A leading Republican critic of the fiduciary rule is again seeking to dismantle the regulation, circulating draft legislation that would halt the Labor Department's rollout.
Missouri Rep. Ann Wagner's discussion draft was greeted with enthusiastic support from officials representing firms and industry trade groups who appeared at a House subcommittee hearing on Thursday, where they warned that the fiduciary rule is already having negative consequences for advisers and clients alike.
"Our customers and advisers are very confused by the phalanx of new DoL rules applying to retirement accounts," said Jerome Lombard, president of Janney Montgomery Scott's private client group. "They do not understand why there are now two sets of rules ― one for retirement accounts and one for taxable brokerage accounts."
Lombard, who was testifying on behalf of SIFMA, said that Janney has been shuffling its account portfolio in response to the regulation, and is projecting that by the end of the year, more than 10,000 retirement accounts ― roughly one in eight that the firm handles ― will be "relegated to a no-advice service desk."
"They are too small for the risks imposed by the DoL, or too costly to be placed into an advisory account that would remove the supposed conflicts the DoL is trying to relegate," Lombard said. "How switching small retirement savers from a full-service adviser to a no-advice service desk is in these clients' best interests, I will never understand."
Under the draft legislation, 18 months after the bill were to become law, broker-dealers would operate under duties of customer loyalty and care that would require them to make recommendations in their clients' best interest. However, that framework would rely heavily on disclosures to manage conflicts of interest, and include carve-outs such as a provision stipulating that brokers are under no obligation to recommend the least expensive option from a menu of comparable investment products.
The first phase of the fiduciary rule took effect June 9. The second phase, which carries the controversial best interest contract exemption provisions for handling conflicts of interest, is set to take effect Jan. 1.
FIDUCIARY OR BEST INTEREST STANDARD?
The lone critic of Wagner's bill among the five witnesses who testified at Thursday's hearing was Cristina B. Martin Firvida, the AARP's director of financial security and consumer affairs, who argued that the legislation would do little if anything to elevate the quality of advice that retirement investors receive.
"The standard as described is quite vague," Firvida said.
"We are concerned that the current suitability standard could even satisfy the benchmark that is described in this bill, and if that would be the case ... we don't see how this bill is an improvement on the current situation before the fiduciary rule went into place," she said. "The fiduciary rule very specifically directs how to manage conflicts ― it's more than just disclosure, and disclosure alone is inadequate."
Democratic lawmakers joined the opposition.
"I'm disappointed that we are going through this exercise again," New York's Carolyn Maloney said. "How many more times do these efforts to repeal the fiduciary rule need to fail before my colleagues on the other side of the aisle realize that this is not a productive use of time and that the only realistic way to make changes to the rule is to engage with the Labor Department on reasonable changes that don't harm investors?"
Wagner, for her part, said her bill would strike a balance, creating a "workable, best-interest standard for broker dealers when providing investment advice without losing access [to] such advice for millions of low and middle-income investors."
IS THE SEC MIA?
Lawmakers from both sides of the aisle complained that the SEC had failed to adopt a uniform standard of care for retail investors that would apply in equal measure to RIAs and broker-dealers.
In one of his first actions as SEC Chairman, Jay Clayton called for comments on how the commission could proceed on equalizing standards of care. He revisited the issue in a speech this week at the Economic Club of New York, where he said that in light of the first phase of the fiduciary rule going into effect, it is important that "the Commission make all reasonable efforts to bring clarity and consistency to this area."
"It is my hope that we can act in concert with our colleagues at the Department of Labor in a way that best serves the long-term interests of Mr. and Ms. 401(k)," Clayton said.
At the direction of the Trump administration, the Labor Department has been reviewing its own rule ahead of the Jan. 1 applicability date for the next phase, and Secretary Alexander Acosta has indicated that he is open to working with the SEC to harmonize the fiduciary regime.
Lombard said he was "greatly encouraged" by Clayton's comments..
DUELING COST ESTIMATES
In what has become a largely partisan issue in Congress, both sides came with alarming statistics to bolster their argument. Maloney cited an Obama administration estimate that conflicted advice costs retirement savers $17 billion a year.
Douglas Holtz-Eakin, president of the American Action Forum, a conservative think tank, and a former director of the Congressional Budget Office, countered that that figure was based on faulty assumptions, and "not an estimate that stands up to close scrutiny."
Instead, Holtz-Eakin offered his own analysis, which projects that the regulatory costs passed on to clients who are shifted from brokerage to fee-based advisory accounts will add about $800 in fees per account per year, with the inevitable result of smaller investors quitting the market.
"It stands out as an extremely costly enterprise," he said. "The threat of pricing people out and the threat of having them dropped from investment advice is very real in the data."
On the other hand, the AARP argues that higher-cost products that might be permissible under a suitability regime, but which would not pass the fiduciary test, cost investors dearly. The group cites a government report concluding that a 1% increase in fees on a $20,000 401(k) account would amount to a loss of $10,000 over 20 years. The AARP further estimates that such a conflicted arrangement would lead to a 25% decline in returns over 30 years.
"Conflicted advice is not free," Firvida said.