Brookings Event on Retirement Plans
Brookings Institution
“How Should Retirement Investment Advice Be Regulated?”
Friday, October 16, 2015
Key Topics & Takeaways
- Comment Letters: Secretary Perez noted that the Department received a total of 391,621 letters during the comment period and that the proposed rule will “remain one of the top priorities” of the Administration during its final 462 days in office.
- Cost to Investors: ICI’s Collins stated that the proposed rule will cost investors $109 billion over the next 10 years.
- Robo Advisors: Collins noted that “automated advice is the way of the future” and can be “appropriate” for different investors, but that “sometimes you just want a human being.”
- U.K. Retail Distribution Review: While the Certified Financial Planner Board’s Mohrman-Gillis argued that the DOL’s proposal and the U.K.’s RDR cannot be compared, Davis & Harman’s Mason stressed that they can be and that multiple banks in the U.K. adopted policies where investors cannot speak with advisors until they have a certain account minimum or pay a certain fee.
- Best Interest Contract Exemption: Mason stated that the proposed rule requires “more disclosure than any other proposal in history,” which is part of the financial services industry’s problem with the rule. He continued that while the preamble to the rule says disclosures are “worthless,” the proposed rule itself is “full of disclosures.”
Speakers
- Thomas E. Perez, Secretary, U.S. Department of Labor
- Sean Collins, Senior Director, Industry and Financial Analysis, Investment Company Institute
- Jane Dokko, Fellow, Economic Studies
- Kent Mason, Partner, Davis & Harman
- Barbara Roper, Director of Investor Protection, Consumer Federation of America
- Jim Szostek, Vice President, Taxes & Retirement Security, American Council of Life Insurers
- Marilyn Mohrman-Gillis, Managing Director, Public Policy & Communications, Certified Financial Planner Board
Keynote Speaker
Thomas E. Perez, Secretary, U.S. Department of Labor
Department of Labor (DOL) Secretary Thomas Perez stated that the proposed fiduciary rule establishes a “common sense principle,” as it is “too easy” for advisors to benefit from indirect fees. He noted the “conservative” estimate from the White House Council of Economic Advisors that conflicted advice costs investors $17 billion a year. Perez stressed that industry research “doesn’t meet equally rigorous analytical standards” and argued that the industry does not believe there is a problem and wants to maintain the “status quo.”
Perez stated that the Department remains “flexible” on how to make the proposal work and noted the support for a best interest standard from the financial services industry. However, he disagreed with the industry’s view that the proposal “will slam the door on small savers,” arguing that the proposal encourages small savers to consult with financial advisors. He listed several options for small savers to consider, such as Wealthfront, Financial Engines and Personal Capital, stating that “it’s a multi-trillion dollar market.”
Perez explained that the Department has listened to regulators from the United Kingdom about their Retail Distribution Review (RDR) outcome, as well as colleagues at the Securities and Exchange Commission (SEC), stating that SEC Chair Mary Jo White “believes the Labor Department is well within its jurisdiction to propose this rule and they don’t need to wait on [the SEC].” He noted that the Department received a total of 391,621 letters during the comment period and that the proposed rule will “remain one of the top priorities” of the Administration during its final 462 days in office.
When asked about areas the DOL is considering revising, Perez did not provide any examples but stated that the Department is “reading all comment letters.” He noted that the DOL chose not to ban commissions on products like the U.K.’s RDR, after listening to industry feedback and concluding that it could have “unintended consequences.” Perez noted that the rollover issue has “generated a lot of attention” and that the DOL has received comments on the topic “across an array of the opinion spectrum.” He concluded that the financial services industry stated there should be a “more linear path” to a best interest standard and that the DOL will be taking industry feedback into account.
Panel 1: Examining the Evidence on Conflicts of Interest
Sean Collins, Senior Director, Industry and Financial Analysis, Investment Company Institute
Sean Collins’ testimony focused on the DOL’s cost-benefit analysis, stating that the analysis that investors lose $17 billion annually due to conflicted advice is “flawed” and “drawn out of air,” with data weighing “heavily” from the 1990s and 2000s. He explained that the Department should have completed its own analysis using public data, as the study results are “findings from individual funds rather than the entire economy of all investors.”
Collins criticized the DOL for taking a “heavy weighted” front-load fee and using it as a proxy for all broker-sold individual retirement accounts (IRAs), which “doesn’t make sense.” He continued that the proposal will “shut down” small account investors from receiving financial advice due to balance requirements of $100,000 or more, and that the proposed rule will cost investors $109 billion over the next 10 years.
