New DOL Rule: Opposition Abounds to Serving Your Best Interests

Clients of Edelman Financial needn’t worry, but millions of other investors aren’t so fortunate.

New DOL Rule: Opposition Abounds to Serving Your Best Interests

The Department of Labor has issued a rule (more than a thousand pages long! — but we’ll kvetch about that another time) that will require every firm or individual who provides investment advice to company retirement plans, plan sponsors, participants, beneficiaries and IRA accounts to abide by the fiduciary standard — meaning they must put their clients’ interests ahead of their own.

The rule begins to take effect April 10, 2017, and is to be fully implemented Jan. 1, 2018.

We fully support this new regulation (although, of course, we can find ways to improve it). Not only that, but we already act in each client’s best interests. And we’ve always behaved this way.

So what’s the big deal? Simply this: The vast majority of those who provide advice are currently not required to serve investors’ best interests. Instead, they are permitted to place their own interests, or those of the companies they work for, ahead of what’s best for their clients.

I’m talking about people licensed as stockbrokers and insurance agents.

These folks currently operate under what’s called a “suitability standard” that allows them to steer investors into investment products (such as retail mutual funds, annuities and non-traded real estate investment trusts) that often charge high commissions and large ongoing fees, usually with limited liquidity, adverse tax consequences and a history of low returns. Such products are clearly not in their clients’ best interests.

Starting next year, those firms and advisors will have to change the way they do business or risk being held accountable — and not just by regulators but also by the clients themselves. Indeed, the rule will allow consumers to sue advisors who violate the new best-interests standard. (Currently, investors filing complaints must undergo arbitration.)

The rule pertains only to retirement-related accounts, as they’re the extent of DOL’s jurisdiction. The rule does not apply to brokerage accounts, mutual fund accounts, college savings accounts or other types of investment accounts.

It’s up to the Securities and Exchange Commission or Congress to broaden the reach of the new rule. The limited reach of the new rule will give brokers and insurance agents a lot of latitude to continue selling products that shouldn’t be sold.

The saddest part about this situation is that so many investors do not even know a fiduciary standard exists — or that the people they are relying on to help them make investment decisions aren’t required to adhere to it.

So even though everyone will have to act under the fiduciary standard, they will have to do so only when giving advice to retirement plans and IRAs. Other accounts will remain fair game for brokers and insurance agents.

Of all the people in the financial services industry who give advice today, only Registered Investment Advisors are currently required to adhere to the fiduciary standard. Edelman Financial Services is an RIA, of course. And, as mentioned, we fully support DOL’s new rule. Who wouldn’t want to serve their clients’ best interests?

Well, it seems, an awful lot of people. Many in the financial services field and the life insurance industry are objecting to this new rule — vehemently.

“This is the single largest regulatory impact ever in our industry,” says Mike Partnow, a director at Pershing LLC, a subsidiary of BNY Mellon. “This is a game changer, where 50% of your business on average will be impacted,” he told an audience of broker-dealers and their financial advisors at a June conference.

Industry lobbyists persuaded both houses of Congress to pass a resolution in May to repeal the rule, but President Obama vetoed the resolution on June 8. Congress tried to override the veto but failed to muster enough votes.

Anticipating failure in Congress, the industry also filed five lawsuits (so far) asking federal judges to overturn the rule. Three were filed in the U.S. District Court for the Northern District of Texas.

Why Texas? Because judges there have ruled against DOL many times. (Filing lawsuits where you have a friendly judge is called “forum shopping.” It’s a common tactic when plaintiffs fear they won’t win on the merits of their case.)

