account. That’s unambiguously pro-consumer.” Mr. Cooley also said that because the final rule incorporates the financial-services industry’s comments, “It will be harder for people in the industry to argue that the DOL didn’t take their feedback into account. I suspect the DOL drafted this with an eye towards potential court challenges.”
Evensky & Katz
Harold Evensky, chairman of financial-advisory firm Evensky & Katz and a long-standing supporter of the rule, said, “I figured they [the Labor Department] would get stopped somewhere along the line” by opposition to the regulation, adding, “I have already seen from my allies on the ‘fiduciary side’ some concerns about the modifications” in the final rule. “My attitude is we live in the real world and while perfection would be terrific, I think substantively this is extraordinarily important and powerful” for consumers, he said. Mr. Evensky, who champions the fee-only, fiduciary approach to financial advice and planning and sees the rule as supporting his business model.
Investment Company Institute
Paul Schott Stevens, president and CEO of Investment Company Institute, the mutual-fund industry trade group, said: “While we continue to believe that a ‘best interest’ standard should be applied through legislation, it is apparent that the Department of Labor has revised its proposal in numerous ways. We are reviewing those changes to see if they address our concerns about the unquestionable negative impact of the original proposal on retirement savers.
“From what we have heard and read and the conversations we have had with the secretary and others, I think the [Labor] Department has made sincere efforts to streamline the original rule and make it easier for the industry to accommodate to the rule and minimize the unintended consequences and cost of complying,” said Christopher Jones, chief investment officer at Financial Engines, Inc., a Sunnyvale, Calif., company that mainly manages 401(k) accounts and IRAs for participants who want investment help. “The core elements remain focused on making sure anybody who is providing advice in a retirement context does so as a fiduciary. We think that’s an unqualified win for the public and will ultimately benefit the industry, as it realigns to be more consumer-friendly.”
American Council of Life Insurers
“In our effort to help fix the 2015 proposal, we alerted the Department of the harm it would impose on lower- and middle-income workers preparing for retirement,” said Dirk Kempthorne, president and CEO of American Council of Life Insurers, a trade group. ““As we carefully review the final regulation, we will determine if necessary revisions have been made to avoid adverse unintended consequences for America’s savers.”
Morgan Stanley said the Labor Department’s final version of fiduciary rules were “meaningfully softened in several aspects” from the original proposal, “which we see as good news for those companies impacted by the rules.” Most factors previously highlighted as problematic were addressed, Morgan Stanley says, while the timeline for implementation is extended. Insurers still face “higher compliance and likely litigation costs as a result of the standard.” But Morgan Stanley sees the changes in the final rule as positive for Ameriprise, Principal, Voya and Lincoln.
In an unexpected positive change for the industry, RBC Capital Markets said in a research note, the requirement that financial advisers enter into a separate fiduciary contract with customers when dealing in the retirement area got scrapped. Another positive: The Labor Department expanded the universe of 401(k) and other retirement plans that would be exempt from the new rule. The draft proposal would have covered plans under $100 million in assets, while the final rule drops that threshold to $50 million. RBC said annuity companies including Lincoln, MetLife and Prudential “would still see a negative hit to variable annuity sales—although the impact would likely be slightly less than if the draft had been left unchanged.”
Scaling back aspects of the rule will likely boost the stocks of the very firms most affected by the tighter restrictions, a team of researchers at UBS Group AG said in a research note. “While the thrust of the rule remains unchanged and we still see longer-term headwinds, we believe the rule’s softening could provide a relief rally in many of the most impacted stocks including asset managers, life insurers and [independent broker-dealers],” the UBS researchers wrote. They based their analysis on a fact-sheet distributed by the Obama administration.
“On the margin a few things were a little more positive, but the core rule will still be a net negative for traditional asset managers. It will encourage more money to flow into passives, ETFs and low-cost funds, which is not good for traditional asset management profitability,” Craig Siegenthaler, an analyst at Credit Suisse Group AG, said of his initial impression of the rule. Mr. Siegenthaler added that he expected a shorter implementation period for the rule and questioned whether the longer time frame might open the door for a new president to significantly change or pull back the regulations.
