Financial adviser rule draws industry fire

Financial adviser rule draws industry fire
© Getty Images

Financial services industry firms are locked in a battle to shape the final language of contentious draft regulations meant to crack down on financial advisers.

Administration officials convened a series of at least four meetings in March at the White House, hearing from progressive groups who back the new regulations as well as business interests looking to dial them back, Office of Management and Budget (OMB) records show.

ADVERTISEMENT

President Obama and Department of Labor (DOL) officials, backed by labor groups and the AARP, argue that the new disclosure requirements are needed to better protect consumers who might not understand that some financial advisers receive commissions off selling retirement advice to consumers.

But the business community says that the new requirements — dubbed “fiduciary standards” — would upend the industry’s payment model and decrease lower-income Americans’ access to the financial advice industry.

Sources familiar with the meetings say the business community is concerned that the Labor Department’s proposed rule would restrict certain ways in which financial advisers are paid.

The meetings indicate that the OMB could release its review of the controversial policy as early as mid-April, according to sources.

In addition to the AARP, consumer groups like Better Markets, as well as labor powerhouses AFSCME and AFL-CIO, have met with administration officials on the issue supporting Obama’s effort. 

Officials from Fidelity Investments and the American Society of Pension Professionals & Actuaries (ASPPA) met to relay concerns about the regulations.

Ralph Derbyshire, deputy general counsel at Fidelity, was among the participants at one of the meetings earlier this month.

“We do look out for the best interests of our customers and we’re willing to do that under a DOL rule,” Derbyshire said. “But it needs to be structured in a way that we can provide adequate assistance to our investors that include many low- and middle-income savers.”

Specifically, business groups are asking DOL officials to allow financial advisers to continue to receive disclosed payments from mutual funds — often called “revenue sharing” — that they say make it economically feasible for the advisers to serve small accounts.

They are also concerned that the department’s rule would restrict “principal trading,” where, on a fully disclosed basis, financial advisers can sell investments such as bonds that their company owns. Without principal trading, investor costs and trading difficulties can go up very significantly, according to the business groups.

Though no one has seen the DOL rule yet, business groups fear that officials will list some of these revenue streams as “prohibited transactions.”

Brian Graff, CEO of the ASPPA, said that the financial advice industry could support the agency’s rule should the administration address its concerns about prohibiting certain transactions.

“If they were to address it, we would certainly not be as concerned about it as we are now,” Graff said. 

Kent Mason, an attorney working with business groups on the issue, said “the problem with the DOL approach has always been the prohibited transaction rules.”

“So if the DOL reproposal addresses the prohibited transaction issues in a workable and comprehensive way, the industry reaction to the reproposal will be far more favorable,” Mason said.

The rule’s backers are equally vehement in their support for tough language to rein in longstanding industry practices.

Bill Harris, CEO of the digital wealth management startup Personal Capital, also met with officials in March.

“Anyone who argues against [these regulations] is just trying to preserve a corrupt system, where brokers push the products that make them the most money rather than those that are best for their clients,” he said.

Harris, the former CEO of PayPal, called the new regulations “inevitable.” Harris’s firm looks to offer more digitally centered financial advice, saying “the rapid growth of electronic access to financial information is making good financial advice ever cheaper and more available to families at all income levels.”

Meanwhile, officials at the Securities and Exchange Commission (SEC) are also working on a fiduciary proposal. Though separate agencies, the DOL and the SEC both have jurisdiction over regulating financial advisers, allowing for each agency to issue its own fiduciary standard.

The business community has raised concerns that DOL and SEC officials are not coordinating their efforts, a claim the agencies have refuted. Businesses, in particular, say they are worried about the compliance and regulatory hurdles created by two competing standards.

They note that if a financial adviser is offering advice to a client who wants retirement advice versus investment advice, the adviser could conceivably have to follow competing standards, creating further confusion for the investor — the same problem regulators are hoping to correct.