Everyone has heard the gossip, even if no one has produced evidence yet: Brokers are allegedly moving clients’ retirement accounts from commission to fee-based accounts in response to the U.S. Department of Labor's fiduciary rule.
“I’ve heard the same rumors and it would not surprise me at all for firms to be moving clients from commission to fee-based accounts, in significant part out of fear of running afoul of regulators or to avoid the numerous hoops necessary to continue working with commission-based accounts,” says Michael Renetzky, a partner with Locke Lord LLP, Chicago.
“My reaction to the fiduciary rule since the initial proposal is that it would have precisely this impact—to move clients from commission-based accounts to fee-based accounts, based on a theory that these accounts were “better” for clients,” says Renetzky, leader of the firm’s Investment Advisor and Alternative Funds practice.
Brokers may feel that this is the path of least resistance or have the perception that there is less regulatory risk in converting clients to fees, but the accounts are not necessarily best for all investors and may be pricier, depending on client transaction levels, industry attorneys say.
That is precisely the fear the Consumer Federation of America raised on Thursday in a letter to the DOL, the Securities and Exchange Commission and the Financial Industry Regulatory Authority, citing anecdotal evidence of abuses and accusing the DOL and regulators of not enforcing the rule.
“If firms are inappropriately shifting retirement investors into fee accounts and charging them excessive fees, as industry lobbyists have claimed, there’s no way the Department could conclude that firms are making a good faith effort to comply,” says Micah Hauptman, a CFA attorney. Neither the CFA nor regulators have delivered definitive proof of broker wrongdoing.
What is needed, experts say, is a client-by-client review and clear decision-making process for account selection that may or may not be taking place at firms.
“What the real challenge is, and there is risk in it, is to determine which fee structure is better for each client. And to the extent the DOL hurdles make it more difficult for brokers to use commission-based structures, than it pushes the industry in the direction for fee-based accounts,” says Renetzky, who works across the industry with investment advisors and broker-dealers, along with banks, insurance companies and others.
The CFA came out swinging earlier this week, threatening to sue the DOL if the agency goes forward with a proposal to delay full implementation of the fiduciary rule until July 2019. The group opposes delay of the scheduled January 1, 2018, implementation of the rule.
“If they finalize the delay as it is proposed, Labor should expect a legal challenge,” said Micah Hauptman, an attorney with the CFA.