The final version of the Department of Labor's conflict-of-interest rule will be thoughtful and balanced, Labor Secretary Thomas E. Perez said at an event hosted by the Brookings Institution.
While Perez was reluctant to reveal what specific revisions might be made before the fiduciary rule (RIN 1210-AB32) is eventually finalized, he said that he is “confident” that there will be changes made to clarify and improve upon the proposal while addressing “legitimate” concerns that have been brought to the DOL's attention, he said Oct. 16.
“This isn't about bad people doing bad things. It's about good people operating under a structurally flawed system where the incentives of the adviser are not properly aligned with the best interest of the customer,” he said.
Perez added that without a best-interest standard, it's very easy for advisers to benefit from hidden fees and “too easy for working families to be unwittingly victimized by the corrosive power of fine print.”
The DOL's proposed rule, released in April, would require brokers to work under a fiduciary duty when working with retirement investors, meaning they would have to act in the clients' best interest. Presently, they are held to a “suitability” standard, meaning they can sell products that generally fit an investor's needs and tolerance for risk.
While there is agreement that the current definition of a “fiduciary” under the Employee Retirement Income Security Act is too narrow, the DOL's proposed rule goes to the opposite end of the spectrum, Kent A. Mason, a partner at Davis & Harman LLP in Washington, said during a panel at the same event.
The debate surrounding the controversial rule doesn't have to do with a requirement to act in the best interest of a client, it has to do with other aspects of the proposed rule that would cut off access to advice for those with small accounts, Mason suggested. This is because without an exemption from ERISA's prohibited transaction rules, the “brokerage model is illegal,” and if that's the case, then small accounts will get burned by their advisers.
While the proposed rule technically provides an exemption—the best-interest-contract exemption (ZRIN 1210-ZA25)—many will be unable to take advantage of it during the eight-month period between the date the final rules are issued and when they become effective. This will inevitably lead to the “firing” of small accounts in the summer and fall of 2016, he said.
Though Perez promised changes to the finished product, Mason doesn't prognosticate many substantive changes, saying that in his view, “all of the changes being contemplated are just around the edges.”
Excerpted from a story that ran in Pension & Benefits Daily (10/21/2015).
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