The following organizations that filed the lawsuits make up a who’s-who of the financial industry. These groups regularly lobby members of Congress:

  • Securities Industry and Financial Markets Association, which represents broker-dealers, banks and asset managers that collectively manage $67 trillion for individual and institutional clients. Well-known members include Goldman Sachs, Barclays, Merrill Lynch, BlackRock, JPMorgan Chase, Ameriprise Financial and Fidelity.
  • Financial Services Institute, a group of 120 independent broker-dealers and 35,000 independent financial advisors, including Wells Fargo Advisors, Raymond James and Transamerica.
  • Insured Retirement Institute, whose members include major insurers, asset managers, broker-dealers and 150,000 financial professionals. U.S. News & World Report calls IRI “the primary trade association for annuities.” Its board members include executives from U.S. Bancorp Investments, Morgan Stanley and Prudential.
  • Financial Services Roundtable, a lobbying group whose members are the CEOs of the 100 largest financial services firms.
  • American Council of Life Insurers, whose 300 member companies offer life insurance and annuities. Its board of directors includes the CEOs of Guardian Life Insurance Co., Transamerica and MassMutual.
  • National Association of Insurance and Financial Advisors, one of the oldest and largest groups, representing 37,000 insurance agents.
  • Indexed Annuity Leadership Council, whose members include American Equity Investment Life Insurance Co., Eagle Life Insurance Co., Midland National Life Insurance Co., National Life Group, Life Insurance Co. of the Southwest, and North American Co. for Life and Health.
  • National Association for Fixed Annuities, which says it is “exclusively dedicated to promoting the awareness and understanding of fixed income and deferred annuities through the education of policymakers, journalists, consumers, and the industry about the benefits of fixed annuities.” Its board of directors is made up of executives of life insurance companies, including National Western Life, Fidelity & Guaranty Life and Standard Insurance Co.
  • U.S. Chamber of Commerce, the world’s largest business organization. Its lobbying efforts in 2016 include “financial regulations, retirement reform and capital markets.”

Several individual insurance companies also joined in the lawsuits, including:

  • Life Insurance Company of the Southwest, which sells a variety of annuity products.
  • American Equity Investment Life Insurance Co., one of the leading providers of equity-indexed and fixed-rate annuities.
  • Midland National Life Insurance Co., a seller of fixed-index, traditional and single premium immediate annuities.
  • North American Company for Life and Health Insurance, which offers fixed and fixed-index annuities.

The lawsuits claim the rule is bad — for the plaintiffs! Here’s what will happen, the lawsuits say, if the industry is forced to serve each client’s best interests. The following are direct quotes from their filings:

  • “Independent insurance agents ... will be forced to exit the fixed-index annuity market.”
  • “The Fiduciary Rule ... will increase supervisory burdens and costs.”
  • "Participants in IRAs ... [would be able] to sue financial institutions and their representatives for breach of standards of conduct.”
  • “Financial institutions and representatives have no choice but to comply.”
  • “Faced with this minefield of unpredictable liability risk, many firms or distributors may simply stop selling variable or fixed indexed annuities. Even if they do not stop selling those products, insurance agents or broker-dealers may scale back the sale of annuity products, out of fear that sales of those products ... will lead to substantial liability down the road.”
  • “These changes will upend one of the primary distribution channels for fixed indexed annuities ... [It] will be costly and disruptive.”
  • “[Insurance companies] will likely need to re-design and re-file their fixed annuity products for approval by state regulatory authorities — a costly and time-consuming process ... creating a devastating interruption in the sale of fixed annuities.”
  • “Insurance agents will face enormous additional compliance costs, including spikes in their errors and omissions insurance premiums, because they will suddenly be classified as ‘fiduciaries.’”
  • “An estimated 20,000 independent insurance agents will exit the business of selling fixed annuities.”
  • “Under the [rule], IMOs [independent marketing organizations, which are companies that manufacture and market annuity products] are not among the financial institutions that are eligible to receive commissions for the sale of [annuities]. If IMOs cannot receive such compensation, their revenues are projected to fall by roughly 70%, resulting in massive layoffs and the closing of many firms. Those IMOs that are able to remain in the business will likely face massive spikes in their compliance costs.”
  • “The Department’s decision to ... require fixed indexed annuity sellers to [conform to the rule is] ... unexpected and illogical.”
  • “IMOs not affiliated with a financial institution or insurance company will [lose business to] registered investment advisers, banks, and broker-dealers.”
  • “Independent insurance agents and IMOs are likely to exit the annuity marketplace ... There is already anecdotal evidence that agents are exiting the marketplace and industry analysts are forecasting that tens of thousands more may eventually exit.”
  • “Those independent insurance agents and IMOs that remain in the annuity marketplace now face substantial additional costs ... For example ... it is anticipated that premiums for errors and omissions insurance covering the agents will increase substantially.”
  • “[B]ecause fixed indexed annuities constitute a significant percentage of underlying agent sales, IMOs, insurance agencies, and other businesses that support independent agent distribution channels are now experiencing difficulty in retaining and recruiting independent insurance agents ... Indeed, there is mounting evidence that the Department’s regulatory action will cause tens of thousands of agents to exit the annuity marketplace.”

