Department of Labor’s Proposed Amendment to the Fiduciary Rule

(Note: Last week we discussed the new rules proposed by the Department of Labor (DOL) to require financial advisors act solely in their clients’ best interests when investing for retirement. If you missed it click here: A Fiduciary Standard for Retirement Plans?)

Scott Cooley, Morningstar’s Director of Policy Research, recently offered a compelling argument in support of the DOL proposed amendment to the fiduciary definition under ERISA, the Employee Retirement Income Security Act. The proposal requires any individual receiving compensation for providing investment advice to a plan sponsor, plan participant, or IRA owner making a retirement investment decision to adhere to a series of fiduciary duties – and act in the best interests of their clients.

President Obama has directed the DOL to adopt the rule. But that won’t be a layup. Cooley outlines the old arguments trotted out by the business-as-usual fiduciary opponents. In a letter to The New York Times, Paul Stevens, the head of the Investment Company Institute, a fund industry trade group, criticized the White House’s economic argument for a fiduciary rule, calling the government’s analysis “fatally flawed.” The Securities Industry and Financial Markets Association’s chief Kenneth E. Bentsen Jr. said that a DOL fiduciary standard may “cause a detrimental impact on all American savers, especially middle class investors, and the retirement system as a whole.”

Here’s Colley’s take: “The issue comes down to the harm that can and does come to individual retirement investors in the absence of the fiduciary rule. Take the case of an investor who works for an employer who offers a low-cost, well-diversified target-date fund. When this investor leaves her employer, it can set in motion a chain of events that could include a broker recommending a high-cost portfolio of funds that offer him the highest commissions. Is that really the way we want our retirement system to work?”

And he adds, “ls there really anyone prepared to argue that retirement investments driven by conflicted payments are likely to produce better investor outcomes than operating under a “best interest” standard?

On the plus side, Cooley notes that some institutions, including Bank of America Corporation, seem to be coming around. CEO Brian Moynihan said of the fiduciary rule, “We believe that doing what is in the best interests of your customers is absolutely the right thing to do.” And as the industry move to a fiduciary standard, Moynihan said, “We expect to help move it there.”

But as folks dig deeper into the 444-page proposal, the more they find. For instance, the proposal offers this example of investing in clients’ best interests, “Facilitating investments in such high-quality, low-fee products would be consistent with the prevailing (though by no means universal) view in the academic literature that posits that the optimal investment strategy is often to buy and hold a diversified portfolio of assets calibrated to track the overall performance of financial markets.”

I agree with this premise but most Wall Street firms and licensed brokers will most likely fight any provision that low-cost, market-tracking investments are in the clients’ best interests despite all of the evidence to the contrary. Therefore, I am not willing to predict whether all financial advisors will be required to act solely in their clients best interest when investing for retirement.  Stay tuned.

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