July 13, 2017
House Financial Services Subcommittee on Capital Markets, Securities, and Investment: “Impact of the DOL Fiduciary Rule on the Capital Markets”
Key Topics & Takeaways
- DOL Fiduciary Rule Implementation: Rep. Trey Hollingsworth (R-Ind.) asked if it made sense to have the Department of Labor’s (DOL’s) fiduciary rule become effective while it is still under review. American Action Forum’s Holtz-Eakin stated that it does not make sense in this situation, and also questioned why the Securities and Exchange Commission (SEC) has not acted in implementing its own rule. Subcommittee Chairman Bill Huizenga (R-Mich.) asked the panel if they support a delay in the fiduciary rule’s January 1 implementation date, and all but American Association of Retired Persons’ (AARP’s) Firvida replied yes.
- Rep. Wagner’s Discussion Draft: Rep. Ann Wagner (R-Mo.) asked the panel to discuss how her bill’s best interest standard would build on top of the suitability standard. 1st Global’s Knoch noted that it requires a broker dealer to disclose a conflict of interest. Lombard added that it also asks to uphold a duty of loyalty and care, a higher standard than suitability, and is applicable to all accounts, not just retirement accounts. Wagner then asked if her draft provides a more comprehensive best interest standard than the DOL rule, and all of the panel except Firvida replied yes.
- Nevada Fiduciary Rule: Rep. French Hill (R-Ark.) cited the Nevada fiduciary rule going into effect on July 1 and noted his concern that it will create additional conflict due to states creating their own standard while a uniform standard is being created. Transamerica’s Halloran agreed that “having 50 states doing 50 different things” is counterproductive.
- David C. Knoch, President, 1st Global
- Mark Halloran, Senior Director, Head of Industry and Regulatory Strategy, Transamerica
- Jerome Lombard, President, Private Client Group, Janney Montgomery Scott LLC
- Cristina B. Martin Firvida, Director, Financial Security and Consumer Affairs, AARP
- Dr. Douglas Holtz-Eakin, President, American Action Forum
In his opening statement, Subcommittee Chairman Bill Huizenga (R-Mich.) said sound financial advice is critical for retirement savers, and millions of Americans are working to achieve financial independence. Huizenga stated that the Department of Labor’s (DOL) fiduciary rule is complex and not only fails to protect customers, but harms them by driving up costs. Huizenga stated the DOL is denying American savers access to advice and limiting their choice, pricing out those that would benefit the most from financial advice – low- and middle-income savers.
In her opening statement, Subcommittee Ranking Member Carolyn Maloney (D-N.Y.) stated she is a supporter of the DOL fiduciary rule because it provides “critical protections” for Americans saving for retirement. Maloney stated that many financial advisors already believe the fiduciary standard is the law, and the DOL rule serves to codify this belief. Maloney stated that delaying the rule would be costly for investors, and encouraged her colleagues on the committee to engage with the DOL for “reasonable changes.”
In his opening statement, Rep. Randy Hultgren (R-Ill.) expressed concern about the regulatory framework for retirement accounts, stating that the DOL fiduciary rule is not workable. Hultgren cited that savers with low account balances cannot afford for the rule to go into effect, and said that the Securities and Exchange Commission (SEC) should act first in its capacity as the primary investor protection agency.
In her opening statement, Rep. Ann Wagner (R-Mo.) stated that America is in a “retirement savings crisis” and Congress needs to empower retirement savers, not limit access. Wagner highlighted her discussion draft for consideration by the committee that would repeal the DOL fiduciary rule and apply a “workable best interest standard” for broker-dealers that would not result in savers losing access to financial advice. Wagner said that the draft would keep the issue under the jurisdiction of that SEC.
David C. Knoch, President, 1st Global
In his testimony, Knoch, on behalf of the Financial Services Institute, stated that although they are strong supporters of a uniform fiduciary standard, the DOL fiduciary rule adds unnecessary complexity to the regulatory environment and raises new barriers for investors. Knoch said that investors with small account balances are losing access to investment advice, and cited multiple areas where the rule has already impacted investors. Knoch cited the number of accounts held by 1st Global clients directly with mutual fund companies has dropped 10 percent since 2016, and new accounts have dropped 19 percent in the first six months of 2017. Knoch also said advisors are challenged to find viable, cost-effective solutions to small-employer retirement plans, particularly Simple IRAs where account balances can be as low as 100 dollars. Knoch highlighted how compliance requirements are confusing for investors, who now receive more than 100 pages of paperwork, 70 of which are disclosures. Knoch stated the significant new disclosure requirements are cumbersome, expensive, and unnecessary, and the regulatory burden should be reduced to help financial advisors serve more clients, serve them better, and serve them more completely.
