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How the DOL’s Retirement Rule Conflicts with Investor Needs

In this episode of the SIFMA Podcast SIFMA President and CEO Kenneth E. Bentsen, Jr. sits down with Scott Smith, Director of Advice Relationships at Cerulli Associates, and Lisa Bleier, Head of Wealth Management and Retirement and State Government Affairs at SIFMA. They discuss new findings issued by SIFMA and Cerulli Associates regarding the current landscape of financial planning, namely the increasing desire from investors for personalized comprehensive advice delivered through trusted advisors. They also dive into the proposed DOL fiduciary rule and how it conflicts with the needs of the next generation of investors as laid out in the research.

Transcript

Edited for clarity

Ken Bentsen: Welcome to The SIFMA Podcast. I’m Ken Bentsen, SIFMA President and CEO. Today we’ll discuss new findings issued by SIFMA and Cerulli Associates regarding the current landscape of financial planning, namely the increasing desire from investors for personalized comprehensive advice delivered through trusted advisors. We’ll also discuss the proposed Department of Labor fiduciary rule and how it conflicts with the needs of the next generation of investors as laid out in the research.

I’m glad to be joined today by Scott Smith, Director of Advice Relationships at Cerulli Associates, and Lisa Bleier, Head of Wealth Management and Retirement and State Government Affairs at SIFMA. So let’s jump in.

So Scott, late last year, SIFMA worked with Cerulli Associates to issue new research on individual investors’ use of financial advisors. Our key question going in, I would say, is, what will the future of the investor-advisor relationship look like considering changes in technology, recent market volatility, and changes in how investors are thinking about retirement? For our listeners who haven’t yet seen the report, perhaps you can give a quick rundown on some of the key findings.

Scott Smith: Thanks, Ken. So first off, despite a seemingly unlimited array of information and tools designed to empower investors to take an active role in managing their own investments, the demand for hands-on advisors continues to increase. Since 2009, the advised investor segment has grown from 35% to 47%, while those who consider themselves self-directed has dropped from 41% to just 24% of investors. A big part of this change is investors moving away from the idea that being a self-directed investor was some kind of badge of honor.

There was a fairly widespread belief that being a do-it-yourself investor was something that just about anyone could do if they spent enough time and effort on it, and that the growing availability of online tools would make it easier for anyone to go this route. Instead, we are finding that investors are increasingly recognizing the value of outsourcing this work to a trusted advisor. In 2009, just 38% of investors indicated they were willing to pay for financial advice. By the end of 2022, willingness to pay for advice had increased from 38% up to 63%.

Over the last 10 years, we have seen more and more investors embracing this approach to their financial affairs, realizing that working with an advisor is crucial to helping them reach their financial goals while also lowering their mental load.

Ken Bentsen: So I’m sure we’ve all heard the conventional wisdom that investors are turning en masse towards online sources, namely social media influencers, to seek financial advice. This study actually found that only 20% of investors reported using social media for financial guidance. Scott, what do you think we can infer from this?

Scott Smith: Well, it’s not just that the 20% are reporting using social media or influences for financial guidance. It’s that the majority of younger investors actually reported they prefer in-person interactions with their advisors. A couple of main reasons are responsible for that. These investors who have seen firsthand in their young adult significant market volatility, the coronavirus pandemic, for example, the majority described their short-term financial situation as quote, “surviving.” The other important factor is that there is just an overwhelming amount of sources of information available now. It’s easy to find data and opinions. The hard part is figuring out what matters to you and how it applies to your specific circumstance. With so many options to sort through, it’s intimidating to figure out even where to get started. With that in mind, younger investors value extremely personalized advice aligned with their specific situations and financial goals. They’re looking for a personal relationship with an advisor they know and that they can trust. They want to explain their goals, their concerns, and their preferences and get solutions tailored to their circumstances.

Ken Bentsen: So with all this in mind, how should financial advisors be preparing for the future?

Scott Smith: Great question. We talked a little about how investors use technology, but even more important is how advisors are using evolving technology. Moving forward it’s absolutely crucial for advisors to rely more on digital options for the things that computers do best, right? Aggregating data, tracking progress towards goals, and portfolio oversight so that advisors can spend more time on the activities where they create the most value, talking with clients to better understand not just their big goals, like saving for retirement, but specifically what retirement might look like for them from a financial freedom perspective, more about how they can use their assets to give them the life they want both today and in the future. The future of financial advisors isn’t going to be about picking individual stocks. Advisors need to be prepared with their clients to be a trusted partner in providing comprehensive and personalized plans for the clients to use all the resources available to them as they define and achieve their long-term goals, ultimately what clients want, and what advisors will need to be able to do over the long term.

