One of the biggest proponents of best-interest advice and low-cost investing is of two minds on a currently delayed fiduciary regulation.
In a letter sent Monday to the U.S. Department of Labor and signed by Chairman and CEO Bill McNabb, Vanguard weighed in on the review and delay of the fiduciary rule to argue that the rule's best-interest standards should be modified to address concerns about access to retirement and investment advice, and that the rule's delay should be extended to allow for analysis and revisions.
“We believe that the rule as drafted harms investors through reduced access to products, information and advice, and is likely to unnecessarily increase litigation and cost to investors seeking retirement services,” wrote McNabb.
Long in the making, the DOL’s regulation would more broadly define fiduciary advice and apply more stringent standards of best interest across retirement investment recommendations. The DOL slated most of the provisions of the rule to become applicable on April 10, but later delayed enforcement to allow for an additional 60-day period of review and comment following a request by President Donald Trump.
Provisions of the rule must be revised, says Vanguard, or investors will become confused by multiple standards for advice and may lose access to informational resources provided by advisors, plan sponsors and investment firms.
Otherwise, Vanguard’s letter strongly supports applying a fiduciary standard to retirement advice, and to all investment advice in general.
“Vanguard strongly believes that investors should always receive investment advice that is in their best interest, and those who provide investment advice should be held to a fiduciary standard,” wrote McNabb. “As a result, Vanguard supports the Department’s efforts to require those who provide investment advice to retirement accounts to do so in the investors’ best interest.”
Vanguard uses its “Advisor Alpha” concept to argue that a fiduciary rule should not negatively impact an individual’s ability to access advice. Since advisors add most of their value through planning and behavioral wealth management, not asset allocation, a too-stringent rule would exacerbate the advice and retirement gaps.
To make his point, McNabb cites the enactment of fiduciary reforms in the United Kingdom, which led many advice providers to avoid providing advice to clients with lower asset levels and raise their account minimums.
The DOL’s definition of financial advice is too broad, according to Vanguard. In its letter, the company proposed that the rule be revised, narrowing the definition of fiduciary advice to exempt investment education and sales information delivered to investors.
To support narrowing the rule, Vanguard cites data from its recordkeeping business: While 75 percent of the participants in those retirement plans have access to investment advice or management, only 16 percent have used those services, suggesting that participants and retirement investors are more dependent on educational resources and product information than they are on formal financial advice.
As currently enacted, the DOL rule could have a chilling effect on retirement plan features that allow one-step enrollment and investment that have had a measurable impact on participation and savings rates, according to Vanguard, especially concerning actionable education and messaging to plan participants to “enroll now.”
Rather than revoke the rule, Vanguard argues that the DOL should revise the rule to meet its objectives while protecting investors’ ability to access retirement advice.