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FAs and Investors at Odds in DOL Rule Comments

By Rita Raagas De Ramos August 11, 2017

While the Department of Labor’s fiduciary rule has its advocates within the industry and the investor community, analysis of the 503 submissions during a recent round of public comments indicates the DOL’s latest decision to seek an 18-month delay of the rule’s full implementation may be a victory for many advisory firms and other industry stakeholders opposing the rule. Analysis by FA-IQ shows that those who lobbied for a reprieve mostly did so either because they oppose the need for the rule at all or are against certain components of the rule – particularly those they consider costly to implement or fear could expose advisors to excessive litigation.

Two days after the DOL closed its latest official comment period on its fiduciary rule, the department has now officially submitted a proposed extension of the rule’s transition period to the Office of Budget and Management. While the rule is presently due for full implementation on January 1, 2018, the DOL now wants the transition period to last until July 1, 2019. The rule was partially implemented on June 9.

Among other things, the so-called fiduciary rule requires advisors to inform their investors of any potential conflicts of interest and have their clients sign a Best Interest Contract Exemption document if the advisors receive variable compensation for providing retirement advice. But during the transition period until Jan. 1, 2018, retirement advisors who make use of the BICE are required to comply only with so-called Impartial Conduct Standards, which state BICE users must “adhere to basic fiduciary norms and standards of fair dealing.” Specifically, advisors must receive no more than reasonable compensation, must refrain from making materially misleading statements, and must provide advice in accordance with the best interest standard of care.


Dennis Concilla, Columbus, Ohio-based head of Carlile, Patchen & Murphy’s securities litigation and regulation practice group, says the extension of the transition period would be a “great comfort” to those opposed to the rule – partially or in its entirety.

“Under the current DOL rule, with the way it is written, it would make it difficult – if not impossible – for small investors to get legitimate advice. The liability would be so great that no advisor would be comfortable doing it under those circumstances,” he says. “Just in anticipation of the rule we’ve seen all sorts of changes in the industry in ways that didn’t even make sense because nobody was certain about what the rule was trying to accomplish.”

Concilla says it is “highly unlikely” the DOL rule will survive in its current form. He hesitates to speculate on whether it could still be rescinded or how a final rule would look, but notes there is plenty of input for the DOL to consider from this latest review.

Indeed, over 500 comments were submitted by broker-dealers, advisory firms, advisors, investors, industry groups, lawyers, accountants, service providers, employers, employer benefit groups, and other stakeholders. There was a close split between commenters who (1) lobbied for the full implementation of the DOL rule on Jan. 1, 2018; (2) lobbied for a delay; and (3) didn’t give a stance on timing but voiced their concerns about the rule.

The most common reasons cited by opponents of full implementation as currently scheduled are:

  • The perceived costs of compliance
  • Anticipated burdensome compliance requirements
  • Risk of exposure to potential litigation, including class action suits
  • Supposed disenfranchisement of investors with smaller accounts because keeping them as clients would no longer be economically viable
  • The possibility of disadvantaging investors by limiting the investment products advisors can recommend to them
  • Limiting investors who may benefit from paying commissions instead of fees
  • The belief that the DOL is the wrong body to impose a fiduciary rule and responsibility should instead go to the SEC.

A sampling of advisor criticism of the DOL rule shows a variety of worries.

Ben Brooks, president of Capital Investment Companies, says staffing requirements related to the DOL rule “have placed intense margin pressures” on advisory firms.

Paul Reilly, chairman and CEO of Raymond James Financial, says the operational and IT changes to comply with the DOL rule will take at least two-and-a-half years to complete, and it will cost “tens of millions of dollars in addition to the millions that have already been spent.” He adds the firm sees “no benefits” to clients from these additional expenses.

“Layers and layers of disclosure requirements simply hassle honest advisors and fail to impede dishonest ones.”
Gary Duell
Duell Wealth Preservations

Berthel Fisher & Company Financial Services, a broker-dealer with around 350 independent contractor advisors, says DOL rule-related costs will “most likely force” its smaller practices to either consolidate or shut down. Berthel Fisher notes that it received a quote from Morningstar for a technology solution that costs $1.014 million annually, which is more than its annual net income. “We have already spent over $300,000 in legal costs and staff hours to develop compliance procedures. We won’t survive.”

Bethel Fisher also balks at the potential litigation-related costs, citing figures reported by Morningstar. “This is the death nail [sic] for our industry as small businesses. Maybe Merrill Lynch can afford it, but we can’t.”

In a report published in February, Morningstar analyst Michael Wong estimated the range of the long-term annual cost for the advisor industry from potential class-action settlements at $70 million to $150 million. In a bearish scenario, the cost of class-action settlements alone could decrease the operating margin on the advised, commission-based IRA assets of affected firms by 24% to 36%, Wong added.