Despite “modest positive changes” for companies in the Obama administration’s new rule for minimizing conflicts of interest in dealing with retirees’ savings, investment bank Keefe, Bruyette & Woods said it thinks that litigation to block the rule is possible. Lawsuits would probably be based on Administrative Procedure Act, which governs how federal agencies propose and establish regulations, it said. Suing parties would likely claim that the fiduciary rule is arbitrary and capricious. In general, “we doubt the lawsuits will succeed,” it says. However, lawsuits focused on the generally unexpected inclusion of “indexed annuities” might have “a greater chance of success,” as the Labor Department hadn’t proposed changing their treatment last year. The firm said it thinks Congress blocking the rule is “a longshot” because “too few Democrats would vote against the president.”
Insurers woke up this morning to learn that the Labor Department’s toughened approach to dealing with retirees’ savings dollars isn’t “as onerous” as feared, Barclays equity analysts conclude. “Still, we anticipate life insurers, annuity providers, and financial advisors will likely face some downward pressure on revenues and upward pressure on expenses as a result of the new rules. The potential still exists for the financial services industry lobbyists to litigate the new DoL rules, but we would anticipate this only extends the timeframe for implementation.” Barclays says insurers most exposed to the rule are Ameriprise Financial Inc., Lincoln National Corp., MetLife Inc. and Prudential Financial Inc. Least exposed: Aflac Inc. and Torchmark Corp.
“At first blush, it appears that the DOL’s final fiduciary standard rule has been softened more than originally expected which should be viewed as a broad positive for the industry,” Isaac Boltansky, a policy analyst at Washington, D.C.-based Compass Point Research & Trading LLC, wrote in a research note. He added, however, that he still expects a legal battle over the rule and that the new standards will “usher in significant operational shifts for the retirement management industry.” Mr. Boltansky said a longer timeline for implementing changes as well as some of the the procedural changes in the rule were “incremental positives” for firms including LPL Financial Holdings Inc., Raymond James Financial Inc., Waddell & Reed Financial Inc., Ameriprise Financial Inc. and Primerica Inc.
Bing Waldert, managing director at Cerulli Associates, a research firm that specializes in the asset-management industry, said the final rule “takes a little pressure off broker-dealers. The challenge of this was going to be that if you are Merrill Lynch or LPL, or another large broker-dealer, this was going to dominate anything you did over next eight months. You would have had to direct all of your technology and project management resources to complying with this rule. It’s probably still going to be a hustle for these firms, but they have a little more time to comply.”
Companies that manage money for retirement savers rallied after investor protections championed by President Barack Obama appeared weaker than expected.
Insurer Primerica Inc. and brokers including Ameriprise Financial Inc. and LPL Financial Holdings Inc. that recommend investments to 401(k) plans or IRAs gained Wednesday. LPL rose 5.7 percent to $24.59 at 1:45 p.m. in New York while Primerica climbed 8.8 percent to $46.67, the biggest gain for the insurer since 2010. Stifel Financial Corp. gained 5 percent to $29.57.
While the Obama Administration contends the rules will help protect investors from conflicted advice and high fees, analysts said the changes aren’t as sweeping as expected. Both LPL and Primerica faced some of the biggest challenges under earlier versions of the rule since they sell investments that generate commissions. But the rule announced today allows commissions if brokers disclose conflicts of interest and put clients’ best interests first.
“The summary of what’s come out so far is a bit more lenient and has more changes than people were anticipating,” said Michael Wong, an analyst at Morningstar Inc. in Chicago, who’s still reviewing the details. “It will probably preserve more of the profits of the wealth management firms than expected.”
Scaled Back Rules
Labor Secretary Thomas Perez also scaled back the proposal issued last year by making it easier to notify customers of the new obligations, setting a final implementation date of January 2018, and making allowance for firms to recommend their own in-house products.
In 2015, LPL dropped 4.3 percent and Primerica slumped 13 percent amid speculation that the rules could crimp sales and increase compliance costs.
Ameriprise, which climbed as much as 3.6 percent, and insurer Principal Financial Group Inc. were the two biggest gainers in the 90-member Standard & Poor’s 500 Financials Index. Charles Schwab Corp. rose 1.1 percent.
The final rule, which was “not as onerous as feared,” may help eliminate some of the negative pressure that weighed on life insurance stocks, according to Barclays Plc analysts led by Jay Gelb.
LPL said it was encouraged by the Labor Department’s “willingness to listen to concerns about protecting choice for investors,” according to a statement. LPL has already reduced some prices to better position the company.
“Relative to the initial proposal some of the requirements are a bit more benign and that’s where you’re seeing some positive outcome for stocks,” said Devin Ryan, a managing director at JMP Securities LLC. “Longer term the rule is still going to make life more difficult for the industry.”