Jane Dokko, Fellow, Economic Studies
Jane Dokko spoke on research that included mystery shoppers with Thrift Savings Plans (TSPs) visiting financial advisors over whether to rollover their accounts into an IRA, noting that the advice “encouraged” rollover despite the increased fees and no guarantee of higher returns. She noted that in Canada, Germany and Switzerland, investors are “steered” towards “underperforming assets” due to their financial advisors being persuaded by fees.
Dokko explained six goals that researchers should follow to promote high-quality research: 1) The research should “carefully” measure and isolate the role of conflicted advice and how payments lead to different outcomes for savers; 2) Have pre-specified research methods to prevent data mining favorable results; 3) Have replicable results that are consistent among a range of data sets; 4) Include transparent results; 5) Demonstrate valid critiques; and 6) All research could be considered and balanced.
Questions
Cost-Benefit Analysis Results
When asked about the validity of mystery shopper peer-reviewed journal articles, Collins stated that the design of the survey is important, as well as what is going on in the economy. He noted that the DOL needs to measure the costs and benefits of all IRAs across the economy, which would not be attainable through a mystery shopper survey, adding that “it’s not obvious there is a systemic problem here.”
Dokko noted that many of the criticisms of the DOL’s analysis were directed at a certain table included in the report, explaining that the table was supposed to highlight an example of how an investor loses money due to conflicted advice, adding that the aggregate estimates of $17 billion “were not informed by a hypothetical example in the rollover context.” Collins argued that the table in question “has a fundamental problem” and compared it to using the gas consumption of a Hummer for all cars.
Broker-Sold Funds Performance
Dokko noted that it is difficult to compare broker-sold funds with Morningstar returns and broker-sold assets with fiduciary accounts. Collins explained that the DOL concluded that broker-sold funds underperform, but that the Department did not measure underperformance, and instead used a coefficient from a journal paper.
Dokko stated that the assertion is not that broker-sold funds underperform, but that these funds underperform due to conflicted advice, which is “slightly different.”
Collins noted that “automated advice is the way of the future” and can be “appropriate” for different investors, but that “sometimes you just want a human being.”
Panel 2: How Should the Rule Be Implemented?
Kent Mason, Partner, Davis & Harman
Kent Mason noted that if the brokerage model becomes illegal, it will impact small accounts as advisory services with year-round management have a flat-fee and require certain account minimums. He noted that the rule will cause small businesses to have trouble setting up retirement plans and that education programs in companies will be “shut down” due to the best interest contract exemption (BICE). Mason stressed that the U.K. announced “things are terrible” in August due to the RDR and offered recommendations to the DOL on its proposed rule:
- Have a simple BICE with two requirements: 1) Advisors act in the best interest of their client, and 2) Clear disclosure of financial interests.
- Include an appropriate transition period, as the proposed eight months “will not work.”
Barbara Roper, Director of Investor Protection, Consumer Federation of America
Barbara Roper stressed that firms cannot “evade” fiduciary responsibilities “by disclaiming them away” and commended the DOL for its rollover recommendations, calling rollovers “the most important financial decision many will ever make.” She noted that while the U.S. can duplicate the U.K.’s rule, it is not a “politically feasible approach.” Roper explained that the BICE creates enforcement that is not “entirely dependent on reluctant and underfunded regulators” and stressed that to get advisors to act in their clients’ best interests, payments that cause decisions not in the clients’ best interest must be stopped.
Roper applauded the industry’s “recent” support for a best interest standard and offered three core principles the regulation “must” include: 1) A broadly-applied fiduciary standard; 2) Be enforceable; and 3) Be backed by “real restraints.” She noted that industry alternatives from SIFMA, the Financial Services Roundtable (FSR), Fidelity and others are “missing” the core principles. Roper concluded that an eight-month transition period “isn’t reasonable.”
Jim Szostek, Vice President, Taxes & Retirement Security, American Council of Life Insurers
Jim Szostek stated that the proposed rule denies access to advice, resulting in life insurers not being able to encourage small business owners to make retirement plans for their employees, adding that the proposal is a “direct threat” to low and moderate wage workers. He noted the “limited” sellers exemption that the rule includes, adding that small plans do not have access to the exemption. Szostek continued that the best interest standard “remains a sole interest standard,” only working for those giving advice, and asked how the rule applies to those in sales. He stated that ACLI and its members are “ready to work” with the Department but that if significant changes are not made, the rule will do “much harm.”