Ken Bentsen: So, Lisa, let me turn to you. We know from the SIFMA Cerulli report and the statistics that Scott shared how important financial advisors are and will continue to be for investors of all age groups. Meanwhile, we’ve been hearing a lot of concern in the advisor community on a new proposed rule from the U.S. Department of Labor. Could you explain to our listeners what the Department of Labor proposed fiduciary rule is and why there’s a concern that it would limit access to those seeking financial advice from financial advisors?

Lisa Bleier: Absolutely, thank you, Ken. In November, the Department of Labor proposed a rule intended to protect the interests of investors. However, in practice, it will actually limit investor access to many of those advisors who are necessary to help make these important investment decisions. As Scott said, advisors can help figure out which information matters and how it applies to you. The Department of Labor refers to this proposal as their new retirement security rule.

However, it is actually another iteration of the Department amending the definition of fiduciary in a way that will change the means by which advisors can provide these offerings. Since 2010, the Department has proposed a few iterations of this, changing the definition of fiduciary. But each version has been either withdrawn by the Department or turned back by the federal courts. The Department’s newest proposal would again look to change the rules. So, the net effect will be the limited access to a broad range of financial advisors and their ability to offer a full complement of investment options.

Ken Bentsen: So another point we often see from financial advisors is that the regulatory landscape has changed and evolved since the Department of Labor first proposed this rule change, you know, back in 2010 and again in 2015. Can you expand on that?

Lisa Bleier: That’s absolutely right. They started this process in 2010, and a lot has happened on both the federal and state level since that time. On the federal level, the SEC changed the standard of care to ensure that financial advisors look out for their clients’ best interests. This new standard called regulation best interest, or RegBI, was adopted in 2019 and ensures that financial advisors either eliminate or disclose and mitigate material conflicts of interest. To supplement that action, the states, who by federal law regulate insurance products, have developed and implemented standards for state insurance commissioners, including a best interest standard, which has now been adopted in 43 states. The last thing I would mention is that the Department itself issued a new prohibited transaction exemption in 2020 intended to allow financial institutions to accept a risk of fiduciary status and to take certain steps to receive compensation even when there is a conflict as long as the advisor is providing advice in an investor’s best interest. It’s worth pointing out that the new proposal from the Department not only changes who is captured as a fiduciary and needs to then follow these new rules, but it also changes the Department’s own exemption, the one I just referred to that was introduced in 2020, and that was the one to allow for the provision of investment advice. The Department has chosen to move the goalposts here so that there will be additional hoops for advisors to jump through to be able to provide the personalized investment advice that so many investors need and seek.

Ken Bentsen: So, in addition to, I don’t want to say ignoring, but not taking into consideration all of the changes that occurred at the federal level at the SEC, as well as the states, as well as the Department of Labor itself, and moving the goalposts, as you say, another sticking point that has been raised is the lack of any meaningful cost-benefit analysis from the Department. How do you think the Department of Labor could better engage with the advisor community and what should they be doing to ensure they’re engaging properly with the investor community on this rule change?

Lisa Bleier: Now at this point, we would hope the Department would start by slowing down their proposal. We believe that if they take a look at how the environment has changed since they started in 2010, they would discover that it is unnecessary to create such a broad-based new rule. It is overly broad with too few paths to make it work for most investors to be able to receive investment advice. By doing a proper cost-benefit analysis, the Department would have found that investors and their assets are well protected by the various rules and regulations that currently oversee the investment marketplace, as well as properly regulated by various current regulators. In fact, regulation best interest came into effect only four years ago, and the Department’s own new prohibited transaction exemption only came into effect three years ago. The Department has not yet given these rules a chance to see how these could work in the marketplace. Let’s give them a chance to work.

Ken Bentsen: I think that’s very well said. It can be really frustrating. And frankly, result in some very serious unintended consequences when, in effect, the right hand doesn’t know what the left hand is doing. And given all of the work that the industry has done to implement Reg BI, the Department’s prohibited transaction exemption, as well as what the insurance industry is doing across the states that have adopted the state insurance best interest standard, it really can not just result in a lot of unnecessary duplication and redundancy, but conflict that is going to really result, as you said, in people who want advice, need advice, not being able to get that advice. Let’s hope that they’re listening in earnest to these valid concerns.

Lisa and Scott, I wanna thank you all for spending so much time with me today. Thank you to our listeners for being here today. For more information on SIFMA’s work in this space, and more generally, please visit our website at www.sifma.org. Thank you all for being with us today.

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Kenneth E. Bentsen Jr. is President and CEO of SIFMA. From 1995 to 2003, he served as a Member of the United States House of Representatives from Texas. Prior to his service in Congress, Mr. Bentsen was an investment banker specializing in municipal and housing finance.

Lisa Bleier is Managing Director and Associate General Counsel, Head – Wealth Management, Retirement and State Government Relations at SIFMA.

Scott Smith is Director of Advice Relationships at Cerulli Associates.

 

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