Financial firms that create proprietary products investments and recommend them to clients will be more challenged than advisers who don’t sell their own investments. So will managers that receive money from the placement of certain investments in retirement accounts. That’s because the rule forces disclosure of such third-party payments, according to Morningstar.
To adapt, some firms may develop different product lines for retirement accounts, compared with taxable ones, or create separate share classes for IRAs, Wong said. Many will have to change how their advisers are compensated and devote additional resources toward complying with the rule.
Primerica has more than 106,000 sales representatives that sell life insurance, mutual funds and annuities to middle-income households. Sellers can earn commissions on deals, a system that puts them at risk of increased compliance costs. About 59 percent of its total client assets were held in U.S. qualified retirement plans at Dec. 31, according to a February regulatory filing.
Banks Better Positioned
Shares of BlackRock Inc., the world’s largest asset manager, rose less than 1 percent Wednesday. Similar firms that provide low-cost index and exchange-traded funds will benefit because the regulation scrutinizes the recommendation of high-fee products, Wong said Tuesday.
Big banks including Bank of America Corp., JPMorgan Chase & Co. and Morgan Stanley with wealth management units were little changed in trading today. They are better positioned than some independent brokerages to adapt to the rule because of their resources to re-train advisers and comply with additional paperwork required, Wong has said.
The Labor Department guidelines weren’t positive for all companies. American Equity Investment Life Holding Co., a seller of annuities, dropped 17 percent, the most since 2008. Indexed annuity sellers may face more “onerous legal requirements," according to Randy Binner, an analyst at FBR & Co. The product accounts for more than 90 percent of AEL’s sales, he said.
AEL was the second-biggest seller of the product at the end of 2015, and Allianz SE’s North American unit is the largest, according to data from industry group Limra.
The industry is 5 years ahead of regulators.
I spent yesterday at the Tiburon CEO Summit in lower Manhattan rubbing elbows with some of the most powerful people in the wealth management industry. But the name on everybody’s lips was actually an acronym: DOL.
The Department of Labor’s final “fiduciary rule,” on conflicts of interest in retirement savings, then just 24 hours away from being released, hung over the conference proceedings like a soupy fog. We all took turns describing what the shape of it might be and enumerating the potential impact to each other’s business models, like the proverbial blind men sizing up an elephant.
For the last year or so, the industry has been bracing for the new rule, expecting a punch in the face that would force a dramatic overhaul of how they dealt with their customers, and complaining loudly and often dishonestly about how much it would hurt them. Instead, they received a love tap, in the form of the rules announced by the Department of Labor today. Stocks like Ameriprise AMP -1.74% and LPL Financial LPLA -3.11% , two of the brokerage firms that were said to have been most vulnerable, gapped higher as the details hit early this morning.
The industry and its lobbying groups haven’t had much to say about the rules so far, although that will probably change. All things considered, and in comparison with the rules as originally proposed last summer, they got off incredibly easy. In fact, the rule dovetails pretty nicely with changes that many companies on Wall Street have already been implementing for at least the last five years.
The rule doesn’t change very much on the ground. Existing accounts are largely left untouched and previously conducted transactions with the public will not require a lookback. The firms have years to get into compliance with the rule for new
Mutual fund families, retirement plan architects, broker-dealers, insurance companies and the registered reps in the trenches will all sleep easily tonight. Virtually all of the products they sell, where conflicts are a given, will still be allowed under the new rule so long as additional disclosures are made and a “Best Interest Contract Exemption” or BICE is signed off on by the client. This will be no trouble at all: Just picture the speed with which you click “Agree” everytime iTunes does a software update, and you can imagine how little of an impediment this sort of thing represents. Existing clients who’ve already been sold a product that requires a BICE will merely need to receive a written notification rather than have to repaper their accounts.
Some of the big items the industry was most concerned with became non-events. There will not be a bias toward lower-cost funds vs higher-cost funds, so long as a justification can be made for their being recommended (quality, performance, etc). Advisors will still be able to sell the proprietary products of their own firm so long as they can enunciate the reason why these products are in their customers’ “best interests” – a hurdle whose height will probably be adjusted on a case-by-case basis as no one really knows what it means yet.