Marilyn Mohrman-Gillis, Managing Director, Public Policy & Communications, Certified Financial Planner Board
Marilyn Mohrman-Gillis stated that while there are concerns that the brokerage model will be illegal, commissions will not be eliminated under the BICE and that it is an “important addition” to the rule. She explained that the Certified Financial Planner Board (CFP Board) has standards in place similar to those found in the BICE, striking claims that it is “unworkable.” Mohrman-Gillis continued that rather than eliminate advice to small savers, many certified financial planners (CFPs) are offering fiduciary-level services to small and large savers using the commission-based model with low or no minimum assets under management, adding that the financial services industry is “very flexible.” She concluded that there is a “huge” gap in knowledge between advisors and consumers, which is why it is “imperative” that advice is given with a fiduciary standard.
Questions
Retail Distribution Review
Roper stated her hope that the proposed rule will decrease the cost of investment products in the U.S. like the RDR did in the U.K. While Mohrman-Gillis argued that the DOL’s proposal and the U.K.’s RDR cannot be compared, Mason stressed that they can be and that multiple banks in the U.K. adopted policies where investors cannot speak with advisors until they have a certain account minimum or pay a certain fee.
Appropriate Commissions
When asked how those selling annuities can determine an appropriate commission, Mohrman-Gillis explained that reasonableness is defined under the Employee Retirement Income Security Act (ERISA) and noted that the DOL recognizes that some categories of products and services may have higher levels of commissions associated with them due to the additional time and expertise required. Szostek noted that the proposed rule ties compensation with total services provided and that the DOL is “looking for outliers.” Roper stressed that insurance and securities regulators have not made any steps to control conflicts of interest and compensation structures, adding that there is “too much unreasonable pay” that results in increased sales.
Best Interest Contract Exemption
Mason stated that the proposed rule requires “more disclosure than any other proposal in history,” which is part of the financial services industry’s problem with the rule. He continued that while the preamble to the rule says disclosures are “worthless,” the proposed rule itself is “full of disclosures.”
The panel remained split on agreement as to whether the BICE was workable.
For more information on this event, please click here.
Brookings Institution
“How Should Retirement Investment Advice Be Regulated?”
Friday, October 16, 2015
Key Topics & Takeaways
- Comment Letters: Secretary Perez noted that the Department received a total of 391,621 letters during the comment period and that the proposed rule will “remain one of the top priorities” of the Administration during its final 462 days in office.
- Cost to Investors: ICI’s Collins stated that the proposed rule will cost investors $109 billion over the next 10 years.
- Robo Advisors: Collins noted that “automated advice is the way of the future” and can be “appropriate” for different investors, but that “sometimes you just want a human being.”
- U.K. Retail Distribution Review: While the Certified Financial Planner Board’s Mohrman-Gillis argued that the DOL’s proposal and the U.K.’s RDR cannot be compared, Davis & Harman’s Mason stressed that they can be and that multiple banks in the U.K. adopted policies where investors cannot speak with advisors until they have a certain account minimum or pay a certain fee.
- Best Interest Contract Exemption: Mason stated that the proposed rule requires “more disclosure than any other proposal in history,” which is part of the financial services industry’s problem with the rule. He continued that while the preamble to the rule says disclosures are “worthless,” the proposed rule itself is “full of disclosures.”
Speakers
- Thomas E. Perez, Secretary, U.S. Department of Labor
- Sean Collins, Senior Director, Industry and Financial Analysis, Investment Company Institute
- Jane Dokko, Fellow, Economic Studies
- Kent Mason, Partner, Davis & Harman
- Barbara Roper, Director of Investor Protection, Consumer Federation of America
- Jim Szostek, Vice President, Taxes & Retirement Security, American Council of Life Insurers
- Marilyn Mohrman-Gillis, Managing Director, Public Policy & Communications, Certified Financial Planner Board
Keynote Speaker
Thomas E. Perez, Secretary, U.S. Department of Labor
Department of Labor (DOL) Secretary Thomas Perez stated that the proposed fiduciary rule establishes a “common sense principle,” as it is “too easy” for advisors to benefit from indirect fees. He noted the “conservative” estimate from the White House Council of Economic Advisors that conflicted advice costs investors $17 billion a year. Perez stressed that industry research “doesn’t meet equally rigorous analytical standards” and argued that the industry does not believe there is a problem and wants to maintain the “status quo.”
