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More Stringent Standards Expected Soon For IRAs

January 29, 2013 • FA staff

Officials at the Financial Services Institute are "not hopeful" that the Department Of Labor will accede to their request to drop or modify a Department of Labor (DOL) proposal implementing stringent ERISA-based fiduciary standards over retirement accounts including IRAs, FSI executive vice president and general counsel Dave Bellaire said at the group's annual meeting in San Diego. If he is correct, the DOL ruling expected in April could prompt brokerages "to orphan" millions of small IRA accounts.

Bellaire made those remarks after FSI members sent the White House more than 5,000 letters and convinced more than 100 Republicans and Democrats in Congress to request either dropping the rule or altering it significantly.

Bellaire said he expects that "no amount" of disclosure and client sign-off would allow an advisor operating under strictly interpreted ERISA guidelines to accept commissions. The only way commissions could be acceptable would be if the DOL provided some kind of meaningful exemptive relief, which FSI officials consider unlikely.

Even if there are some minimal exemptions, the DOL probably will set up "hoops and hurdles" that raise the costs and make commission-based advice impractical, Bellaire noted.

FSI's CEO Dale Brown was somewhat more guarded in his outlook, saying that though he had not given up hope, the environment was challenging. Brown added that the FSI has worked with other associations, including the Financial Planning Association, and has established a working relationship with Labor Department Assistant Secretary Phyllis Borzi.

Congress passed the ERISA in 1974 after major abuses in some large corporations' pension plans and put regulation of pensions under the DOL, partly because legislators were concerned about the cozy relationship between financial regulators and the industry itself. "The DOL has a certain degree of mistrust of the financial services industry," Bellaire said.

The DOL is expected to put final rule proposals out for comment in April and then make them official during the summer. Assistant secretary Borzi is scheduled to speak at the FSI's first conference for advisors in September.

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Comments

mikegg 11 years ago

Dear Leo, You're right, a commision is not immoral or unfair. What is immoral and unfair is having salespeople behaving as advisors. How can a professional salesman call himself an advisor when even the agreements to set up a brokerage account have the following disclosure: "When we act in a brokerage capacity, we do not enter into a fiduciary relationship with you. Except under special circumstances, a brokerage relationship is not held to the same legal standard as an investment advisory relationship. For example, in a brokerage relationship, our obligation to disclose the nature of our business, conflicts of interest, fees and the background of our key personnel is more limited than in an investment advisory relationship." Brokers and insurance agents are not required to disclose their conflicts of interest. So, that means if selling that annuity will qualify you for a cruise in the caribbean your client doesn't need to know about it. Even if there's a better annuity for him that you could sell him (but doesn't offer a trip). Brokers and insurance agents are not required to act on the best interest of their clients. And, most of the time, they don't. In fact, brokers and insurance agents work for their firms. A RIA, on the other hand, is bound legally to work for his clients and because he's a fiduciary. So no, Leo, compensation is not the issue, is the nature of the relationship. And that's the problem that the DOL has. And the public should know about it.
Leonard_Digate_Income_Planning 11 years ago

This would be disasterous to people who want to roll from one firm or plan to another. If the only source of information and help will be directly from investment companies or banks, where will the transparecny originate. Will a bank teller guide someone to go to a mutual fund or asset manager? Will an 800 number employee of an investment product manufacturer tell a call-in that they really should talk to an advisor to get the personal service that they deserve? These services are not a commodity. They shouid be delivered by someone trained in relationships as well as products. If rhe services are commoditized as the DOL would like to do, most consumers will be underserved without a choice of their own. If the consumer doesn't weant to compensate a professional for his/her help, they have the option of callin 1 (800)-who-ever to complete the transaction A commission or fee-for-service arrangement is not immoral or unfail, but a way to compensate a professional advisor for his/her efforts in building a relationship as well as helping develop a customized management plan for what is most American's most important asset. Leonard T. Digate, MBA, CLU, AEP Chartered Financial Consultant
tnrep 11 years ago

The bigger problem is that Lawyer's do not have to limit their pay. That is what they should be looking at...oh wait they are Lawyers.