Last week the U.S. Justice Department filed a court brief with the Court of Appeals arguing that the Department of Labor’s fiduciary rule, also called the conflict of interest rule, should be upheld, with the exception of allowing class-action lawsuits to be filed under the best-interest contract exemption.
The first phase of the rule, which requires that financial advisors act in the best interests of their clients, was rolled out last month. The rule also gives clients the right to file class-action lawsuits against firms that ignore the rule.
The hotly contested rule is far from final. The DOL is revising it and is asking for public feedback on what parts of the rule should be revised, if at all, and whether the January 1, 2018 applicability date should be delayed.
According to the Economic Policy Institute, every year, retirement savers lose $17 billion acting on advice from financial advisors who have conflicts of interest. Choosing a financial advisor is akin to selecting doctor, it’s not to be done casually.
Linda Sherry, director of national priorities for Consumer Action, weighs in on the issue, “The fiduciary rule is a win-win for consumers, as well as the banks and brokerages that serve retirement account customers. Consumer Action doesn’t see any downsides, and in fact, we are mystified as to why any firm would want to recommend retirement account investments that are not in the investor’s best interests.”
She points out why the rule is important, “Much of consumers hard-earned savings are wasted by unnecessary fees and commissions and predatory products. The higher the fees and commissions, the less of a person’s money is going to compounded investment earnings. This has a very negative effect on returns over time. It means that people who are doing their best to save for retirement might end up needing taxpayer support in their old age instead of having enough of their savings to see them through their lives.”
Furthermore, she says, “The rule was written with a big out to allow companies to continue in the same vein they always have if they wish to collect commissions, revenue sharing, or other types of compensation—by meeting specific requirements and entering into a contract with the client. (BIC exemption). Of course, even this is not acceptable to the industry, which complains that the best interest contract exemption is still too much of a burden. Boo-hoo!”
But there is another side to the story. “From the standpoint of small, community banks, we’re opposed the rule,” says Chris Cole, executive vice president and senior regulator counsel for the Independent Community Bankers Association.
He explains, “Many of our guys work in the wealth management division with commissioned-based accounts in the $100,000-$300,000 range,” and find the rule onerous. “Some of our guys have gotten out of the market of offering advisory services. Too much regulation means the end of services. Just like a lot banks got of mortgages because of Dodd-Frank.”
Bank board of directors, no doubt, are already grappling with what the rule could potentially mean in terms of compliance, employee and legal issues.