Perez stated that the Department remains “flexible” on how to make the proposal work and noted the support for a best interest standard from the financial services industry. However, he disagreed with the industry’s view that the proposal “will slam the door on small savers,” arguing that the proposal encourages small savers to consult with financial advisors. He listed several options for small savers to consider, such as Wealthfront, Financial Engines and Personal Capital, stating that “it’s a multi-trillion dollar market.”
Perez explained that the Department has listened to regulators from the United Kingdom about their Retail Distribution Review (RDR) outcome, as well as colleagues at the Securities and Exchange Commission (SEC), stating that SEC Chair Mary Jo White “believes the Labor Department is well within its jurisdiction to propose this rule and they don’t need to wait on [the SEC].” He noted that the Department received a total of 391,621 letters during the comment period and that the proposed rule will “remain one of the top priorities” of the Administration during its final 462 days in office.
When asked about areas the DOL is considering revising, Perez did not provide any examples but stated that the Department is “reading all comment letters.” He noted that the DOL chose not to ban commissions on products like the U.K.’s RDR, after listening to industry feedback and concluding that it could have “unintended consequences.” Perez noted that the rollover issue has “generated a lot of attention” and that the DOL has received comments on the topic “across an array of the opinion spectrum.” He concluded that the financial services industry stated there should be a “more linear path” to a best interest standard and that the DOL will be taking industry feedback into account.
Panel 1: Examining the Evidence on Conflicts of Interest
Sean Collins, Senior Director, Industry and Financial Analysis, Investment Company Institute
Sean Collins’ testimony focused on the DOL’s cost-benefit analysis, stating that the analysis that investors lose $17 billion annually due to conflicted advice is “flawed” and “drawn out of air,” with data weighing “heavily” from the 1990s and 2000s. He explained that the Department should have completed its own analysis using public data, as the study results are “findings from individual funds rather than the entire economy of all investors.”
Collins criticized the DOL for taking a “heavy weighted” front-load fee and using it as a proxy for all broker-sold individual retirement accounts (IRAs), which “doesn’t make sense.” He continued that the proposal will “shut down” small account investors from receiving financial advice due to balance requirements of $100,000 or more, and that the proposed rule will cost investors $109 billion over the next 10 years.
Jane Dokko, Fellow, Economic Studies
Jane Dokko spoke on research that included mystery shoppers with Thrift Savings Plans (TSPs) visiting financial advisors over whether to rollover their accounts into an IRA, noting that the advice “encouraged” rollover despite the increased fees and no guarantee of higher returns. She noted that in Canada, Germany and Switzerland, investors are “steered” towards “underperforming assets” due to their financial advisors being persuaded by fees.
Dokko explained six goals that researchers should follow to promote high-quality research: 1) The research should “carefully” measure and isolate the role of conflicted advice and how payments lead to different outcomes for savers; 2) Have pre-specified research methods to prevent data mining favorable results; 3) Have replicable results that are consistent among a range of data sets; 4) Include transparent results; 5) Demonstrate valid critiques; and 6) All research could be considered and balanced.
Questions
Cost-Benefit Analysis Results
When asked about the validity of mystery shopper peer-reviewed journal articles, Collins stated that the design of the survey is important, as well as what is going on in the economy. He noted that the DOL needs to measure the costs and benefits of all IRAs across the economy, which would not be attainable through a mystery shopper survey, adding that “it’s not obvious there is a systemic problem here.”
Dokko noted that many of the criticisms of the DOL’s analysis were directed at a certain table included in the report, explaining that the table was supposed to highlight an example of how an investor loses money due to conflicted advice, adding that the aggregate estimates of $17 billion “were not informed by a hypothetical example in the rollover context.” Collins argued that the table in question “has a fundamental problem” and compared it to using the gas consumption of a Hummer for all cars.
Broker-Sold Funds Performance
Dokko noted that it is difficult to compare broker-sold funds with Morningstar returns and broker-sold assets with fiduciary accounts. Collins explained that the DOL concluded that broker-sold funds underperform, but that the Department did not measure underperformance, and instead used a coefficient from a journal paper.
Dokko stated that the assertion is not that broker-sold funds underperform, but that these funds underperform due to conflicted advice, which is “slightly different.”
Collins noted that “automated advice is the way of the future” and can be “appropriate” for different investors, but that “sometimes you just want a human being.”
