DOL Conflict of Interest

Rulemaking
Presentation by
Micah Hauptman to the
National Press Foundation
October 17, 2017
 Framing The Issue

DIY Retirement Planning Is Complicated

How much do I need to save?
What should I invest in?
Whom should I trust for advice?
When I leave a job, what should I do? Leave
my money in the old 401(k), roll it over into a
new 401(k), or roll it over into an IRA?
 Complex Investment Marketplace

Seemingly Limitless Investment Choices,

All Come with Claims
Higher returns!
More diversification!
Downside protection!

How Does An Investor Make An Informed

Decision?
 Complex Investment Marketplace

Equity-Indexed Annuity Surrender Fee Disclosure

 Financial Illiteracy

Sad Truth: Investors Lack Knowledge of BASIC

Financial Concepts Necessary to Make Informed
Investment Decisions On Their Own
Interest Rates
Inflation
Risk vs. return
Stocks vs. Bonds
Mutual funds
 Financial Literacy

If Youd Like to Take a Financial Literacy Test

FINRA Foundation National Financial Capability Study
http://www.usfinancialcapability.org/
Results:
Correct Incorrect Don't Know

National
3.16 1.25 1.54
Average
 So Investors Turn to Financial
Professionals
Financial Professionals Hold Themselves Out As
Trusted Advisers
So They Turn to Financial Professionals

Financial Professionals Hold Themselves Out As

Trusted Advisers
 40 Year Old ERISA Fiduciary Rule

Former Definition Determining Who Was a

Fiduciary Was Too Easy to Evade
Advice had to be provided on a regular basis
One-time advice (ex: rollover) wasnt included
Advice had to be given pursuant to a mutual
agreement that the advice would serve as the
primary basis for the investment decision
Firms used fine print legal disclaimers to evade
fiduciary responsibility
Fine Print Legal Disclaimer

Guidance provided
by Fidelity is
educational in
nature, is not
individualized and is
not intended to
serve as the primary
or sole basis for your
investment or tax-
planning decisions.
 The Standard That Applied: Suitability

Sales Standard, Not Trust Standard

Acts more like a do not defraud standard than
advice standard
Out of all the suitable options, can recommend the
least suitable
Incentives to recommend whatever suitable product
pays the advisor the most
 Academic and Empirical
Evidence of Harm
Peer-reviewed academic studies that show
brokers incentives tilting their
recommendations to funds that underperform
Mystery shopper studies that show advisors
steering clients away from lower-cost,
diversified funds toward higher-cost funds in
the advisors economic interest
 The Harm To Retirement Savers

Evidence Suggested Conflicts Cost Retirement

Savers Billions
$17 billion a year (WH Council of Economic Advisers)
Would cost between $95 billion and $189 billion over
the next 10 years if not addressed (DOL)
These estimates were based on an examination of
only one part of the market. They didnt consider a
variety of products that are subject to sales conflicts.
 Survey research

Investors want advice thats in their best interest

Investors believe their advisers are already legally required to serve their
best interest
2017 Personal Capital survey: 46 percent believe all financial advisers
are required by law to always act in their clients best interests, and
nearly a third (31 percent) are unsure.
2017 Jefferson National survey: 59 percent believe that all financial
advisers are required by law to put their clients best interests first.
Investors are troubled when they learn that this is not the case
Jefferson National survey: 48 percent said they would stop working
with their financial adviser if they learned the adviser is not required
by law to serve their clients best interests.
These results come after a multi-year, high-profile public awareness
campaign and political debate over the different standards of conduct that
apply to different types of financial providers
 The DOL Conflict of Interest Rule

DOL Rule To Update Fiduciary Investment Advice

Definition and Related Exemptions
Closes loopholes so fiduciary duty cant be evaded
Applies more broadly to interactions retirement
savers reasonably believe to be advisory in nature
Rollover recommendations are explicitly covered
Commissions are still allowed, subject to Best
Interest Contract (BIC) Exemption
 The BIC Exemption

Allows Commissions Subject to Conditions

Designed to Ensure Retirement Savers are
Protected from Conflicts
Must contractually agree upfront to serve investors best interest
Recommendation must be in investors best interest, without
regard to advisers or firms financial interest
Must charge no more than reasonable compensation
Must not make misleading statements
Must rein in practices that reward advisers for working against
clients best interest
Must disclose costs and conflicts associated with advice
If the adviser or firm dont live up to their end of the bargain, the
investor can hold them accountable for breach of contract
 Better Outcomes

If Firms Comply, Retirement Savers Will Benefit

When Their Best Interests are Being Served
Recommendations will be based on whats
best for retirement savers, not whats best for
advisers or their firms
Products will compete based on cost and
quality
Costs will be more transparent and decrease
Returns will increase
 Wave of Innovation

Were already seeing the rule work as intended

T shares:
Max 2.5% sales load, compared with an industry
avg for A shares of 4.75% (and as high as 5.75%)
All T shares have the same compensation
structure, no incentive to recommend higher
paying fund
 Wave of Innovation

Were already seeing the rule work as intended

Clean shares:
No backdoor payments
Broker charges directly instead of mutual fund
charging and then paying broker
Broker can levelize commissions for all products
More transparency, more competition
 Wave of Innovation

Were already seeing the rule work as intended

Fee-based annuities:
Lower costs
Lower or no surrender charges
Offering simpler, more consumer friendly products
More competition in the market
 Wave of Innovation

Were already seeing the rule work as intended

Firms engaging in more due diligence, culling
investment menus
Firms investing more in research to improve
their offerings
 Financial Industry Opposition to Rule

Mainly from Broker-Dealer and Insurance Industry:

General Arguments
Claim they are well-regulated and its a
competitive industry
Response: See suitability discussion above
Claim to support best interest standard, but
that SEC/FINRA should determine that standard
Response: SEC/FINRA have authority only over
securities; wouldnt require firms to fundamentally
change practices, their preferred standard can be
satisfied through disclosure
 Financial Industry Opposition to Rule

Specific Arguments
Claim charging commissions will be too
burdensome and expose them to too much
liability, so they will either:
Shift clients to fee-based accounts and charge more;
or
Small savers will lose access to products and services
and make worse decisions.
Response: Firms are continuing to charge
commissions; offer advice with very low
minimums, lower costs.
 Financial Industry Opposition to Rule

Legal Attempts to Kill DOL Rule

6 Lawsuits Have Been Filed in 4 jurisdictions
3 district court decisions, DOL won on all
claims
On appeal
 Current Political State of Play

Congressional Attempts to Kill DOL Rule

Protect Advice for Small Savers Act (Wagner)
Affordable Retirement Advice for Savers Act
(Roskam, Roe)
Appropriations riders
 Current Political State of Play

Trump Administration
Presidential Memorandum in February
instructing DOL to undertake a reexamination
of the rule
Delayed initial implementation by 60 days
Proposed to delay full implementation by 18
months, waiting for final rule
Rescind or revise?
 Current Political State of Play

SEC
Chair Claytons Request for Information

State Insurance Regulators

Formed working group on Best Interest
standard for annuity recommendations

States
 What Now?

A lot of different threats to rule

If the rule is rescinded or revised, have we

nonetheless changed practices and
expectations?
 Thank You

Questions?

Contact:
Micah Hauptman
Financial Services Counsel
Consumer Federation of America
mhauptman@consumerfed.org
(202) 939 1004
@MicahHauptman