The Department of Labor is blasting several industry-sponsored studies that claimed small investors would be hurt by a fiduciary standard for IRA accounts.
The studies were done in response to the DOL’s original 2010 proposal, which was revamped and released this week.
In addition, the department tipped its hat to the emergence of low-cost “robo” advisors in order to counter industry arguments that small investors would be harmed by the proposal.
Industry interests have yet to comment in any detail on the new proposal, so it’s unclear whether the revised rule will address their main concern, which was that small IRA investors would be forced into fee accounts and get priced out of the market if advisors had to act as fiduciaries.
But in releasing the new proposal, the DOL was pretty clear about what it thought of the “small-investors-will-be hurt” argument. “The Department believes that many of the … dire predictions were exaggerated” because they wrongly assumed commissions would be banned, the DOL said.
One study, by consulting firm Oliver Wyman, done for 12 unnamed financial services firms, “wrongly assumed that fiduciary advisers to IRA investors could not accept commissions, when in fact much of such compensation would have been permitted” under an existing exemption, the DOL said in an impact statement released along with the new fiduciary proposal. Advisors could still receive commission and trail fees under the new proposal.
Another study, by Compass Lexecon, a consulting firm working for Primerica, also assumed that as fiduciaries, advisors and firms could no longer take commissions or revenue sharing, the DOL said. The study also presumes “that IRA investors can police the quality of advice  and make efficient decisions as to what advice to buy, how much to pay for it, and what investments to make,” the DOL said, citing academic research to the contrary.
The DOL commissioned its own study by the Rand Corporation to debunk the Oliver Wyman and Lexecon studies.
To the contrary, the department’s original proposal “was premised on banning broker-dealer compensation, which they don’t dispute,” said Kent Mason, a partner at Davis Harman LLP who oversaw the study by Oliver Wyman. “That was what the Oliver Wyman study was premised on.” 
Although the DOL’s new proposal allows brokerage firms to receive commissions and revenue sharing from retirement plans and IRAs, Mason says the requirements are unworkable.
“There are pages and pages of detailed data requirements,” he said. “I haven’t talked to anyone who could potentially meet the conditions.”
Todd Kendall, senior vice president at Compass Lexecon and co-author of the firm’s study, did not have an immediate comment.
The DOL also pointed to the emergence of low-cost robo platforms as a promising development.
Traditional firms “are scrambling to develop, partner with, or acquire such innovative tools, and to combine these with more traditional services to deliver tailored services to more market segments at far lower cost,” the DOL said. 
“The new [fiduciary] proposal will help ensure that these new approaches evolve toward less conflicted and more innately impartial business models,” the department said.