Mark Halloran, Senior Director, Head of Industry and Regulatory Strategy, Transamerica
In his testimony, Halloran, on behalf of the American Council of Life Insurers (ACLI), stated that rules impacting retirement savings should be appropriately tailored, effective, straightforward, and consistent to ensure savers have access to a full range of financial advice and services. Halloran stated that the SEC and state insurance regulators are in the best position to develop a best interest standard and are the appropriate authorities for oversight of financial professionals. Halloran indicated the DOL rule harms middle income savers and limits consumer choice, making it harder for the average American family to access financial advice and save for retirement. Halloran said the fee-based advice model is not always the right choice for consumers, especially small and medium account holders and purchasers of annuity products designed for long-term retirement goals. Halloran said Wagner’s draft “ensures savers have more access to advice and more choices about how to pay for advice.”
Jerome Lombard, President, Private Client Group, Janney Montgomery Scott LLC
In his testimony, Lombard, on behalf of the Securities Industry and Financial Markets Association (SIFMA), expressed support for the committee’s consideration of legislation to allow the SEC to develop a best interest standard for broker dealers. Lombard stated the industry has already seen the harmful effects of the DOL rule, including limited product choice, limited access to advice, and rising costs. Lombard said both Janney’s advisors and customers are confused by the new regulation, and upwards of 10,000 of their customer retirement accounts will be moved to a “no advice service” desk from a full-service advisor. Lombard expressed SIFMA’s support for “establishing a best interest standard for broker dealers that mirrors the elements of the Impartial Conduct Standard under the DOL Rule, but unlike the DOL Rule, would apply across all broker dealer accounts, not just retirement accounts.” Lombard said the DOL should at a minimum delay the January1, 2018 applicability date to allow the SEC to lead the effort to put in place a standard that works for all accounts.
Christina B. Martin Firvida, Director, Financial Security and Consumer Affairs, AARP
In her testimony, Firvida stated that the AARP “enthusiastically supports” the DOL fiduciary rule. Firvida stated that because of the DOL rule, firms have developed new products and services to meet consumer demand, and that the AARP is confident firms will continue to innovate and compete. Firvida stated that firms have incurred compliance costs due to the rule, but that AARP has “not seen prices increase for investors served by those companies.” Firvida said that the SEC should act in addition to, but not in lieu of, the DOL on this matter. Firvida stated that the Wagner draft does not define a best interest standard as a fiduciary standard, and that AARP remains committed to the “strongest possible fiduciary standard for retirement investment advice.”
Douglas Holtz-Eakin, President, American Action Forum
In his testimony, Holtz-Eakin said there is a consensus regarding the desirability for a standard of conduct to protect small retirement savers, but that the DOL fiduciary rule is not workable. Holtz-Eakin stated the high cost of the DOL rule derives from changes in business practices the rule will force on the financial services industry, which will be most harmful to small savers. Holtz-Eakin cited an American Action Forum study that concluded the DOL rule was the most expensive regulation in 2016, and the second most expensive non-environmental regulation since 2005, and will cost an estimated $31.5 billion plus an additional $2 billion annually. Holtz-Eakin encouraged a “more workable approach” to developing a standard of conduct.
Question & Answer
Best Interest Standard Draft Legislation
Huizenga asked if the panel supports the best interest standard in Wagner’s draft bill, and all but Firvida replied yes.
Maloney asked Firvida to talk about the differences in the DOL’s fiduciary rule and Wagner’s draft bill to replace the rule with a best interest standard for brokers giving retail investment advice. Firvida responded in saying that the draft bill is “too vague,” and that FINRA’s suitability standard could possibly already satisfy the standard as currently drafted.
Maloney also pointed out that the draft bill would not take affect for 18 months after it was made law but that the DOL rule would immediately be repealed, and asked how this would impact customers. Firvida agreed with Maloney that brokers would not have to act in the client’s best interest those 18 months and that it would be “very significant on the nest eggs” of those saving for retirement.
