Two subcommittees of the United States House of Representatives Committee on Financial Services held another round of fiduciary rule hearings in Washington, D.C., adding still more commentary to an impressively long-running fiduciary rule debate.
The hearing was hosted by the Subcommittees on Oversight and Investigations and Capital Markets and Government Sponsored Enterprises. Taken together, the latest round of commentary closely matched earlier hearings at the Department of Labor (DOL). As with the previous commentary, experts cited pros and cons in the DOL’s exemption-based rulemaking package, largely based on the financial interests of the type of service provider or advocacy organization for which they work.
The first to testify was Caleb Callahan, senior vice president and chief marketing officer at ValMark Securities. His commentary was given on behalf of the Association for Advanced Life Underwriting (AALU) and its 2,200 members nationwide. Callahan explained that AALU members are primarily engaged in sales of life insurance used as part of retirement and estate planning, charitable giving, deferred compensation plans and within other employment benefit contexts.
He also noted his own firm, ValMark, stands in a particularly informative spot with respect to the fiduciary rule debate. The firm has roughly $14 billion in assets under administration, split basically in half between fee-based registered investment advisory work and commission-based broker/dealer solutions delivery. “Our model of providing both types of solutions enables us to have a level of independence and objectivity that allows client goals to drive the best solution,” Callahan said. “In our experience, both models for receiving advice and products are chosen regularly.”
Callahan went on to suggest the DOL rulemaking “is well-intentioned, with the goal of helping Americans save for retirement, but unfortunately it will have the exact opposite result.” He said the rulemaking does not go far enough to ensure clients will have a right “to make choices in their own best interest—as they determine it.”
“Particularly concerning is the implicit assumption that there are serious problems with the sale of annuities and lifetime income products,” Callahan warned. “AALU feels that these products are already the subject of robust regulation, and the DOL has not presented any data showing serious deficiencies with the current framework.”
NEXT: A problem already solved?
Callahan claimed the best-interest contract exemption that serves in some respects as the backbone of the new rulemaking “makes it difficult, if not impossible, for our business to continue providing valuable life insurance and lifetime income products that offer the only solutions allowing retirement savers to transfer longevity risk and market sequence of return risk to third parties.”
Research shows individuals often underestimate the value of an annuity, Callahan continued, so life insurance producers have to educate savers about the benefits of annuities, and proactively walk them through their various options. If this becomes a fiduciary function under ERISA, Callahan said it is unclear whether individuals will still be able to access detailed information about insurance and annuity products and services. At the very least, insurance product providers serving the defined contribution (DC) retirement plan market will have to start charging more, potentially much more, for services that are attractively priced today.
“Unfortunately, the restrictions on advisers under this rule—from the definition of fiduciary to the conditions set forth by the [best interest contracts]—will prevent our advisers from continuing to provide valuable advice to retirement savers,” he said.
Callahan said that, in examining the business metrics of ValMark’s own advisers throughout the country from 2013 onward—the first full business year following the final adoption of 408(b)(2) and other important fee-disclosure regulations—there is “a clear trend that under these recently finalized disclosure rules advisers are increasingly becoming fiduciaries and charging fees as opposed to selling plans as brokers for a commission.”
The numbers are pretty compelling, and suggest some of the problems the DOL is trying to solve with a new fiduciary rule are already being sorted out. When comparing year-end 2013 results to year-end 2014 results, commission-based plans grew at a rate of 26%, Callahan said, while fee-based plans grew by 114%.
“When we filter this data down to the firms whose primary business is qualified plans, the trend is even more prominent,” he said. “The qualified plan specialist advisers saw a decline of commission-based plans by 85% between 2013 and 2014, but a 21% increase in the sale of fee-based plans. These metrics evidence a noticeable shift in the business model. Conversations with our advisers reveal that this shift is directly tied to the new 408(b)(2) disclosure regulations.”
