President Joe Biden introduced the Labor Department’s revised fiduciary rule proposal today as the latest attempt to curb “junk fees,” or high and potentially unsuitable commissions, though many industry advocates objected to the term.
“Some advisors and brokers steer their clients towards certain investments not because it’s in the best interest of the client, but in the best interest of the broker,” Biden said in an event of the White House. “I get it; I understand it, but I just want you to know we’re watching.”
The rule was unveiled in full earlier Tuesday and marks the latest iteration of a Department of Labor attempt to re-investigate and revise the definition of a “fiduciary” for advisors.
The administration says high (and potentially unsuitable) commissions are an example of junk fees in the retirement advice space, with Biden claiming such fees could result in as high as a 20% decline in money for savers at retirement age.
“When you pay someone for retirement advice, they must give you advice in your best interest, and not whether it gets them the best payday,” he said. “Most people think there is that fiduciary duty already.”
The DOL’s new rule was delivered to the White House’s Budget Office in early September, with meetings held for industry and investor advocates throughout October. The new rule clarifies that one-time advice on rollover recommendations from 401(k)s into annuities or IRAs falls under fiduciary protections, as does advice on menus for retirement plans.
The rule also amends 2020-02, a “prohibited transaction” exemption fiduciaries can take provided they adhere to certain conduct standards. The new rules strengthen disclosure obligations so investors have “sufficient information” about the costs of the transaction, as well as the “significance and severity” of any conflicts of interest for the fiduciary.
Industry groups, including the Financial Services Institute and the National Association of Insurance and Financial Advisors, came out in opposition.
NAIFA CEO Kevin Mayeux decried the “misleadingly named Retirement Security rule” in a statement, arguing the rule would unfairly saddle advisors with unnecessary regulations while they already operated under the Securities and Exchange Commission’s Regulation Best Interest and the National Association of Insurance Commissioners’ model rules for annuity recommendations.
“Referring to legitimate compensation many advisors receive for their work as ‘junk fees’ is insulting and unfair,” Mayeux said. “It disregards the fact that many consumers are best served by models that include products delivered on a commission basis.”
In an initial read of the rule, Insured Retirement Institute Chief Legal and Regulatory Affairs Officer Jason Berkowitz said the new proposal effectively replaced ERISA’s five-part test for determining whether advice fell under fiduciary status for a new framework the IRI worried could “drop the bottom out” for lower and middle-class retirement savers.
Berkowitz warned of further effects on the brokerage space; according to his reading, the proposal claimed fiduciary status applied to investment recommendations made as part of an advisors’ regular business, based on an investor’s particular needs and could be relied on as being in that client’s best interest.
But all of those requirements would be satisfied by any registered rep of a broker/dealer with Reg BI, Berkowitz said.
“Based on my initial read, it strikes me that I don’t see how a registered rep who is complying with their obligations under Reg BI would not automatically by virtue of that also be triggering fiduciary status under this new test,” he said.
Several Labor Departments under previous administrations attempted fiduciary rules, including an Obama-era rule that was overturned by the Fifth Circuit Court of Appeals.
Bradford Campbell, a partner with the law firm Faegre Drinker and former DOL executive under President George W. Bush, told WealthManagement.com that the scope of the extension of fiduciary requirements in this rule mirrored the previous attempt, despite some changes.
“They’re diverting the efforts of dozens or hundreds of people to retread an issue the DOL’s already lost on,” he said.
Some other groups, including the Public Investors Advocate Bar Association and the CFP Board, threw their support behind the DOL’s efforts, with incoming PIABA President Joseph Pfeiffer saying that the rule would ensure “that advisors will have to put retirees ahead of commissions.”
In a statement Tuesday morning, a CFP Board spokesperson said the rule made long-overdue changes to ERISA’s framework.
“We celebrate the work of the advisors who seek to do what is best for their customers,” they said. “However, the outdated law does not prevent advisors from taking advantage of gaps in the regulations to steer their clients into high-cost, substandard investments that pay the advisory well but eat away at retirement investors’ nest eggs over time.”
In a cursory look at the new rule, Consumer Federation of America Director of Investor Protection Micah Hauptman told WealthManagement.com that it looked like it “checked all of the boxes” the organization was hoping to see, particularly when it came to ending the exclusion of rollover recommendations from fiduciary protection.
“Rollovers are a time when people typically have a lot of money at stake and are vulnerable to receiving bad, conflicted advice,” he said. “The proposal would cover rollover recommendations, which is a significant improvement.”
Hauptman also was happy with the proposal’s coverage of advice on retirement plans, bemoaning that financial advisors currently don’t have an obligation to act in a plan’s best interest, including when giving advice about what will be included in a lineup for a 401(k).
Hauptman also stressed that the proposal would apply to non-securities investments, including recommendations and sales of products like fixed index annuities. Reg BI’s scope is strong but narrow, Hauptman said; the SEC made it clear that its purview extended to recommendations for retail customers, and that does not include retirement plans.
“This extends Reg BI’s protections to where Reg BI doesn’t currently apply,” he said.
Hauptman felt the proposed rule did address the Fifth Circuit’s issues with the Obama-era rule, pointing to the excision of a requirement that firms sign a “best interest” contract, as had been mandated in the 2016 version.
He believes the rule narrowed the barriers of who falls under its mandates, trying to tailor it to relationships between advisors and retirement savers who “reasonably believe” they’re getting investment advice in their best interest.
“The way this rule has been drafted targets the types of relationships the Fifth Circuit was concerned about,” Hauptman said.
But Campbell believed the DOL had really only put a “fig leaf” over the structure the Fifth Circuit objected to, saying that the Biden administration and DOL likely believe the court was mistaken in overturning the Obama-era rule.
“I think the DOL is intentionally writing a rule where they can claim they gave some lip service to the Fifth Circuit’s reasoning, though they really didn’t,” he said. “They’re challenging a different court to find a different result, and at the end of the day I think they think they got unlucky with the three judges they got last time.”
After its publication in the Federal Register, a public comment period will run for 60 days, with the DOL expected to hold a public hearing about 45 days after the proposal’s publication.