Rep. David Scott (D-Ga.) stated that Wagner’s draft does not allow additional obligations related to the standard of care by broker dealers to be added on top of the one in the draft, and criticized it for undermining the SEC’s rulemaking.
Wagner asked the panel to discuss how her best interest standard would build on top of the suitability standard. Knoch answered that it requires a broker dealer to disclose a conflict of interest. Lombard added that it also asks to uphold a duty of loyalty and care, a higher standard than suitability, and is applicable to all accounts, not just retirement accounts.
Wagner then asked if her draft provides a more comprehensive best interest standard than the DOL rule, and all of the panel except Firvida replied yes.
Rep. Stephen Lynch (D-Mass.) criticized Wagner’s draft, explaining that an advisor could recommend whatever product offers the highest commission if it is suitable, arguing that it is a “loose” standard.
Fiduciary Rule Implementation Date
Huizenga asked the panel if they support a delay in the fiduciary rule’s January 1 implementation date, and all but Firvida replied yes.
Rep. Trey Hollingsworth (R-Ind.) asked if it made sense to have the DOL’s rule become effective while it is still under review. Holtz-Eakin stated that it does not make sense in this situation, and questioned why the SEC has not acted in implementing their own rule.
Small Business Owners and Investors
Huizenga and Rep. Warren Davidson (R-Ohio) asked how the fiduciary rule has impacted Simple IRAs and other small business plans. Knoch replied that so far that has been the largest impact of the rule, with the number of Simple IRA accounts dropping 20 percent already, and expected to drop to over 40 percent.
Rep. Steve Stivers (R-Ohio) inquired whether the panel thought that the current DOL fiduciary rule disadvantages annuities. Halloran argued that it “absolutely” does because the wealthy do not have as much of a need for this product as lower earners do, creating a disadvantage for a tool that lower- and middle-income people use for their retirement.
When Stivers asked the panel to expand on how this would affect the future of middle-class and lower-class Americans, Holtz-Eaken claimed that while the rule is intended to provide high-quality advice, it will not work if the advice cannot be reached. He explained the DOL’s rule will make it too expensive for middle and low-income earners to access financial advice.
Hollingsworth asked about the unintended consequences that the panel may see that limit small banks from providing IRAs and other opportunities. Firvida explained that small account holders are going to gain more money in the situation so it is mostly beneficial. Holtz-Eaken highlighted that investment advice is going to be less available to small investors which is a bigger problem, adding that approximately 42 percent of people will not qualify for minimum balance IRAs at his company.
Rep. Bruce Poliquin (R-Maine) asked if there has been an increase in the minimum account size due to the fiduciary rule, and who will advise the smaller investors. Knoch replied that he has seen financial advisors discontinuing their services due to the rule.
Rep. Brad Sherman (D-Calif) criticized the bifurcated system between the SEC and DOL regarding the fiduciary rule, and asked if there are unintended consequences for smaller institutions when it comes to IRA rollovers and other savings opportunities. Firvida replied that the biggest concern with the rule is that there will be disruptions in the marketplace, but claimed that many of them will be “beneficial” for retirement savers. Holtz-Eakin argued that the combination of fee-based accounts and litigation costs make investment advice unavailable to small account holders.
Huizenga inquired if the panel agreed that the SEC should hold the responsibility in regulating fiduciary standards and Firvida was the only panelist to reply no, as she believes both the SEC and DOL should.
Hultgren asked if the SEC would better be able to weigh the costs and benefits of the fiduciary rule, to which Holtz-Eakin replied that they are the primary regulator and “perfect to do this.”
Hultgren asked what would happen if the DOL’s rule goes into effect prior to the SEC finalizing their rule. Knoch cautioned that there would be a decline in utilization of platforms that are most often offered to investors with small account balances.
Scott noted that Dodd-Frank gave the SEC authority to create a fiduciary rule years ago and was critical of the Commission for failing to create the rule. He argued that since both the SEC and DOL have jurisdiction, they should harmonize in creating a rule but that it has not been done yet.
Stivers asked about the differences between the expertise in the DOL and SEC. Lombard answered that the SEC has been the primary regulator of broker dealers for a long time, and that throughout his career, he has seen the SEC auditing advisory activities, but has never dealt with the DOL.
