Ronald Reagan used to say that the surest way to live forever was to become a federal program. If that’s right, the surest way to die is to be studied by Congress. In Washington, becoming the subject of legislative scrutiny virtually guarantees inaction, the disappearance of funding and political support, and ultimate demise.
That’s precisely why congressional Republicans are insisting on the need to “study” further an Obama administration proposal to make financial advisors more accountable. The proposal in question, put forward by the Department of Labor, would target the conflicts of interest that can arise when advisors attempt to steer their clients into high-fee, high-risk investments.
The Labor Department is attempting to update the fiduciary standard, raising the bar for any advice given by brokers working with retirement investors. If instituted, financial advisors will have to place a client’s interests above their own or those of their firm. That doesn’t seem like too hard a standard to meet, but not all advisors deliver on it. And to this point, nothing in the law has made them do so.
A change is long overdue. The current proposal has already been studied at length, while the public and affected industries have had their chance to examine the rule, comment on it and suggest changes. Labor Department researchers estimate that the regulation would save more than $40 billion over 10 years in retirement savings.
Republicans and some Democrats in Congress would apparently rather leave America’s investing public exposed to advisors who serve themselves first and their clients second. But rather than put forward their own ideas to address this problem, they’re attempting to dictate new parameters for the rule that would require it to be rewritten, thus running out the clock before President Barack Obama leaves office.
As a former broker, I cannot accept the argument that brokers are simply order-takers rather than advisors. Responding to customers’ directions and anxieties invariably involves a dialogue that veers into the area of advice and counsel.
As chairman of the Securities and Exchange Commission in the 1990s, I’m also intimately familiar with the tactic of “study to kill.” Then, too, the Republicans in control of Congress used the maneuver to stymie important new rules to protect investors.
In that case, I wanted to keep audit and accounting firms from selling consulting and other high-margin services to their audit clients. My fear was that the audit process -- which is dependent on independence and objectivity -- would be infected by concerns over losing other client work. An audit might be toned down in hopes of winning a lucrative consulting gig from the same client. Or auditors might not share important information with an audit committee so as not to embarrass managers critical to their success on other projects. The risk of self-dealing appeared to be great.
'Studying' Fiduciary Rule Further Means Killing It, Says Levitt
December 7, 2015
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I submitted comments when the Department of Labor proposal was originally put out for comment. The DOL study was flawed as the DOL employee that did the study stated that the cost for the Thrift Saving Plan (TSP/Government pension plan) was only 25 cents per thousand when in fact the the fee for the TSP administrator was 0.25% but that does not address the expenses of the funds contained in the Thrift Savings Plan or the administration of the TSP in it's entirety. The Office of Management and Budget has stated that the total expense for the Government TSP is around 8% making it one of the more expensive 401K like pension plans. I am not defending Registered Ad visors versus brokers as simple math clearly shows that after a few years the 1% or higher fee assessed against the client's assets quickly ends up costing much more than a front end sales charge. Add in the break points available to larger accounts and fee management becomes even more expensive. As long as the broker uses a fund company with a full assortment of funds available the client pays one sales charge regardless how many adjustments to the funds used. Most RIA's don't accept clients with less than one million in investable assets and most fund companies allow a person to invest one million or more with no sales charge so the "broker" is handling the client's future account issues for around 2/10ths of one percent 12b1 fee. The other key issue is the 12B1 fee is a non-taxable event to the client versus when the advisor rolls all the dividends/capital gains through some sort of cash account so they can withdraw their annual 1% or higher fees with becomes a taxable event ..... even on qualified plans. .
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Mr. Levitt shows his real character in this article - bureaucratic, and elitist. Aren't there enough regulations that can be used to weed out incompetent and/or unethical financial advisers, registered investment advisers, and broker/dealers already? Isn't the marketplace full enough with attorneys who make a living by targeting the financial services industry. Just how much regulation are needed? I don't know of any reputable financial adviser who doesn't take the time to get to know his/her clients first and put the client's best interest first automatically. As an independent financial adviser, I depend on word of mouth advertising. If I took advantage of my clients I wouldn't be in business very long. It has occurred to me that over the last 25 years there has been a real increase in socialism creeping into the marketplace. Perhaps the bureaucrats and politicians would do well to learn more about capitalism and trust the efficiency of the marketplace and not lean so heavily on socialism and trying to regulate the economy. I agree with Frank. Implementation of these regulations would freeze the average citizen out of the marketplace. It would force them to either "do-it-yourself" with the discount brokerages or put their money in a bucket under their bed like my aunt did 50 to 70 years ago. In the final analysis it's not a question of fiduciary vs suitability for the average person. It's a question of trust. Can the client trust their financial adviser? I also like how this issue has pitted financial advisers against registered investment advisers. We shouldn't be arguing. We should be united. We need to recognize who our enemies are - the attorneys, bureaucrats, and the socialist politicians. There's already enough regulation!
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I always admired Arthur Levitt, Jr. when I was a stockbroker. However, maybe now he is wealthy enough to afford to pay a recurring fee to have someone be his financial advisor, or with his financial background has no need to obtain financial advice or services from anyone. That is no excuse for ignoring that should the proposed DOL Fiduciary rules go into effect, millions of lower income and lower net worth retirement savers will have NO access to any sort of a financial professional. Most lower income and lower net worth retirement asset savers have episodic needs for a financial professional, and neither want a fee-based financial planner or could afford one. In addition, for accounts less than $250,000, good luck finding a fee-based financial planner at all. Let's be honest, if a recent retiree with a 401(k) invested in securities-based mutual funds or money markets, with a current value of just $10,000 to $50,000, wanted to either reduce the risk of the 401(k) if it was in mutual funds, or wanted a better safe return and eventual guaranteed lifetime income, would looking to use a fee-based financial planner be feasible or a good financial decision? Could that person even find a RIA willing to work with him? For the above episodic need, I would gather all the information a RIA or a Registered Rep. would. I would likely recommend a fixed index annuity IRA that would be safe, have some upside (but no downside) growth in deferral, and then be able to be switched over to guaranteed lifetime income I would earn a one-time commission from the life insurance company issuer when I helped the client start the FIA. I might monitor that fixed index annuity with the client for 20 years. I have never had a client complain that I earned a commission from a third-party life insurance company to help the client do such a fixed index annuity. Now, I can still provide my services. However, I will no longer be able to do so for a client like this once misguided proposed DOL fiduciary rules go into effect. Then, NO ONE will want to or be able to work with these millions of retirement savers. They will all be cast adrift into a myRA world. Where is the fiduciary responsibilty in that on the part of DOL or the Treasury? Frank P., CLU, ChFC