Adviser, Insurance Industries at Odds During DOL Fiduciary Proposal Hearing

The Department of Labor hosted the second of two hearings Wednesday to discuss a retirement security proposal, sometimes called the fiduciary adviser proposal, with stakeholders. Representatives of the financial advice industry and consumer advocates support the rule, for the most part, but the insurance industry’s opposition has been unequivocal.

The proposal would scrap the traditional five-part test for determining who is a fiduciary under the Employee Retirement Income Security Act and would apply a test in which meeting one of three criteria makes the professional a fiduciary. The criteria are: having discretionary authority; claiming to be a fiduciary; or regularly making individualized advice upon which investors can rely. The test would apply to one-time recommendations such as rollovers and annuity sales, as well as other advice.

Stakeholders also shared their comments in Tuesday’s initial hearing, and comments submitted to the DOL on the proposal can be found here.

Thomas Roberts, a principal in Groom Law Group, represented the National Association of Fixed Annuities and spoke against the proposal. He explained at the hearing that transaction-based producers who sell products for commissions, such as annuities, are required in most states to only make recommendations that are in their clients’ best interest. Insurance agents are licensed by states, Roberts explains in speaking separately, and most states have adopted the model legislation from the National Association of Insurance Commissioners.

The distinction between such producers and a fiduciary is that transaction-based producers can be compensated on a per-transaction basis, which can create a conflict by incentivizing sales of more expensive products, such as annuities, when a cheaper product may be a better fit.

Roberts notes, however, that fee-based fiduciaries can also face a conflict “prior to engagement” with a client because they likewise are only compensated if a client agrees to buy from them. Additionally, many less affluent investors benefit from commissions as compensation, because that structure can be cheaper in some instances than fee-based compensation.

Roberts adds that selling someone a product is not a “relationship of trust and confidence,” which is a required element of fiduciary status, per the ruling of the U.S. 5th Circuit Court of Appeals when it invalidated a similar DOL fiduciary proposal from 2016.

The consumer advocate and adviser communities had a more positive take on the administration’s proposal.

Joe Peiffer, president of the Public Investors Advocate Bar Association, explained at the hearing that retirement investors trust brokers and other salespeople because they provide marketing that suggests they are trustworthy, not because investors are gullible. When marketing, brokers “are doctors,” but “they litigate like they are used car salesmen.”

Peiffer emphasized that most retirement investors largely do not know who a fiduciary is and who has conflicts. He argued that “you wouldn’t give someone all of your money if you thought it was a sales relationship” and added, “People are entitled to trust the people they are trusting their money with.”

Joshua Rubin, the vice president and associate general counsel at Betterment, which provides digital investment, retirement and cash management services, said the company “enthusiastically supports the goal of expanding access to retirement advice that is in the retirement investors’ best interest.”

Rubin explained that Betterment’s compensation is not based on trading volumes, so the firm has “no incentive to engage in frequent trading.” He added that, “unfortunately, this client-aligned business model is far from universal across retirement offerings,” and conflicted advice likely costs savers billions every year.

Rubin also praised the proposal’s updates to PTE 2020-02, a rule for improving investment advice for workers and retirees, which would apply it to digital advice explicitly: “Advice is advice, regardless of the medium.”

However, Rubin expressed misgivings about the breadth of the proposal, specifically that it might apply to educational materials or “hire me” conversations in which an adviser is initially offering their services to a potential client.

Tim Hauser, the deputy assistant secretary for program operations at the DOL, reassured Rubin and other commenters that the proposal is not intended to sweep up brochures and education materials, regulatory disclosures, “hire me” discussions, marketing or HR communications. It is instead intended to only cover recommendations, understood as a “call to action.”