Pushback and Applause for Obama’s Fiduciary Comments

The president came out on the side of the Save Our Retirement coalition at an appearance at AARP Monday afternoon.

“I applaud the fact they’re taking on the issue,” says Brian Hamburger, president and chief executive of MarketCounsel, a business and regulatory compliance consulting firm. “For more than four years, we’ve been in a stalemate between the Department of Labor [DOL] and the broker industry,” he tells PLANSPONSOR.

Hamburger says he is thrilled that the concept of fiduciary responsibility is getting attention. “However,” he says, “the comments show the White House is as confused about this issue as we fear Americans are confused.”

Hamburger finds it disturbing that the White House continues to look at “financial adviser” as if all advisers are alike. The issue has less to do with advisers bilking clients out of retirement savings, he thinks. It is more broadly about conflicts of interest and how broker/dealers (B/Ds) operate. “Brokers furnish products and services under the guise of investment advice but deliver something else,” he says.

The White House is painting those providers with a very broad brush, Hamburger contends. “[It’s] not speaking about fee-only advisers,” he says. The issue is consumers who are sold products by advisers who work on a commission basis.

In Hamburger’s view, another aspect of the conflict is the companies or trustees that decide on a provider of advice for their employees. “Typically they go after the lowest-cost providers, which often means those that have the ability to generate revenue elsewhere and be held to a lower standard of fiduciary care,” he says. “Would-be retirees think they’re the beneficiaries of advice, but they’re receiving financial transactions and services.”

Plan participants need access to what he calls real investment advice, which is not tied to compensation for specific products; however, it is too expensive for many companies to offer this service.

Expanding the definition of fiduciary to cover brokers is a knee-jerk reaction, he says. “It’s a noble fight, but it could have unintended repercussions, like losing advisers for small accounts.”

Advice? Or Sales?

Hamburger’s concern is that if broker/dealers are held to a fiduciary standard, but only for their work in certain types of accounts, it will make the investment and advice landscape even more confusing to consumers. A broad expansion of the fiduciary obligation could raise the cost of advice and potentially hamper some investors’ access to it.

Hamburger believes the real problem is that many people think they are receiving advice when in fact they are not, when they rely solely on the service provider chosen by their employer. “The answer is for the White House to move the DOL to impose the existing rules,” he says. “You’re a fiduciary if you provide advice about securities for compensation. It’s clean, and it’s easy.”

The DOL and the Securities and Exchange Commission (SEC) should come up with a uniform definition of fiduciary, Hamburger says, and more stringently enforce the SEC’s exemption for “solely incidental” advice under the Investment Advisers Act of 1940.

The discussion has been a long time coming, says Cyrus M. Amini, vice president of Charlesworth & Rugg, a Los Angeles registered investment adviser (RIA), noting that Obama is likely to get plenty of pushback from various lobbying groups, because of entrenched interest on the broker/dealer side. Broker/dealers have a natural bias due to the commission system, he believes, and the White House comments make the differences between between RIAs and broker/dealers clear. “Independent advisers aren’t subject to this kind of conflict,” he tells PLANSPONSOR. “As an RIA, I don’t worry about being painted with that brush. If there is any residual effect from the overuse of the word ‘adviser,’ the confusion will have to be overcome with education.”

Amini doubts expanding the definition of fiduciary will prevent people from getting advice they need. Ever-increasing ways to get low-cost financial advice—including robo-advisers and the Internet, among other tech solutions—are signs that the industry will continue adapting, in step with the transition away from defined benefit (DB) plans.

Hidden Fees

Also of concern are fees and transparency. “The idea that hidden fees are directly costing participants and savers money is right,” Amini says. Higher fees eat into the returns on an account. When it comes to payments, the 401(k) landscape is very opaque and complicated, and can be very difficult for a plan sponsor to navigate proposals from providers, he says. For example, one bid might seem to have very competitive prices, but the use of 12(b)1 fees can complicate the pricing structure. “Depending on the rebate, the fees can make certain cost components seem lower than they are.”

Amini describes a bid proposal his firm reviewed that had some mutual funds with 12(b)1 fees. The rebates were applied to another cost component of the plan to lower that cost. “They took mutual fund lineup expenses and rebated the fees against the recordkeeper services,” he explains. “They showed that without explaining the true mutual fund costs. And they wouldn’t show the underlying average expense ratio for the lineup.”

The fees and costs were not completely hidden, he admits. All details are available in a couple of hundred pages of the accompanying document. “It’s a disservice to plan participants more than anyone,” Amini says.

A world where advisers and brokers can choose if they want to act in a fiduciary capacity is skewed, Amini says. Most people will have to depend on defined contribution plans and retirement accounts, and those assets need to be safeguarded and grown. “Having someone at the helm with a conflict of interest is not good,” he says. “That’s a lot of money being thrown away, because it’s being spent on the wrong products.”

Bradford P. Campbell, counsel at Drinker Biddle & Reath and a well-known industry commentator, notes that, according to the DOL’s own estimates, lack of access to investment advice costs participants about $100 billion per year in preventable investment mistakes. 

“This is a direct result of making ‘the perfect’ the enemy of ‘the good’ by using the blunt tool of the prohibited transaction rules—it is difficult for participants to get any advice at all,” he says. “This is the risk the re-proposed regulation presents, that it may go so far in trying to eliminate conflicts that it also effectively eliminates access. This real-world problem dwarfs the ‘back-of-the-envelope’ predictions from the White House about the cost of conflicts.”

Therefore, Campbell says the most interesting statement from the administration is that there will be a “principles-based” exemption regarding conflicts in the reproposal.

“While it is not clear what this means, one may hope that it is an exemption with reasonable conditions permitting fiduciary advisers to plans to help plan participants with [individual retirement account (IRA)] rollovers, rather than a prohibition of such advice,” Campbell says. “The reality is that a 401(k) is an accumulation vehicle, not a distribution vehicle. People need access to IRAs and advice to make a plan for spending the savings. A blunt application of the prohibited transaction rules could prevent people from getting this needed advice from known and trusted advisers to their plans by effectively forcing them to go find a stranger.”