It's probably not a hot topic of dinner conversation, but there is a firestorm in Washington surrounding a Labor Department proposal that could have a big impact on Americans' retirement savings. And the controversy over this proposed rule change can tell you a lot about the financial services industry and its friends on Capitol Hill.
It started last year, just seconds it seems, after the Labor Department proposed the new rule, which is aimed making financial advisers more accountable and transparent. The industry's response was fast and furious. The rancor built through the summer and into the fall, and by Thanksgiving, industry leaders were predicting that the rule would cause investment firms to collapse and punish small investors. Cohorts of lobbyists patrolled, and industry-friendly congressmen fired up bills to protect their contributors.
You may have missed some of the nastier bits, so let us catch you up.
The Department of Labor wants to impose both accountability and transparency on the industry that manages some $3 trillion in investor retirement funds. Despite the uproar, the proposed fiduciary rule change would establish two surprisingly humble requirements:
- Brokers must act in the best interests of their clients.
- All the fees collected by brokers must be disclosed.
Now, you can be forgiven for thinking "your guy" at Raymond James or "your pal" at UBS was already doing that. The industry does its level best to convince the buying public that it puts our needs first. Check the Web sites. Wells Fargo wants to give you a financial adviser "dedicated to doing what's right for you," while RBC aims it will "put clients' goals, aspirations and priorities first" and Bank of America's Merrill Lynch says "getting to know you is your financial advisor's primary goal ... to put your needs and priorities front and center."
Seductive language obscures some facts. For example, as things stand now if "your guy" at Merrill is a "financial adviser" or a "financial planner" or a "stock broker" or any of a number of titles that look impressive when embossed on heavy vellum business cards, that person is only required to put your IRA or 401(k) dollars into suitable investments.
Suitability sounds better than it is. It will probably keep you out of emerging-market debt traps but may well land you in high-fee instruments. The 90% of advisers who are not fiduciaries are entitled to put retirees in high-fee funds rather than into comparable lower fee funds. Why would they do that? Because, while the fund is suitable, the adviser shares in the fee. The higher the fee, the better for the adviser.
On the other hand, a fiduciary (from the Latin fidere, to trust), is required to put the investors' interest before his own. As things stand now, only a small subset of advisers -- Registered Investment Advisers, or RIAs -- are fiduciaries. They are regulated by the Securities and Exchange Commission under the Investment Adviser's Act and can face substantial penalties if they stray front the best practices ethic.
So, first the Department of Labor wants anyone benefiting from your retirement investments to be working in your interests, that is, to be a fiduciary. And keep in mind, we're only talking about retirement funds. The wealth management industry would still have a free hand when it comes to collecting rich fees on nonretirement dollars.
The DOL also wants the firms to tell you -- in plain English -- how much you are paying, how often, and for what. Simply put, the new rule demands the firms tell you how much of your money becomes their money. The current fee structures are layered into a dense custard of impenetrable language and strategies. (The Department of Labor estimates investors pay $17 billion annually in conflicted fees, that is, fees that result from conflicts of interest. Some argue even that robust number understates the problem as the $17 billion only refers to mutual funds in IRAs.)
On the other side of the ledger, Morningstar estimates the rule change will affect some $3 trillion of retirement assets currently under management. Its analysis projects that just implementing the rule would cost the industry $2.4 billion. So, it is hardly surprising that efforts to defeat this proposal have been aggressive.
Arguments against the fiduciary rule change range from the claim that the new rule will make financial advice so expensive that small investors will be shut out, to claims that the Department of Labor's proposal is just another example of the Obama administration's attempt to govern by fiat. The political rhetoric aside, there are plenty of money management firms, RIAs and trust companies that make a profit while conforming to the "best interest" fiduciary standard. Many of their customers are small investors.
Congressional efforts, driven by Wall Street-funded lobbyists, to declaw, defund, or delay the rule change are essentially "kill bills." They got a lot of play in December. Of those, Rep. Peter Roskam's (R., Ill.) bill to amend the tax code and Rep. Phil Roe's (R., Tenn.) bill to amend federal retirement law, were prominent. But, with the new year, proponents of the rule change were surprised and delighted to see it come through the end-of-year scramble that resulted in the Omnibus bill unscathed by any debilitating riders.
Today, while the retirement wealth industry, and it's friends on Capitol Hill, continue to lobby against the proposed investor protections and insist the investor-friendly DOL Fiduciary Rule is still in play, it is instructive to look at what the industry is doing rather than what it is saying.
Investment News, a newsletter for financial advisers, reports some IBDs (independent broker dealers) "are preparing for the reality of advising clients in individual retirement accounts under the new rule."
Kate McBride, a CEFEX analyst with the Centre for Fiduciary Excellence, says: "What has been interesting is that progressive firms of all types are seeking and getting fiduciary training and putting fiduciary processes in place, so that they can make this transition to fiduciary care of retirement investors."
Amy Webber, president of Cambridge Investment Research told Investment News: "It is time to stop feeling sorry for ourselves and get proactive on it, otherwise, we're going to get behind the eight ball."
Pershing, a clearing and custody services provider owned by Bank of New York Mellon has held more than two dozen meetings on the rule with brokers and advisers.
At WeathManagement.com, Terry Dunne, is among those making lists of winners and losers after the rule takes effect.
Morningstar's Stephen Ellis concludes the rule could "drastically alter the profits and business models of investment product manufacturers like BlackRock and wealth management firms like Morgan Stanley." He projects the "full service firms like Morgan and Merrill and Wells Fargo will adjust and be winners." Ellis sees life insurance groups as losers here.
Whatever the case, the industry at large seems to be preparing to adjust to the rule.
The timeline going forward has all the caveats you would expect in a bureaucratic move of this magnitude.
The Department of Labor rule change lives in the agency, that is to say, the executive branch of government. The Department has moved the rule change through the public comment process and the Hill hearing process and submitted the proposal for review to the Office of Management and the Budget on Jan. 28. The OMB has 90 days for the review, but it's likely to expedite the process. Once OMB signs off, Congress will have 60 legislative days to review it.
And that's the kicker -- the double-twisting Tsukahara that is our Washington process.
This Congress has 60 legislative days to review it. Given all the available recesses and adjournments and gamesmanship ploys available, speculation is rampant that the administration is expediting the process because there is some magic date in April or May by which it has to be received or this Congress can kick it to a new administration, thereby killing it.