Fiduciary Rule Hearings Kick Off in Washington

The Department of Labor (DOL) on Monday kicked off three days of hearings on its contested fiduciary rule reform package, demonstrating just how divided the retirement plan services industry remains on the question of how to address conflicts of interest and adviser accountability.

Even diehard Washington policy wonks may have tired by the close of Monday’s testimony—a solid eight hours of discussion about whether the DOL’s proposed fiduciary rule reforms strike a workable balance between the yin and yang of consumer protection and provider opportunity. The hearings are being hosted by the DOL’s Employee Benefits Security Administration (EBSA) through Wednesday afternoon (live stream is here).

On the side of the DOL stand organizations such as the Financial Planning Coalition, which delivered testimony via Marilyn Mohrman-Gillis, CFP Board managing director of public policy and communications, and Ray Ferrara, chairman and CEO of ProVise Management Group LLC. The pair explained that the coalition “fully supports the Department’s efforts to strengthen consumer protection under the Employee Retirement Income Security Act (ERISA) and looks forward to working with the Department as it refines the re-proposed rule.”

Mohrman-Gillis and Ferrara both argued against the common industry conjecture that the new fiduciary rule, as written, would severely challenge the commission-based broker/dealer business model and force advisers into fee-based models that may be more expensive for consumers.

NEXT: The comments keep coming 

“This is not consistent with the rule itself or with our experience in implementing a fiduciary standard,” Mohrman-Gillis said. “The Best Interest Contract Exemption is a principles-based, business-model neutral exemption that allows advisers to continue to receive commissions and still comply with the fiduciary standard under ERISA.”

She said the Financial Planning Coalition believes that advisers who may be required to start taking on the fiduciary role will still be able to profitably serve middle- and lower-income clients. She observed that there are already thousands of professionals across the country doing just that—providing fiduciary-level services “to everyday Americans, either under commission-based business models or for fees with no or very low minimum asset requirements. If our experience is any indication, firms and advisers are more likely to adjust their policies and practices than to abandon middle-class clients,” she says.

Other commenters disagreed, of course, with varying degrees of severity and constructiveness. Some of the more dire-sounding warnings were summarized nicely by Nick Lane, who is chairman of the board of directors for the Insured Retirement Institute and head of U.S. life and retirement business at AXA.

Lane suggested the disruption to commission-based advisory models will be severe, given the inevitable challenge of creating and maintaining large numbers of contract-based exemptions. Even if the DOL is successful in streamlining the agreements, it’s rather daunting to imagine just how many contracts a large financial services firm will have to handle. Citing figures from the U.K., where related conflict of interest rulemaking was debated and adopted, Lane predicted up to 25% of advisers “could leave the industry within the first year of implementation of this rule.”

NEXT: Whose best interest? 

Many commenters agreed with Lane and warned plan participants may have trouble understanding the purpose and scope of a so-called best interest contract exemption—it could just become another misunderstood piece of paper or electronic mailing that falls by the wayside. Beyond this, some suggested bad apples will continue to find ways to harm their customers under a stricter rule, which rather than protect consumers will in fact only slow down the typical adviser who is already committed to serving clients fairly and transparently.

Lane concluded by observing there are already a wealth of regulatory schemes applied to prevent conflicts of interest in the financial services and retirement planning industries, raising the question of whether another strict rule will be helpful. 

For their part in directing questions to those giving testimony, EBSA officials struck a somewhat conciliatory tone and repeatedly said they understood providers’ concerns. One consistent question EBSA had for commenters explored why advisers, given the fact that they rely on a level of trust from the consumer, should not be expected to deliver to the best of their ability on that trust. What is the alternative, advice that is given without conviction, or worse, disingenuously?

Other groups, including high-ranking legislators in the Senate and House, weighed in just prior to the hearings, publishing open comment letters in support of one side or the other. One such set of Senators included Jon Tester (D-Montana), Heidi Heitkamp (D-North Dakota), Joe Donnelly (D-Indiana) and Angus King (I-Maine), who said in an open letter to Labor Secretary Thomas Perez that, whatever form the final rulemaking takes, the DOL must ensure middle-class and lower-income investors maintain affordable access to quality retirement advice.

The Senators argue the DOL should take more care to ensure its rulemaking will indeed be “business-model neutral.” The lawmakers pointed to substantive changes that could be made based off of feedback received through public comment, to ensure that the rule is effective in protecting consumers without significantly disrupting provider’s current compensation practices.

For those unable to listen to the testimony, much of the commentary has already been made public via the respective organizations’ full public comment letters. More coverage of the hearings to follow.