The Department of Labor (DOL) released its long-awaited rules for investment professionals advising on retirement accounts Tuesday, and after five years, we finally know what their idea of a fiduciary standard looks like. And it is … not much different than the old guard, just with reams of added paperwork. The DOL’s promo materials boast they’ll “protect investors from backdoor payments and hidden fees in retirement investing advice,” but that seems a tad too optimistic. We read through all the legalese and loopholes, and in our view, the proposed rules don’t ensure clients’ interests always come first—and they probably won’t improve the quality of advice.
The DOL’s proposal (which is still pending public comment and perhaps some last-minute tweaks) would basically expand ERISA duties of care to all brokers, registered investment advisers (RIAs), insurance brokers and other investment professionals advising on retirement accounts—but with a few small tweaks to, as the DOL’s FAQ put it, continue “to allow for common forms of compensation.” That is your first clue this standard is not quite all it’s cracked up to be. You see, the DOL’s primary beef is with high “hidden” commissions, like backdoor compensation for recommending certain products over others, revenue sharing agreements with mutual fund companies and incentives for selling proprietary products. But these are not banned. Nor are plain vanilla trading commissions. Nor are sales of high-fee products when a similar product with lower fees exists. All those are still legal! As long as the broker selling those products jumps through a few extra hoops: They must agree in writing to act in the client’s best interests, disclose all potential conflicts of interest prominently in writing and on a dedicated website, and describe the policies and procedures in place to mitigate those conflicts. There are also exemptions for principal transactions (where brokers sell products out of their firm’s inventory) and instances where brokers are just executing transactions without giving advice.
In other words, it’s a watered-down version of major investment advisory standards. It’s weaker than the SEC’s fiduciary standard for RIAs (which the SEC is considering expanding to brokers, too). It’s a toothless version of the UK’s Retail Distribution Review (RDR), which outright banned Britain’s version of revenue sharing (called trail commissions and paid directly from the fund to the adviser, not his/her firm) and forced all advisers to charge itemized flat or percentage-based fees. It is essentially a ream of forms, disclosures and a website—paperwork—that doesn’t really change the products sold or advice rendered. It doesn’t guarantee investors’ interests will come first. If anything, it seems designed to enable the status quo—it adds a veneer of client-friendliness while giving brokers the tools to justify current actions. It doesn’t prevent insurance brokers from selling variable annuities in IRAs—they just have to rationalize it. (Which is also not a change.) Nor does it prevent brokers from basing recommendations on Wall Street mythology, age or risk-tolerance surveys—they just have to rationalize it. It doesn’t prevent brokers from selling proprietary products only, limiting clients’ investment options—they just have to rationalize it. It doesn’t require advisers and brokers to objectively analyze all potential investment options for their clients—as long as they can rationalize whatever they pick. It doesn’t improve the quality of funds that are recommended. Even if it didn’t have the high-fee loopholes, lower-cost products aren’t always superior—fees aren’t the only determinant of returns. It doesn’t address how we got here in the first place: the blurring of the line between investment sales and service. If anything, it blurs the line further, promoting confusion. Not to pooh-pooh disclosure—transparency and sunlight are always good—but disclosures are often long tomes written in legalese. Few folks read them, fewer still may understand them. The website aspect is intriguing, but its efficacy is untested. Overall, it seems like a green light for brokers and advisers to keep doing what they’re doing—as long as they can rationalize it if the DOL comes a-knockin’. That last bit is subjective, folks—rationales are based on opinion, experience and knowledge. Expertise matters.
On the bright side, the unintended consequences seem minimal. Some folks fear it will hollow out the brokerage world by making it less profitable for brokers to serve smaller accounts, but that seems a bit of a stretch to us. That argument is largely based on the assumption it would flip more brokers to a fee-only mode, which the DOL straight up says isn’t true. And the loopholes are expressly designed to preserve current forms of compensation. It’s hard to envision brokers and advisers being materially worse off here, aside from higher internal compliance costs. If RDR didn’t hollow out the UK’s financial services industry by banning most commissions, we fail to see how a watered-down version would limit financial services access stateside.
We’re sure the DOL will continue patting themselves on the back, talking up their trumped-up estimates of how much excess fees cost investors and congratulating themselves on saving mankind. But don’t let this fool you, folks. The retirement investing landscape didn’t improve—it just got more complex. It will still be up to investors to discover how any adviser they’re considering values putting clients first and how they’ll implement those values for investors’ benefit.
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