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By Sean Forbes
Sept. 17 — A recent congressional hearing on the Department of Labor's proposed conflict-of-interest rule gave the impression that the financial advisory industry is united in opposition to the proposal, but representatives for one industry group—the Financial Planning Coalition—told Bloomberg BNA that they are strongly in favor of the regulation.
The proposal (RIN 1210-AB32) does need modifications, but fears and concerns that industry opponents and their House supporters expressed during the Sept. 10 joint hearing of two subcommittees of the House Financial Services Committee are either exaggerated or aren't justified, said Marilyn Mohrman-Gillis, managing director, public policy and communications at the Certified Financial Planner Board of Standards Inc, speaking on behalf of the FPC.
Mohrman-Gillis, who attended the hearing, addressed comments made by lawmakers and witnesses on such topics as the best-interest-contract exemption, definitional issues in the rule and robo-advice.
Concerns that advisers will run from the proposed best-interest-contract (BIC) exemption aren't realistic, Mohrman-Gillis said.
During the hearing, critics of the proposal said one of the problems with the proposal is that advisers wouldn't even be able to talk with potential clients before signing a contract.
Mohrman-Gillis said the timing for when to sign the contract can easily be addressed in the proposal if the DOL takes up a recommendation the FPC made in a comment letter on the rule: that obligations to offer advice in the best interest of the client retroactively cover any recommendations made prior to the signing of the contract.
“This whole notion that I have a client who comes to me and I say, ‘Nope, before I can even talk to you, you have to sign this contract—you sign here, you sign here”—that is an exaggeration of the rule as it is written, and certainly will be a great exaggeration of the rule as we believe that the Department of Labor will modify it,” she said.
One aspect of the proposed rule that needs clarification by the DOL concerns advice that is “individualized” or “specifically directed to” a potential client, Mohrman-Gillis said.
Under the proposal, such advice would bring an adviser under the Employee Retirement Income Security Act's fiduciary duty standard.
The Financial Planning Coalition offered suggestions in its comment letter to the DOL on this point as well, Mohrman-Gillis said. The group said the DOL should clarify that advisers' marketing materials aren't considered individualized or specifically directed to the recipient.
It is “important,” Mohrman-Gillis said, for the DOL “to recognize that certain marketing materials are allowed before fiduciary liability arises.”
One definition that doesn't need clarification, despite criticism of it, according to Mohrman-Gillis: “reasonable compensation.”
One of the conditions that would allow advisers to depend on the BIC exemption would be that their compensation meet that standard.
Mohrman-Gillis said the DOL's proposal doesn't spell out the term's meaning, but that it is defined within ERISA jurisprudence. “And at this point in time, any adviser who’s providing advice under ERISA—and there are plenty of them out there right now—knows what that means,” she said.
William Nelson, public policy counsel at the CFP Board, a member organization of the Financial Planning Coalition, who also was at the hearing, added that reasonable compensation is a facts-and-circumstances test, often based on the market. Moreover, the term is defined under case law, so the term isn't a new one, and therefore industry reaction to it is unfounded, he said.
“It’s disingenuous for the industry to say they just threw this at us,” he said.
While many commenters have said that the eight-month implementation period for the rule is far too quick, and two or three years is needed, the FPC is in favor of keeping it tight, at only one year, but with a phase-in of some aspects, such as disclosure and record-keeping requirements, Mohrman-Gillis said.
A former DOL official said at a conference held Sept. 14 that the department may include a compliance aid period.
Another hot topic among the proposal's critics at the hearing was the rise of digital wealth advisers, also called “robo-advisers.”
Although only a miniscule portion of the U.S. advisory industry—currently about 0.01 percent of the $33 trillion dollar industry, according to an Ernst & Young study—robos appear poised for significant growth.
Some critics of the DOL proposed rule see their rise as a threat to investors.
For example, Rep. Sean P. Duffy (R-Wis.), chairman of the House Financial Services Subcommittee on Oversight and Investigations, said during the hearing that the proposal “isn't going to allow” lower-income and smaller savers to get professional advice, and they will be “relegated” to getting impersonal algorithm-driven advice.
But depictions in the media of robo-advisers as the Terminator or other fearsome metallic goons are “fear-mongering,” Mohrman-Gillis said.
She said her adult son uses a robo-adviser.
Even though he's never talked with the adviser face to face, the adviser “operates under a fiduciary standard of care that is being provided at scale, in a way that allows for fiduciary advice to be provided at a very, very, very low cost,” Mohrman-Gillis said. “So there are lots and lots of models out there and they don’t require people to talk to just a robot.”
Jeffrey A. Levy, managing partner of Cammack Retirement Group in New York, also said that robo-advisers come in a wide variety of business models, such as how they're compensated, whether they're technology-only or combined with live advisers, whether they abide by a fiduciary standard and how they generate revenue. And while the majority are focused on investors with individual retirement accounts, “one or two” work with employer-sponsored plans and others focus on those who have $500,000 to $2 million in investments, he said.
One concern about robo-advice is when the line between education and advice is crossed, “and is it still better than taking a dart and throwing it at the market, which frankly a lot of people do,” Levy said. Another question is about getting the right amount of disclosure, such as figuring out how much one is paying for advice or how the adviser is being paid, he said.
Several factors may drive robo-advisers to a greater share of the market, Levy said. For example, legislators may have an interest in putting into place appropriate safeguards to protect investors, and consumers themselves will determine how much advice they want or need.
People like robos just as they did target date funds, because in both, “they put the money in and then they leave it there.”
If a robo-adviser can deliver returns just as good as a traditional, human adviser, but with lower costs, “then the customer may be just happy with that,” he said.
Levy added a disclaimer that his comments were only his and didn't reflect his firm's positions.
The DOL will make some “minor concessions” but is unlikely to change the proposal to any significant degree, said Michael A. Webb, vice president at Cammack Retirement Group, also in New York. As a result, many commission-based advisers who are worried that the BIC exemption will impose too much process and paperwork requirements are preparing for a “worst-case scenario” and considering switching to a fee-basis model, he said.
So what can the DOL do to allay some of those concerns?
A workable exemption would be one in which if a commission-based adviser receives the same commission for any product regardless of which one is recommended, “then that's OK, because I'm not deriving more money by steering you to a certain investment,” Webb said.
If that exemption were included, commission-based advisers would be “much more amenable to continuing to educate participants, continuing to service them and continuing to work with these accounts,” he said.
If the final rule looks like the proposal, in the short term there will be a move toward fee-based accounts, but generally the U.S. industry adjusts in the long term to new rules, and in this case, it will innovate to deal with smaller accounts, Webb said.
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