Gary Duell, owner and investment advisor representative of Duell Wealth Preservations, says “layers and layers of disclosure requirements simply hassle honest advisors and fail to impede dishonest ones.”

Adam Griffin, a financial advisor at Northwestern Mutual, says he would no longer be able to work with clients with less than $150,000 in their investment accounts.

Robert Schmansky, president of Clear Financial Advisors, says the DOL rule is “driving market participants to make safe recommendations rather than the advice they believe is truthfully in the clients’ best interest.”

Dave Lutz, a certified financial planner at Celtic Financial Services, illustrates the point about some investors being better off paying commissions. For example, he says, a client with $100,000 to invest would be charged a 3.5% sales charge upfront, or $3,500, and a 0.25% 12b-1 fee annually. That’s lower than forcing that client to pay a fixed fee of 1% annually, he says.

Ron Palastro, founder and CEO of Cobblestone Wealth Advisors, says the sale of retirement products is already heavily regulated. “The SEC regulates my firm through its anti-fraud authority” in the Securities Act of 1933 and Securities Exchange Act of 1934, he says. The firm is also subject to Finra rules, he adds.

And the DOL’s proposed 18-month extension of the transition period could be seen as a compromise of sorts, given that among those who voiced an opinion on the timeframe for delay, recommendations ranged mostly from 12 to 24 months.

Sifma was lobbying for a delay of at least 24 months after the completion of the DOL’s review and publication of the final rule.

And the lobbying group hasn’t given up hope the rule could be rescinded. In its comment, signed by Lisa Bleier, Sifma associate general counsel, the group says as the DOL “completes the important and necessary work on the reexamination of the rule and the related exemptions, we believe that the resulting findings will lead the department to conclude that both the rule and the exemptions must be significantly revised or rescinded altogether.”

Twenty-one Sifma members surveyed by Deloitte & Touche spent around $595 million preparing for the initial June 9, 2017 applicability date of the DOL rule, and they expect to spend over $200 million more before the end of this year. Sifma says multiplied industry-wide, that equates to a projected expense of more than $4.7 billion in start-up costs relating to the DOL rule.

Sifma says its members are “struggling” with the changes needed to comply with the DOL rule, including:

  • Creating an extraordinarily complex website with extensive detail on product manufacturers and third-party payments that is challenging to make and maintain
  • Collecting and creating a database for any institution that sells either proprietary products or receives third-party fees that might need to be updated regularly
  • Changing the applicable cash sweep vehicles for every retirement account, and reprogramming the cash sweep systems to accommodate these changes
  • All of the required material contained in the scores of conditions in the exemptions in new IRA and plan documents
  • Implementing a reengineered account opening process across front, middle and back offices
  • Enhancing audit, compliance and supervision functions for newly required documentation and investor information
  • Creating document upload capabilities and formalizing reports and other oversight tools on the rollover process to ensure appropriate documentation and information is collected
  • Creating an on-demand disclosure process
  • Altering mutual fund offerings, receiving approval on prospectuses, obtaining approval on changes in insurance products, and drafting the necessary offering materials
  • Training the entire salesforce on all the elements needed for each of the exemptions they will rely upon
  • Communicating with clients, which Sifma says has proven to be particularly challenging, with changing deadlines, short preparation periods, and complicated business workarounds that have proven confusing and unpopular with clients.

“I'm very concerned about what may become of my retirement savings.”
Douglas Cooke

Pro-DOL rule commenters were largely individual investors, most of whom cited wanting to be protected from unscrupulous advisors and expressing dismay at the Obama Administration’s 2016 assertion that $17 billion a year in losses are incurred by American families who fall victims to advisors’ conflicts of interests. Some of these individual investors say they have been victimized by advisors in the past.

Patricia Sykes plainly states she wants the DOL to “protect me.”

Douglas Cooke says he is 51 years old, makes a modest salary, and is “very concerned about what may become of my retirement savings” if the DOL rule is “rolled back.”

Pat Holland describes herself and her husband as “like many other Americans saving for retirement,” urging the DOL not water down the fiduciary rule or open it to loopholes.

Steve Boyd says: “It is morally reprehensible to not require advisors to act in their clients’ best interests.”

Lew Price says: “Most working Americans do not have the time or sophistication to watch their investments that closely. The current fiduciary rule is the right way to deal with this problem.”

Steve Harter says: “I got ripped off by an advisor years ago. Plain lied about the risk of a security.”

At least one advisor who commented, Neal Shikes, is pro-DOL rule, imploring “Enforce the regulation … the law should not be for sale.”