Investment firms pulling out all stops against financial adviser rule change

Financial-services companies are pulling out all the stops to fight a proposed regulation from the Labor Department that they say will hurt middle-class investors.

At stake is the Employee Benefits Security Administration’s (EBSA) proposal to broaden the definition of “fiduciary” status to more financial advisers, potentially including people who oversee investment retirement accounts (IRAs). The rule could change the way many financial brokers and advisers are compensated.

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The plan has sparked a ferocious lobbying response from financial-services companies, which contend it would cut off investors from valuable financial advice. 

“The effect of the rule is that millions of Americans will lose access to investment advice and services for their IRA,” said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable.

The Obama administration hasn’t budged on the proposal despite letters of concern from Democrats and Republicans, hundreds of comments filed in opposition and an active campaign on K Street to stop it. 

A delegation of about 20 executives from Roundtable member companies are visiting Washington this week to talk to lawmakers about the proposed rule. 

Primerica made sure to have its executives attending the Washington trip. With 1.3 million IRA accounts and $18 billion of client assets in IRAs, the Duluth, Ga.-based company has a lot at stake.

Bill Kelly, president of PFS Investments, the company’s broker-dealer affiliate, said the proposed rule would fundamentally change how he does business. Primerica uses brokers who receive a one-time commission when they sell an IRA to a client, but under the proposal, they would have to move to a more restricted investment advisory role and charge annual fees instead.

“They’re not investment advisers. It’s a completely different examination they would have to take, a much more difficult examination. And we believe if forced into this role of having everyone be an investment adviser, we would lose a significant number of our representatives,” Kelly said.

Officials with the Labor Department have said the regulation governing who has fiduciary status is too narrow and outdated, since it was first issued in 1975. They argue 401(k) retirement plans and IRAs were either not around at the time or too small to warrant government supervision.

The department says it must be more vigilant in overseeing the retirement services market to protect investors from self-dealing financial advisers. Nearly 50 million American households hold some type of IRA, with assets valued at around $4.7 trillion.

In a statement to The Hill, Phyllis Borzi, Labor’s assistant secretary for EBSA, said investigations by Labor, the Securities and Exchange Commission, the Government Accountability Office and others show that conflicts of interest for financial advisers result in lower returns and higher fees for investors. 

“Conflicts of interest and a lack of accountability are widespread in the marketplace for retirement advisory services. An adviser’s compensation is often directly tied to the specific investment recommendations that he makes, and there is a real danger that the adviser’s recommendations will not be based solely on the customer’s interest, but instead will reflect the adviser’s own financial self-interest,” Borzi said. 

“Simply put, we are seeking to protect the millions of employers and small-business owners, workers and IRA holders who rely on investment advice by working to address these conflicts. We think this effort has merit and we are committed to getting it right.”

The rule was first proposed in October last year and has been met with questions as well as frustration from lawmakers and lobbyists alike.

A May letter sent to Labor Secretary Hilda Solis and others in the administration by the New Democrat Coalition said the proposed rule would lead to worse investment decisions by consumers and raise costs for financial services and advice.

Others on Capitol Hill have gone further. Sens. Mike Enzi (R-Wyo.) and Orrin Hatch (R-Utah) and Reps. John Kline (R-Minn.) and Dave Camp (R-Mich.) said in an April letter to Solis and others that the proposed regulation should be suspended.

Lobbyists have not held back, either. A handout being passed on by Primerica executives to lawmakers this week urges them to “protect” middle-income retirement from the proposed rule, which would “virtually cut off access” to IRAs for “at least 18,000,000 middle-income Americans!”

The handout asks lawmakers to work to exempt IRAs from the proposed rule.

Primerica has had a solid K Street presence in 2011, having spent $110,000 on lobbying so far after it hired Cypress Advocacy earlier this year, according to lobbying disclosure records.

The financial-services corporation is not the only company that has hired lobbyists to work on the proposed regulation.

Washington Council Ernst & Young was hired this year by New York Life Insurance Co. to look at the proposal, while Charles Schwab & Co. picked up K&L Gates to lobby on “regulatory issues regarding fiduciary duties,” according to its lobbying registration this year.

Just last week, Groom Law Group filed lobbying registration forms for eight different financial-services companies to lobby on the proposed regulation.

The lobbying effort is not surprising, considering how serious financial-services companies are taking the regulation.

“At our firm, those 1.3 million clients would lose their adviser when this rule goes into effect, because they don’t have the license that would allow them to give advice,” Kelly of Primerica said.

Borzi said Labor has been aiming to issue the rule by the end of this year, but that date might get pushed into next year.

“We have also emphasized the importance of having a very thoughtful and deliberative process, which could mean that the issuance date is extended into early 2012,” Borzi said.