Re­tiree ad­vi­sor rule is fac­ing battle

A pro­posed reg­u­la­tion would ban fi­nan­cial plan­ners from cre­at­ing con­flicts of in­ter­est.

Los Angeles Times - - BUSINESS - By Dean Stark­man

NEW YORK — A newly pro­posed rule to ban re­tire­ment plan­ners from cre­at­ing conf licts of in­ter­est with their cus­tomers might ap­pear to put an end to the years-long pol­icy fight over the is­sue.

Don’t bet the re­tire­ment on it. The battle is just be­gin­ning, pro­po­nents of the rule said.

The reg­u­la­tion re­quir­ing ad­vi­sors to put clients’ in­ter­ests first is de­signed to halt plan­ners from, among other things, steer­ing un­know­ing cus­tomers into high-cost, poorly per­form­ing in­vest­ments that pay plan­ners more but cost in­vestors dearly.

The for­mal lan­guage pub­lished late Tues­day by the La­bor Depart­ment trig­gered a 75-day com­ment pe­riod and even­tual public hear­ing that both prom­ise to turn the is­sue into one of the hotly con­tested reg­u­la­tory fights since the Great Re­ces­sion.

“This is go­ing to be the big­gest battle since Dod­dFrank, hands down,” said Den­nis Kelle­her, chief ex­ec­u­tive of fi­nan­cial re­form ad­vo­cacy group Bet­ter Mar­kets Inc., re­fer­ring to the sweep­ing 2010 fi­nan­cial re­form law.

Kelle­her said the in­dus­try can be ex­pected to re­dou­ble its ef­forts to kill or mute the rule with $17 bil­lion in an­nual rev­enue at stake. That’s the amount the Obama ad­min­is­tra­tion said is un­fairly di­verted to Wall Street and other fi­nan­cial in­ter­me­di­aries in fees be­cause of conf licted ad­vice given to cus­tomers.

The ad­min­is­tra­tion said bro­ker-deal­ers, in­sur­ance agents and other fi­nan­cial plan­ners for 401(k) and IRAs are of­ten com­pen­sated through back­door pay­ments from mu­tual fund

com­pa­nies or other in­sti­tu­tions with­out the knowl­edge of their cus­tomers.

So far, ma­jor trade groups, which have led the fight against the pro­posed rule, are of­fer­ing a re­strained re­sponse. Sev­eral busi­ness and fi­nan­cial in­dus­try groups said they wanted to study the pro­posal, which runs 120 pages, along with sep­a­rate seg­ments on ex­cep­tions and other ma­te­rial that adds sev­eral hun­dred pages more.

“This is a vo­lu­mi­nous rule, where the fine print mat­ters,” said Ken­neth E. Bentsen Jr., chief ex­ec­u­tive of the Se­cu­ri­ties In­dus­try and Fi­nan­cial Mar­kets Assn., a Wash­ing­ton trade group for ma­jor Wall Street firms and other fi­nan­cial in­sti­tu­tions.

“We want to en­sure it protects in­vestor choice and doesn’t un­nec­es­sar­ily re­duce ac­cess to ed­u­ca­tion or raise costs, par­tic­u­larly for low- and mid­dle-in­come savers,” Bentsen said. “With so much at stake, we will thor­oughly re­view the rule and its im­pact on in­vestors.”

Sim­i­lar state­ments were is­sued by other ma­jor trade groups, in­clud­ing the In­vest­ment Com­pany In­sti­tute, which rep­re­sents the mu­tual fund busi­ness, and the Fi­nan­cial Ser­vices Round­table, a ma­jor fi­nance in­dus­try lob­by­ing group.

The La­bor Depart­ment’s for­mal re­lease of the lan­guage comes af­ter years of prepa­ra­tion and be­hindthe-scenes lob­by­ing.

As writ­ten, the rule would re­quire fi­nan­cial ad­vi­sors to put clients’ in­ter­ests ahead of their own in ma­jor re­tire­ment trans­ac­tions and to make ex­ten­sive dis­clo­sure when con­flicts ex­ist.

Cur­rently, many ad­vi­sors are paid by com­mis­sions from mu­tual-fund and other fi­nan­cial com­pa­nies, a busi­ness model that the Obama ad­min­is­tra­tion said was rife with conf licts of in­ter­est that are of­ten undis­closed.

Even be­fore the rule was for­mally pub­lished Tues­day, fi­nan­cial groups had stren­u­ously op­posed a ma­jor change. They ar­gued that re­quir­ing ad­vi­sors to adopt a fidu­ciary stan­dard in deal­ing with clients would up­end cur­rent in­dus­try busi­ness mod­els and curb ac­cess to ad­vice, par­tic­u­larly for lowto mod­er­ate-in­come in­vestors.

De­spite the in­dus­try’s muted re­sponse to the pub­lished rule, pro­po­nents ex­pect the in­dus­try to con­test the mea­sure stren­u­ously dur­ing the com­ment pe­riod, which is re­quired be­fore the pro­posed rule can go into ef­fect.

“It’s not over by any means,” said Bar­bara Roper, direc­tor of in­vestor pro­tec­tions at the Con­sumer Fed­er­a­tion of Amer­ica. “They’ll be back.”

In­deed, the U.S. Cham­ber of Com­merce said it was “con­cerned” that the rule would limit in­vestors’ ac­cess to ad­vi­sors.

“In­vestors want and need ad­vice, and if this rule makes it harder for them to seek guid­ance, then that is a prob­lem,” said David Hirschmann of the or­ga­ni­za­tion’s Cen­ter for Cap­i­tal Mar­kets Com­pet­i­tive­ness.

The cham­ber al­ready has pub­lished a pa­per an­tic­i­pat­ing the La­bor Depart­ment’s pro­posal to al­low ex­emp­tions. The cham­ber said it was con­cerned that us­ing ex­emp­tions to pare back a broad rule would in­evitably prove too “nar­row and inf lex­i­ble.”

A spokes­woman for the cham­ber, Erica Flint, said the group was still an­a­lyz­ing the rule. She de­clined to com­ment fur­ther.

A coali­tion of unions, fi­nan­cial re­form groups and re­tiree or­ga­ni­za­tions, in­clud­ing AARP, hailed the rule pub­li­ca­tion as a “ma­jor victory” and said they would work in the com­ment pe­riod to strengthen it.

Kelle­her, of Bet­ter Mar­kets, said pub­li­ca­tion of the rule marked “a day Wall Street hoped would never come.”

“To­day’s pro­posed rule,” he said, “would mean tens of bil­lions of re­tire­ment dol­lars stay in Amer­i­cans’ pock­ets and not be moved into Wall Street’s prof­its. That is why Wall Street will not stop try­ing to kill the rule it hoped the Amer­i­can peo­ple would never see.”

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