Panel 2: How Should the Rule Be Implemented?
Kent Mason, Partner, Davis & Harman
Kent Mason noted that if the brokerage model becomes illegal, it will impact small accounts as advisory services with year-round management have a flat-fee and require certain account minimums. He noted that the rule will cause small businesses to have trouble setting up retirement plans and that education programs in companies will be “shut down” due to the best interest contract exemption (BICE). Mason stressed that the U.K. announced “things are terrible” in August due to the RDR and offered recommendations to the DOL on its proposed rule:
- Have a simple BICE with two requirements: 1) Advisors act in the best interest of their client, and 2) Clear disclosure of financial interests.
- Include an appropriate transition period, as the proposed eight months “will not work.”
Barbara Roper, Director of Investor Protection, Consumer Federation of America
Barbara Roper stressed that firms cannot “evade” fiduciary responsibilities “by disclaiming them away” and commended the DOL for its rollover recommendations, calling rollovers “the most important financial decision many will ever make.” She noted that while the U.S. can duplicate the U.K.’s rule, it is not a “politically feasible approach.” Roper explained that the BICE creates enforcement that is not “entirely dependent on reluctant and underfunded regulators” and stressed that to get advisors to act in their clients’ best interests, payments that cause decisions not in the clients’ best interest must be stopped.
Roper applauded the industry’s “recent” support for a best interest standard and offered three core principles the regulation “must” include: 1) A broadly-applied fiduciary standard; 2) Be enforceable; and 3) Be backed by “real restraints.” She noted that industry alternatives from SIFMA, the Financial Services Roundtable (FSR), Fidelity and others are “missing” the core principles. Roper concluded that an eight-month transition period “isn’t reasonable.”
Jim Szostek, Vice President, Taxes & Retirement Security, American Council of Life Insurers
Jim Szostek stated that the proposed rule denies access to advice, resulting in life insurers not being able to encourage small business owners to make retirement plans for their employees, adding that the proposal is a “direct threat” to low and moderate wage workers. He noted the “limited” sellers exemption that the rule includes, adding that small plans do not have access to the exemption. Szostek continued that the best interest standard “remains a sole interest standard,” only working for those giving advice, and asked how the rule applies to those in sales. He stated that ACLI and its members are “ready to work” with the Department but that if significant changes are not made, the rule will do “much harm.”
Marilyn Mohrman-Gillis, Managing Director, Public Policy & Communications, Certified Financial Planner Board
Marilyn Mohrman-Gillis stated that while there are concerns that the brokerage model will be illegal, commissions will not be eliminated under the BICE and that it is an “important addition” to the rule. She explained that the Certified Financial Planner Board (CFP Board) has standards in place similar to those found in the BICE, striking claims that it is “unworkable.” Mohrman-Gillis continued that rather than eliminate advice to small savers, many certified financial planners (CFPs) are offering fiduciary-level services to small and large savers using the commission-based model with low or no minimum assets under management, adding that the financial services industry is “very flexible.” She concluded that there is a “huge” gap in knowledge between advisors and consumers, which is why it is “imperative” that advice is given with a fiduciary standard.
Questions
Retail Distribution Review
Roper stated her hope that the proposed rule will decrease the cost of investment products in the U.S. like the RDR did in the U.K. While Mohrman-Gillis argued that the DOL’s proposal and the U.K.’s RDR cannot be compared, Mason stressed that they can be and that multiple banks in the U.K. adopted policies where investors cannot speak with advisors until they have a certain account minimum or pay a certain fee.
Appropriate Commissions
When asked how those selling annuities can determine an appropriate commission, Mohrman-Gillis explained that reasonableness is defined under the Employee Retirement Income Security Act (ERISA) and noted that the DOL recognizes that some categories of products and services may have higher levels of commissions associated with them due to the additional time and expertise required. Szostek noted that the proposed rule ties compensation with total services provided and that the DOL is “looking for outliers.” Roper stressed that insurance and securities regulators have not made any steps to control conflicts of interest and compensation structures, adding that there is “too much unreasonable pay” that results in increased sales.
Best Interest Contract Exemption
Mason stated that the proposed rule requires “more disclosure than any other proposal in history,” which is part of the financial services industry’s problem with the rule. He continued that while the preamble to the rule says disclosures are “worthless,” the proposed rule itself is “full of disclosures.”
The panel remained split on agreement as to whether the BICE was workable.
For more information on this event, please click here.