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A Journo’s Take on the Fiduciary Standard Rule 2.0

The U.S. Department of Labor’s latest move to prevent conflicts of interest by stockbrokers and insurance agents selling retirement products stands to shake up the industry.

For a pension and retirement plan geek like myself, April 14 was a red-letter day. After five years of waiting, the Department of Labor issued its revamped fiduciary standard rules that would cover anyone dispensing financial retirement advice, particularly on IRAs, or individual retirement accounts.

For some, this day was long awaited because the first — and ultimately unsuccessful — DoL attempt at fiduciary rulemaking did not survive its comment period, in 2010. DoL took the constructive criticism and went back to the drawing board to write new rules before issuing them for comment this week.

For others, it seemed as if the DoL acted in haste in proposing its new rules (full text), as did the Office of Management and Budget, which vetted them before the release. This occasioned the official launch of some of the first shots at the new rule. The Financial Services Institute, a lobbying organization for retail broker-dealers, for example, wrote in an e-mail that “OMB only took 50 days” — emphasis theirs — to vet the new rules. They deemed that time period too short because — who knew? — OMB reviews of DoL rules take an average of 117 days.

But all can agree on one thing: The new proposal to mitigate conflicts of interest in retirement plan advisement, if finally allowed to see light, will be a game changer. It was with this thought in mind that I dialed in to the 2 p.m. press conference on Tuesday to hear U.S. Labor secretary Tom Perez and Jeff Zients, director of the National Economic Council and assistant to the president for economic policy, give the Fourth Estate a first look at the new rules. Among the dwindling perks in journalism these days, these sneak peeks count as one.

Secretary Perez kept it really simple — personal, even. He told the news media participants that he was among those whose own financial adviser upheld a high standard of care. One example: He mentioned that his adviser had told him to keep his money in the Thrift Savings Plan, the retirement savings plan available to all federal employees. As the TSP is almost universally recognized as the No. 1 defined contribution plan in the U.S., I’m not sure anyone would need to pay for that particular piece of advice. We did get the picture nonetheless.

Perez went on to explain a few key points, including a new “best interest contract exemption” that would “provide guardrails but not straightjackets” for retirement plan advisers. This novel concept means that stockbrokers and insurance salesfolk — and all those previously not held to a registered investment adviser standard — would need to sign a document ensuring that they will act in the client’s best interest before accepting various sales fees. A penalty would accompany any contractual malfeasance.

Whereas there’s no doubt that there will be some changes made at broker-dealers and insurance companies, it’s a bit too soon for financial industry lobbying organizations like the Securities Industry and Financial Markets Association to weigh in. That organization’s web site, for its part, informs us that SIFMA needs some time to review the rules. That’s no surprise, given that, beyond the 120 pages of rules, there are more than 500 additional pages that include six separate exemptions and an economic impact statement that was requested during the first rule comment period.

But the politicians are already making their opinions known. The statement from Republican Congressmen John Kline of Minnesota and Phil Roe of Tennessee on the web site of the House Education & the Workforce Committee, released in the wake of the new rule announcement, held to the view they had adopted in the past. When I spoke with Kline, who chairs the committee, about the need for a rule to mitigate conflict of interest last year, he was firmly in the camp — with much of the financial services industry — that believes more oversight of brokers and other salespeople would make their practices more costly, ultimately hurting middle class and other lower-wage earners’ access to advice.

Unlike Kline, I hold the view that without a conflict of interest regulation, costs will continue to rise for those who can least afford them, from Millennials distracted by plan advisers who suggest spreading young, tiny nest eggs across a dozen actively managed mutual funds to newly retired 401(k) plan participants solicited by salespeople to reallocate to a more expensive IRA with fund choices not selected by an ERISA fiduciary.

Although some might conclude by saying that the financial industry is gearing up for a heated battle — which assuredly it is — I’d also like to ask a question. To paraphrase Angie Herbers of ThinkAdvisor: Why are we even still debating a fiduciary standard?

Follow Frances Denmark on Twitter at @francesdenmark.

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