Through all these statements, the industry is acknowledging that forcing it to adhere to the rule will lower its profits and increase its compliance costs — and cause many insurance agents to stop selling the products, to the extent that thousands will leave the industry.

To me, the industry’s reaction is like saying that selling cigarettes to children must be allowed because stopping the practice would be too costly for the tobacco industry!

To which I say to the industry, “Hey, nimrods! That’s the whole purpose of the rule!”

DOL wants the industry to stop selling products that don’t serve investors’ best interests. If that means the industry’s interests will not be served and salespeople will quit, then so be it. Is the industry really saying it wants to keep ripping off people so it can maintain its profits and let insurance agents keep their jobs?

Not content to petition judges, the industry has taken its case to a different court — the court of public opinion. In a letter to The New York Times, David Hirschmann, president and chief executive of the Center for Capital Markets Competitiveness of the U.S. Chamber of Commerce, wrote, “Investors will face fewer choices and higher costs and will find it harder to get needed investment advice.”

Fewer choices? He’s right. That’s because the horrific products currently available will be removed from the marketplace.

Higher costs? The marketplace — not the regulations — determines prices. Our fee isn’t going to rise, for example, and neither will the overall costs our clients incur. He’s wrong on this.

Harder for investors to get the investment advice they need? He’s right about that, because consumers are currently bombarded with slick marketing pitches enticing them to attend free-lunch seminars where they’re pressured to buy those horrendous products. Today’s product-pushing salespeople are also happy to visit prospective customers in their homes. Those agents will be among the thousands who quit — no more house calls! So, in the future, investors will indeed have to work a little harder to get the investment advice they need from advisors truly devoted to helping them. And when they find them — and trust me, we don’t make it hard to find us — they’ll be glad they made the effort.

As far as I can tell, the industry has already lost its case — in the court of public opinion, that is. The industry is making it clear that it values its own interests ahead of yours, and it is defending its right to sell you products that it admits, under a best-interests standard, would be illegal.

By launching these lawsuits, the financial services industry has declared that it does not want to be required to serve the best interests of the consumers who buy the products it manufactures. It has declared that it wants to continue selling the high-commission, risky, illiquid investments that enrich it and its sales reps — at the expense of hardworking Americans like you.

Ironically, the only result the industry will experience from its self-serving demands is continued animosity from the investing public, followed by the very increased legislation and regulation it seeks to avoid.

Speaking on behalf of everyone at Edelman Financial Services, we are appalled by the industry’s position, behavior and tactics regarding this issue. You can be certain that we do not support the industry’s position on this matter, and we are doing everything we can to maintain and uphold our commitment to serving your best interests — including the recommendation of investments and strategies that are designed first and foremost with you in mind.

Although, by working with us, you are working with a fiduciary, what about your family, friends and co-workers? You might suggest that they ask anyone pitching financial products to them — perhaps even their current advisor — one question:

“Are you a fiduciary?”

Any advisor who says yes is required to provide them a copy of its Form ADV; all Registered Investment Advisors must file this document with the SEC or state regulator.

If the advisor can’t produce that form, they should consider changing advisors (or searching for one who can produce one).

As always, let us know if we can be of assistance.

Originally published in Inside Personal Finance August 2016

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