The rule will only be applicable for retirement assets. It’s been estimated that there are currently $1.7 trillion worth of IRA assets that hold products requiring the contract exemption to a fiduciary standard. Handling 401(k) rollovers may become less profitable, as there will be a real test for brokerages and advisories to be able to make recommendations that are a better option than what clients already had in place. It should be noted that this retirement account scrutiny will also apply to fee-only advisors who are already held to a fiduciary standard under current regulations. Rolling over a 401(k) account where the participant is paying an all-in cost of 60 basis points into a wrap account charging 1.5% will not exactly be a slam dunk going forward.
You’ll probably see fewer annuity sales, especially in those cases where there’s absolutely no legitimate need for an annuity other than the broker feels like paying himself a 7% commission on someone’s money that week.
Firms and advisors will still be able to say “hire me” without the marketing being held to a fiduciary test. The same will apply to general market commentary and public appearances, so long as individualized advice is not being given in that forum.
Overall, the industry will be fine. Business models will adapt, behavior will be nudged further toward fiduciary-like practices, and the public will probably be somewhat better off in the end. Lawsuits will ensure compliance, as will the glare of the spotlight that will accompany the rule’s implementation as it phases into law. Assuming the industry lobby doesn’t look a gift horse in the mouth, the whole thing could happen within 60 days with the phase-in period beginning in 2017.
And here’s what I think is the main point: The market has already been moving in this direction for the better part of the last decade. Consumer preference, advisor choice and the power of the internet have been driving many of the reforms needed, way in advance of what the Department of Labor released today. The new rules just speed up several industry mega-trends–the move toward pay-for-advice instead of pay-per-transaction, the mass exodus from expensive funds into cheap index products, the growth of the independent advisor versus the shrinkage of the brokerage channel.
We were heading toward a de facto fiduciary standard regardless. The DOL’s rule, assuming Congress or the next president doesn’t block it, carves out some exemptions that let brokers and insurance companies hold onto a bit more of their ground than they otherwise would have, for a little bit longer.
For this reason, I would say the biggest winners here are lawyers, followed by some consumers, followed by the advisory firms who want to go fiduciary (they all do) but just needed to buy more time to make the transition. Now they’ve got time and the ability to hang onto a few key profit centers thanks to the exemptions that have been “streamlined” into the final rule.
It’s a workable solution that the industry can live with. Perhaps the best thing to come out of it will be an increased awareness among the public and a change in attitude among the professionals who serve them. If that is the case, you can chalk this up as a minor win for everyone.
Individual investors won some but not all of what was hoped from a sweeping new rule that tightens conflict-of-interest standards for brokers. Those brokers manage trillions of dollars in retirement accounts such as 401(k)s and IRAs, creating compliance headaches and liability issues for the financial industry.
Still, the new rules are more lenient than the financial industry had feared they would be. And that leniency led investors to bid up stocks on Wednesday of many asset managers, brokers and insurers.
Life insurer Primerica (PRI) soared nearly 7%. Broker and financial adviser Ameriprise Financial (AMP) rose 1.5%. T. Rowe Price (TROW) rose 1.4%. "Several of these stocks are trading up today," said Morningstar analyst Greggory Warren. "The rule impact is being seen as not as onerous as feared."
Despite industry relief, overall the rule is seen as a victory for individual investors.
The final Labor Department (DOL) fiduciary rule, which follows months of public and industry views on its proposal, requires brokers to act in the best interests of clients when providing retirement advice. The Obama administration claims that will lower costs and boost returns for investors.
"Today's rule ensures that putting clients first is no longer a marketing slogan," Labor Secretary Thomas Perez said in a conference with reporters. "It is the law."
The fiduciary standard of behavior creates new grounds for complaints by investors who feel they have been short-changed by their broker. At the outset of a brokerage relationship, a broker can still require a client to agree to take any disputes to arbitration rather than to court. But now the broker has to meet a higher standard of professional behavior, says Andrew Stoltmann, a Chicago securities-fraud attorney.
"(The new rule) creates a strengthened cause of action for those suing their brokers," Stoltmann said. The new rule does not mean that DOL itself will become more active as a securities cop, Stoltmann added.
The government made some concessions in its final rule after months of criticism from the financial industry.
The Investment Company Institute, a group representing mutual funds, last summer called the proposal so complicated that it is unworkable. Brokerages charged that the requirement would add costs that make retirement advice unaffordable for many lower- and middle-income investors.
Some financial firms will probably benefit, while others are expected to be hurt.