Rep. Thomas MacArthur (R-N.J.) echoed Scott’s comments on the SEC and asked what current rules apply differently depending on the type of investor. Lombard explained that there are suitability rules that apply to broker dealer activities, an SEC fiduciary standard for investment advisory activities, and an Employee Retirement Income Security Act (ERISA) fiduciary rule applying to the retirement space.
MacArthur then asked if advisors understand their changing duties when dealing with different clients. Lombard explained that even career advisors are “just now coming to grips” with the regulations.
Huizenga questioned the panel if they believe robo advisors are better than in-person advice. While Firvida replied that “it is not wrong” to get advice from robo advisors and new technologies, the rest of the panel answered no.
MacArthur asked if robo advisors are better or equal to live advice. Firvida answered that many traditional firms are adopting the practice, and that robo advisors may add a lot of value to financial services.
Hollingsworth asked if there is a concern that robo advice would not fulfill the requirement of financial advice for those who do not have access to internet. Holtz-Eakin replied that the concern is not the availability of robo advice, but rather the choice of live versus robo advice.
Rep. John Delaney (D-Md.) asked why the entrepreneurial economy cannot react to the change and start new businesses for lower- and middle-income investors. Lombard replied that firms have already used innovation in response to the rule, explaining that his firm has decreased minimum advisory fees. Holtz-Eakin questioned how long it may take for such innovation to be created and what will happen to low- and middle-income investors in the meantime. Firvida argued that innovation is already serving small accounts.
MacArthur asked Firvida if robo advisors are better than live advice, to which Firvida explained that many products and services are being offered in a technological manner, and that many traditional firms have adopted robo services.
Sherman asked if investors will be subject to robo advice, to which Holtz-Eakin replied that it depends on the size of the account. Firvida replied that she believes the future will offer a combination of robo and live advice.
Class Action Lawsuits
Rep. Tom Emmer (R-Minn.) asked if the ability to sue advisors and firms is the biggest flaw with the fiduciary rule, to which Halloran replied, “if not the biggest, among the biggest.” Halloran added that applying such an ability to IRA accounts will expose financial advisors to class action lawsuits as of June 9. He continued that due to the rule being over a thousand pages with little guidance, there is “more concern about what we do not know than what we do know.”
In response to questions about class action lawsuits, Firvida argued that there are two things to remember: 1) there must be a systemic problem prior to bringing on a class action; and 2) it is “extremely difficult” to certify a class.
Hultgren asked about what the most significant flaws of the previous administration’s cost-benefit analysis of the fiduciary rule. Holtz-Eakin replied that the DOL significantly underestimated the cost of litigation, and that the rate of return was not risk weighted in the study, adding that “if you poke hard…you will not find $17 billion in loss.”
UK Retail Distribution Review
Mooney referenced the UK’s Retail Distribution Review from Holtz-Eakin’s testimony, and asked what caused the Financial Conduct Authority to initiate a review of the rule. Holtz-Eakin replied that it was due to the decision to ban commission-based accounts, and that it was found that about 25 percent of advisors left the industry, almost 45 percent of firms no longer provided advice to small accounts, and minimum balances increased. He added that the U.S. is beginning to experience what happened in the UK.
Nevada Fiduciary Rule
Rep. French Hill (R-Ark.) cited the Nevada fiduciary rule going into effect on July 1 and expressed concern that it will create additional conflict due to states creating their own standard while a uniform standard is being created. Halloran agreed that “having 50 states doing 50 different things” is counterproductive.
Impacts of the Fiduciary Rule
Emmer asked about a survey conducted by SIFMA of the impacts of the fiduciary rule on its members. Lombard replied that surveys have shown there is already a disruption, and that there have been limits on product selection in certain areas, specifically fixed income. He added that some members have stopped selling mutual funds and others have stopped offering commission-based accounts, adding that costs are increasing for customers as they move into fee-based accounts.
Davidson stated that the DOL estimated in 2011 that consumers who invest without the advice of a professional make errors costing $114 billion a year, and asked if DOL has factored that statistic into their economic analysis. Knoch replied that he does not believe so, and that it is the “biggest flaw in the calculation.”
Rep. Alexander Mooney (R-W.Va.) asked if the fiduciary rule will harm investors, which Halloran replied that it will take away choices from investors. Lombard added that the DOL chose one business model over the traditional brokerage account “even though it does not work for every client.”
For more information on this hearing, please click here.