Seven years after the Treasury Department recommended in a financial reform report that brokers be held to a fiduciary standard, the industry is struggling to come to grips with it.
The Securities and Exchange Commission “should be given new tools to increase fairness for investors by establishing a fiduciary duty for broker-dealers offering investment advice and harmonizing the regulation of investment advisers and broker-dealers,” the Treasury Department said in the report released June 2009.
What brokers got instead was the Labor Department's fiduciary rule, issued in April, requiring all financial advisers to put their clients' interests ahead of their own when helping with their retirement accounts. About two months later
the lawsuits began, getting under the skin of Ric Edelman, who runs one of the country's largest registered investment advisory firms and has his own radio show about personal finance.
“I'm in a mood,” Mr. Edelman said while opening his weekly program on June 18. “There's something going on behind the scenes,” he said, and “it's getting nasty.”
(More: Everything you need to know about the DOL fiduciary rule as it develops)
He told his listeners that he doesn't often talk about public policy issues on his program, but was moved to share his view of the battle as it's a matter of their own “personal protection.”
Mr. Edelman read pieces of the regulation—pages 21 and 94—that struck at the heart of the issue: everyone giving retirement account advice must act in investors' best interests and without regard for their own financial interests.
“Who on earth could possibly object to this?” said Mr. Edelman.
He railed against the lawsuits filed by groups including the Securities Industry and Financial Markets Association and National Association for Fixed Annuities, citing them as evidence that many in the financial services industry are putting their own interests ahead of consumers.
“They're simply saying why the rule is bad for themselves,” he said, pointing to their concerns that supervisory burdens and costs would go up, revenues would fall, and the fiduciary rule would force insurance agents who sell fixed annuities to exit the market. They're also worried about being sued by investors for conflicts of interest.
A White House Council of Economic Advisers analysis found that conflicts of interest where advisers profit from high-fees result in about $17 billion of losses a year for investors. That's based on a loss of 1 percentage point for investors, which over decades can meaningfully reduce savings.
Mr. Edelman has little sympathy for brokers and insurance agents going out of business due to a rule that keeps them from selling high-commission investment products such as annuities into individual retirement accounts, or IRAs.
“Well, thank goodness! That's the whole point of this!” he said. “I'm just envisioning cigarette manufacturers saying, 'We want to keep selling cigarettes to children and if you don't let us do it our sales will fall.'”
Morningstar analyst Michael Wong said in a June 22 report that $3 trillion of advised, commission-based brokerage IRA assets will be subject to a new fiduciary duty. The Labor Department's regulation will impact about $19 billion of revenue in the wealth management industry, and there could be additional costs tied to litigation, according to Mr. Wong.
Firms have until April to begin complying with the Labor Department's new regulation, and they must be fully compliant by January 2018.
Registered investment advisers, or RIAs, are already held to fiduciary standard by the SEC, which requires them to put their clients' interest ahead of their own. Not just for retirement accounts, but for any kind of financial advice.
“We choose to be required, by becoming a registered investment adviser, to serve our clients' best interests,” Mr. Edelman said on his radio show. “Stock brokers have no such obligation. Insurance agents have no such obligation.”
Knut Rostad, the president of the Institute for the Fiduciary Standard, finds it remarkable that after so many years the industry is still communicating opposition to a best-interests standard, while one segment of financial advisers, RIAs, adhere to it. He said it “defies logic.”
Mr. Rostad also took a strike at brokerage firms who say they will no longer be able to serve small investors once the rule takes effect, calling it “complete and utter baloney.”
Almost $50 billion of IRA rollovers are less than $100,000, a balance that many financial advisers will decline because it's small, according to Morningstar. About $10 billion of IRAs each year are from households with less than $100,000 to invest, Mr. Wong said in his report.
While many firms target high-net-worth individuals, there are firms willing to help those with less money. Edelman Financial Services, for example, will take on households with as little as $5,000 and individual accounts as small as $3,000.
On his radio show, Mr. Edelman slammed the idea that the fiduciary rule means investors with modest savings have to be pushed away, and said firms that are resisting the regulation are more focused on enriching themselves at the expense of consumers.
“I'm appalled by the industry's position, their behavior and their tactics,” Mr. Edelman said. “This is about as deep a personal pocketbook issue as it gets.”
