The U.S. Department of Labor (DOL) has released its proposed rule that would expand the application of a fiduciary duty for advisors when providing investors with advice on their retirement accounts.
The proposal, which was issued Tuesday, comes in response to a recent report from the White House Council of Economic Advisers, which concluded that conflicts of interest in the retirement advice market costs investors about 1% of annual returns, or US$17 billion. The department says that its proposals, which would require retirement advisors to put their clients’ interests ahead of their own, will protect investors by mitigating the effect of conflicts of interest in the retirement investment market.
The DOL says that its proposed rule would expand the number of people who are subject to fiduciary best interest standards when they provide retirement investment advice. It also includes a package of proposed exemptions allowing advisors to continue to receive payments from product manufacturers that could create conflicts of interest, only if certain conditions are met.
For instance, the proposed “best interest contract exemption” is a new principles-based exemption that would require retirement investment advisors, and their firms, to formally acknowledge their fiduciary status, and enter into a contract with their customers that commits them to giving advice that is in the customer’s best interest and making truthful statements about investments and their compensation. If they meet these, and other conditions, these advisors can then continue to receive commissions, revenue sharing payments, and embedded fees (similar to trailer commissions), which fiduciaries otherwise wouldn’t be eligible to receive.
The proposal also includes other new exemptions and updates some existing exemptions for investment advice to plan sponsors and participants. It also seeks comment on a new “low-fee exemption” that would allow firms to accept conflicted payments when recommending the lowest-fee products in a given product class.
“This boils down to a very simple concept: if someone is paid to give you retirement investment advice, that person should be working in your best interest,” said Thomas Perez, the U.S. secretary of labor. “As commonsense as this may be, laws to protect consumers and ensure that financial advisors are giving the best advice in a complex market have not kept pace. Our proposed rule would change that. Under the proposed rule, retirement advisors can be paid in various ways, as long as they are willing to put their customers’ best interest first.”
In the weeks leading up to this proposal, the U.S. securities industry has adamantly opposed the introduction of a new fiduciary duty by the DOL. However, it didn’t immediately dismiss the proposal out of hand today.
Instead, the head of the U.S. industry trade group, the Securities Industry and Financial Markets Association (SIFMA) Kenneth Bentsen, Jr., issued a statement, saying, “This is a voluminous rule where the fine print matters. We want to ensure it protects investor choice and doesn’t unnecessarily reduce access to education or raise costs, particularly for low and middle income savers. With so much at stake, we will thoroughly review the rule and its impact on investors, and express our views in the public comment period.”
Today’s proposals marks the first step in the rulemaking process that includes solicting comment and holding a public hearing on the issue, before anything is finalized. In the meantime, it remains to be seen whether the U.S. Securities and Exchange Commission (SEC) puts forward its own proposal for a common fiduciary duty for both investment advisors and broker dealers, as was recommended by policymakers in the wake of the financial crisis. In Canada, regulators are also considering whether a fiduciary duty is needed to address regulatory concerns in Canadian investment markets.