“Revoking the rule in its entirety would allow some providers to continue to operate under a lower standard of care, different from the fiduciary duty their clients may believe they enjoy -- ultimately sowing confusion and undermining investors’ retirement security,” wrote McNabb.
The letter recommends that the DOL eliminate “arbitrary” distinctions between clients and industry channels to ease compliance. Rather, Vanguard argues that the DOL and other federal agencies should attempt to harmonize their requirements for all financial advice regardless of method of delivery, nature of recommendation or client size.
In particular, robo-advisors should face the same requirements as human advisors, wrote McNabb, and rollovers shouldn’t be treated any differently than investment decisions within a retirement account.
Vanguard also believes that the rule’s best interest contract exemption, or BICE, will increase advisors’ cost of compliance and reduce access to retirement advice, information and education among IRA account holders and plan participants. The BICE should be applicable to advice given to sponsors regardless of plan size. Currently, the rule limits the BIC exemption to investment advice given to sponsors of plans with less than $50 million in assets.
“The arbitrary distinction between small and large retirement plans is an element of the definition that will harm retirement investors if it is not amended in tandem with the Department’s re-evalution of the BIC Exemption,” wrote McNabb.
The BIC Exemption should be limited to its Impartial Conduct Standards, and provisions encouraging enforcement of the rule via class-action litigation in state courts should be omitted, according to Vanguard.
McNabb argues that the plaintiff’s bar is a poor substitute for direct regulation from agencies like the DOL, IRS and the SEC.
“An enforcement system that substitutes class-action litigation for direct oversight by the Department and Internal Revenue Service threatens the critical uniformity in administration that ERISA was designed to promote and will drive up costs, thus lowering investors’ returns,” wrote McNabb. State courts have no experience applying fiduciary standards or prohibited transaction exemptions as they currently exist under ERISA.
Recently, Morningstar proposed a third-party, big data-driven solution that would audit individual portfolios to determine if investment advice adhered to best-interest standards, rather than litigation that would likely involve comparing a plaintiff’s portfolio to skewed samples of its peers.
McNabb also criticized the decision to enact and enforce the fiduciary rule in piecemeal form. Advice providers will be more likely to limit their provision of investment education and information to avoid liability, according to Vanguard, rather than adopt procedures to comply with the rule.
The current delay and review of the fiduciary rule, which pushed back the regulation’s applicability date to June 9, is insufficient to meet the demands of a President’s Memorandum instructing the DOL to conduct a complete economic review of the rule.
In his letter, McNabb argued that the DOL must update its cost-benefit analysis of the rule and any potential delay to reflect changing conditions within the financial and investment industries, mainly, the flood of assets away from expensive, commission-based products and towards passive, low-cost funds. Because the economic analysis supporting the rule was drafted in the past, and asset flows into low-cost products have accelerated in the interim, the DOL’s current analysis “likely overstates” the benefits of the fiduciary rule and the potential costs of its delay.
Yet Vanguard says that the DOL shouldn’t delay the rule to wait for other regulators, like the SEC, to act. Instead, the DOL should work to make sure the public receives similar levels of protection across all investment experiences.
“Advisors and service providers, like many investors, do not operate well in an environment of uncertainty,” wrote McNabb. “It is unlikely that retirement investors will have access to greater protections of the definition of fiduciary investment advice because providers are unlikely to develop services to comply with a rule when only half of the conditions are settled, and likely will choose to avoid fiduciary status instead.”