Fiduciaries must show they can serve Main Street investors to win DOL rule debate

Groundhog Day is coming early for the investment advice sector this year, moving up from February to this week, when the Department of Labor conducts two days of hearings on its latest investment advice proposal for retirement savings.

It’s Groundhog Day in two dimensions. First, the DOL is once again proposing a regulation that would expand the definition of fiduciary to include most financial advisors and insurance sales professionals who make recommendations to retirement plan participants and investors who are putting money into individual retirement accounts.

The DOL argues that advisors to retirement accounts must be held to the fiduciary duty required by federal retirement law to address advisor conflicts of interest that result in “junk fees” when they put their revenue goals ahead of their clients’ and customers’ goal of building a big nest egg.

The second dimension of Groundhog Day involves hearing once again the financial industry assert that the DOL proposal will prevent low- and middle-income workers and retirees from getting investment advice because the regulatory and legal burdens of fiduciary advice make it too expensive to dispense to people with modest assets. Brokerage accounts will wither while advisory accounts thrive, they say.

The DOL has been working on a fiduciary rule — this time called the retirement security rule – for more than a decade. The version that was finalized during the Obama administration was overturned in 2018 by a federal appeals court, which ruled on a lawsuit brought by financial industry opponents.

Like Bill Murray in the movie “Groundhog Day,” fiduciary advocates keep stepping in the same puddle during the debate over the DOL rule. Insurance and brokerage trade associations say that it will mean the end of advice for Main Street investors. If the fiduciary side wants to win, it needs to prove them wrong.

Financial industry lobbyists have conveyed their message to Capitol Hill Republicans, who echo the charge that the DOL rule hurts ordinary retirement savers.

“We would be left with two classes of investors — those who can afford investment advice and those who cannot,” Rep. Ann Wagner, R-Mo., said during floor debate over House legislation to fund the DOL for the next fiscal year. That measure included a provision that would prevent the agency from implementing its fiduciary proposal.

The legislation is in limbo because it was taken off the floor before a vote in November. Nonetheless, Wagner’s statement shows that Main Street investors are again the focal point of the debate over a DOL fiduciary proposal.

Sheryl Garrett, founder of the Garrett Planning Network, has been a strong proponent of the DOL fiduciary rule through its various iterations. Advisors in her network charge hourly fees for advice, which she says makes it accessible to investors of any account size.

Chuck Failla, founder and CEO of Sovereign Financial Group and host of the InvestmentNews goRIA podcast, is trying to service clients across asset levels, and next year his firm will roll out a “frugal fiduciary” initiative.

The program offers four levels of service. At the lowest rung, it’s mostly do-it-yourself advice for free or $10 per month with the option of talking to a financial planning for $200 per hour. Another option costs $1,500 annually for three consultations with a financial planner. The highest level of service comes with an asset fee of 50 to 200 basis points, subject to account minimums set by the advisor.

It's basically a law firm model, with the investor getting to decide whether she wants to work with an associate for a lower cost or a more expensive partner. Failla said his model is better than the brokerage account model touted by financial industry opponents of the DOL rule.

“They’re making x dollars in a brokerage account,” Failla said. “Just charge the client x but give them fiduciary advice for that x. Why do it in a clandestine fashion in a brokerage account, which is opaque at best? Why not spend $1,000 [the cost of a commission] getting good fiduciary advice?”

But Rep. Ralph Norman, R-S.C., said commissions are transparent and investors understand them. The DOL proposal will upend that model, he said.

“You’ve got bureaucrats at the Labor Department restricting what commissions brokers who are in a competitive business can charge to willing buyers,” Norman said on the House floor. “Currently, this compensation practice is disclosed to investors and enables brokers to charge less because of the additional compensation.”

A fiduciary advocate counters that there are hidden charges in brokerage accounts.  

“The average registered representative does not know the total cost their customers are paying because their firms don’t tell them,” said Knut Rostad, president of the Institute for the Fiduciary Standard.

Fiduciary proponents must show that level of care can be provided for Main Street investors if they want to prevail in the ongoing debate over the DOL rule.