Discount brokerages such as Charles Schwab (SCHW) and TD Ameritrade (AMTD) stand to be helped, Morningstar predicted. So are companies that sell a lot of index and exchange traded products, like State Street (STT), BlackRock (BLK) and Vanguard. And robo-advisors are also likely to gain business. Brokers would be compelled to use their low-cost products and services rather than high cost alternatives.
T. Rowe Price stock was up because its funds are relatively good performers, meaning they are more likely to be acceptable investment recommendations by brokers, Warren said. Also, the firm has been bolstering its sales staff in recent months, to boost its IRA business, he added.
In its new rule, the Labor Department addressed some industry concerns. The originally proposed eight-month deadline for compliance is gone, replaced by a longer, "phased" implementation timetable.
Also modified is a requirement for new clients to sign a contract in which any broker conflicts are disclosed. These would include the broker disclosing that high-commission products might be offered even though lower-cost alternatives are available. The final rule says the contract does not have to be signed until a client actually opens an account. The proposed rule called for the contract to be signed when the client first had contact with a broker.
Another item dropped from the final rule: a proposed list of acceptable assets that advisors can recommend instead of certain high-risk investments. And a widely expected prohibition of in-house investment products has been dropped.
"I'm a little disappointed the DOL has caved on the issue of whether firms can recommend proprietary products like annuities," Stoltmann said. "No real fiduciary could do this. I think the DOL caved on a very crucial issue."
What The New Rule Does
The new rule basically extends a fiduciary standard mainly to brokers when they provide investment advice for retirement accounts. A fiduciary standard requires brokers to act in the best interests of clients. Registered investment advisors (RIAs) are already subject to the fiduciary standard, but a stricter version than imposed by the new rule on brokers, said Stoltmann.
The new rule takes aim at IRAs -- particularly on money that is transferred or rolled over into IRAs from workplace retirement accounts such as 401(k)s, says Skip Schweiss, TD Ameritrade head of investor advocacy.
Under the old rule, brokers could recommend investments that were merely suitable for clients. The DOL says that the old standard allowed brokers to base recommendations on what would generate commissions for them, even if a better-performing, lower-cost investment was available.
The White House -- which supports the tighter standard -- said in February 2015 that investments made on the basis of conflicted advice under the old rule returned roughly 1 percentage point less a year on average than investments made on the advice of fiduciaries.
With an estimated $1.7 trillion of IRA assets invested in the type of products that generate conflicts of interest, the White House estimated that the aggregate annual cost of conflicted advice is about $17 billion.
"A retiree who receives conflicted advice when rolling over a 401(k) balance to an IRA at retirement will lose an estimated 12% of the value of his or her savings if drawn down over 30 years," read the White House report. "If a retiree receiving conflicted advice takes withdrawals at the rate possible absent conflicted advice, his or her savings would run out more than five years earlier."
With a $100,000 rollover for people age 55 to 64 in 2012, a 12% loss would cost the average investor $12,000.
Morningstar forecast a mixed impact for active asset managers, including AllianceBernstein (AB), Cohen & Steers (CNS), Eaton Vance (EV), Federated (FII), Janus Capital Group (JNS) and Legg Mason (LM). The same applies to full-service wealth managers, including Bank of America (BAC), Morgan Stanley (MS), Raymond James (RJF) and Wells Fargo (WFC).
These companies have product lineups that include both higher and lower cost products.
Asset Fees, Robo Boom?
And some impact could differ from what's expected. Many full-service brokerages could replace commission-based IRA fund sales with IRAs that generate fees on assets. "As fee-based accounts can have a revenue yield upwards of 60% higher than commission-based, this could translate to as much as an additional $13 billion of revenue for the industry," Morningstar reported.
Also, full-service wealth managers could stop serving clients with low IRA account balances. Those clients could take an estimated $250 billion to $600 billion in assets to robo-advisors. That could push a number of robo-advisors above the $16 billion to $40 billion asset base that Morningstar estimated they need to become profitable.
Even within groups that could be hurt by the new rule, like active asset managers and insurers, some companies could benefit. "(Firms) with moats will gain market share from their less competitively advantaged peers or ... will be able to adjust their business model to offset the negative financial effects of the rule," Morningstar reported.
Here in the U.S., we are witnessing a convergence. The U.S. — in the wake of the Labor Department’s conflict-of-interest rule — will start to look more like the U.K. in its post-RDR world. And the U.K. — in the wake of the pension freedoms reform — will start to look more like the U.S.
And the clear winner in both countries is certain to be investors and consumers. And the sky — despite claims to the contrary by those in the advice/product industry/profession — will not fall.