Concluding his remarks, Callahan suggested Representative Anne Wagner’s (R-Missouri) Retail Investor Protection Act (HR 1090) is “an important bill that will lead to better rulemaking on standard of care issues.” (See “Advisers Gain Congressional Allies in Fiduciary Debate.”)
NEXT: Warmer reception
Next to comment was Mercer Bullard, president and founder at Fund Democracy and the MDLA Distinguished Lecturer and Professor of Law at the University of Mississippi School of Law. Bullard described Fund Democracy as “a nonprofit advocacy group for investors,” and he got right to the point.
“In summary, I do not support H.R. 1090,” he said. “I strongly support the department’s proposal and urge Congress to take proactive steps to help the department finalize its rulemaking. The department’s proposal to treat financial advisers who make investment recommendations to investors as fiduciaries will help protect investors from abusive sales practices and conflicted compensation arrangements.”
His argument was basically that the rulemaking will in fact put sharp limits on some current sales practices, but “the department has proposed exemptions from the prohibited transaction rules that are both workable for the industry and effective in protecting investors.”
“Just as it is a fundamental law of economics that if you tax an activity you will get less of it, it is a fundamental law of economics that if you pay for more certain recommendations, you will get more of them,” Bullard said. “For example, if you pay your financial advisers more for selling stock funds than short-term funds, which is standard industry practice, more stock funds will be sold than if advisers’ compensation was the same for both funds.”
When magnified across the investment services marketplace, this effect is very significant and damages the retirement readiness of U.S. workers, who have neither the time nor skill for second-guessing the advice they get from financial professionals.
Commentary from Juli McNeely, testifying as president of the National Association of Insurance and Financial Advisors (NAIFA) and as the founder of the small independent advisory firm McNeely Financial Services, included similar points to Callahan.
“The one issue the Department of Labor cannot rectify unilaterally is the disharmony that its proposal will create between investments sold through Individual Retirement Accounts and those sold outside of the retirement context,” McNeely said. “Only the Securities and Exchange Commission [SEC] can issue rules that would impose a uniform standard in both contexts. To the extent any SEC action in this space does not (or cannot, by statute) mirror the department’s rule-making, advisers will be faced with multiple complex and potentially contradictory compliance regimes, none of which would advance any legitimate public policy objectives. For these reasons, NAIFA supports RIPA, also known as H.R. 1090.”
NEXT: Still no consensus
Commentary also came from Paul Schott Stevens, president and CEO of the Investment Company Institute, who squarely landed in the negative camp regarding the DOL rulemaking.
“Under the DOL’s proposed rule even the most basic information—such as that offered in many common call-center and web-based interactions—could trigger ERISA fiduciary status and prohibited transactions,” he warned. “To provide a workable framework for its proposed rule, the department must allow service providers to continue to offer meaningful investment education to retirement savers without inadvertently triggering fiduciary status.”
Beyond calling the best interest contract exemption “entirely unworkable,” Stevens said he could not emphasize enough that the proposed applicability date does not provide sufficient time for the extensive system and policy changes needed to comply with the new fiduciary standard.
“If the department moves forward with this rulemaking, it must propose a workable structured implementation of the exemption’s conditions over an appropriate number of years and must adopt a ‘good faith’ compliance mechanism, consistent with previous regulatory initiatives,” he urged.
Concluding the hearings was commentary from Scott Stolz, senior vice president for private client group investment products at Raymond James. Stolz, too, falls somewhat into the negative camp, but he said he “understands why the DOL feels a rule change is necessary.”
But, he says, Raymond James is worried the complexity, ambiguity and legal requirements of the rule ensure that well-meaning advisers who work hard and have always put their clients’ best interest first will be subject to a sudden onslaught of litigation.
“Advisers will start to make investment recommendations based less on their convictions about the markets and their clients’ personal situations, and based more on how they can best limit their future liability,” Stolz said. “It is inevitable that they will move to one-size fits all pricing so they can avoid any possibility of being accused of making a recommendation based on compensation. As a result, many clients will either pay more than they do today or will receive no advice at all.”
Full transcripts of the testimony are available here.