Wednesday, January 28, 2015

Beware a Fiduciary ‘Wild West’: Graff

The “rumor” as of Friday was that the Department of Labor’s redraft of its fiduciary rule was on Labor Secretary Thomas Perez’s desk, so it’s likely it could be at the Office of Management and Budget by year-end, with a proposed regulation out by next April or May, said Brian Graff, executive director of the American Society of Pension Professionals and Actuaries as well as the National Association of Plan Advisors, on Tuesday.

Graff, speaking at Charles Schwab’s IMPACT conference in Washington, said the DOL’s fiduciary proposal — along with about a dozen states “getting more involved with retirement issues,” which Graff said makes him “nervous” — are two of the biggest issues retirement plan advisors should watch next year.

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As Phyllis Borzi, assistant secretary of labor for DOL’s Employee Benefits Security Administration, said Oct. 29 at ASPPA’s annual conference, EBSA is coming “very close” to finishing its work on the reproposed rule.

Graff pointed to the problems he sees with the DOL’s fiduciary reproposal. The “practical impact” on the marketplace will be “how do you get paid, and will certain forms of compensation no longer be allowed,” he said.

“It’s not so much that more people will be fiduciaries,” under the proposal, Graff said, “but how they will get paid.” From an enforcement standpoint, DOL will get at the fiduciary problem “by limiting forms of compensation.”

The potential limit on compensation will affect the small-business market, Graff said, in that if a small business “doesn’t have a [401(k)] savings plan, who’s going to sell them a plan if they won’t get paid?” The small-business problem “is a vexing problem in the context of getting paid under a fiduciary standard.”

Another problem, Graff said, is DOL including IRAs in the reproposal—which Borzi has confirmed will happen. If the definition of fiduciary advice is the same for retirement plans and IRAs, the DOL “will not have the authority to enforce” the IRA portion, Graff said, as IRAs are the jurisdiction of the Internal Revenue Service. The IRS, he said, has six employees devoted to IRAs.

“Here’s my concern with what Borzi is trying to do: It’s not so much the notion of a fiduciary standard … but if there’s no enforcement teeth, you could be creating a Wild West.”

As to the Securities and Exchange Commission’s rule to put brokers under a fiduciary mandate, Graff warned that the agency may indeed create “two kinds” of fiduciaries. Dodd-Frank “explicitly” says that if the SEC develops a uniform fiduciary standard the agency “cannot preclude the advisor from getting commission-based compensation and cannot require the advisor to monitor investments,” Graff told attendees.

David Tittsworth, executive director of the Investment Adviser Association in Washington, told ThinkAdvisor that two fiduciary standards could indeed be a “possible” outcome. /* .premium-promo { border: 1px solid #ddd; padding: 10px; margin: 0 10px 10px 0; width: 200px; float: left; } .premium-promo li, .premium-promo ul { list-style-type: none; margin: 0; padding: 0; } .premium-promo li { margin: 0 0 10px; padding: 0 0 10px; border-bottom: 1px dotted #ddd; } .premium-promo h3 { text-transform: uppercase; font-size: 11px; } .premium-promo h4 { font-size: 16px; } .premium-promo a { text-decoration: none !important; } .premium-promo .btn { background: #0069a1; border-radius: 4px; display: inline-block; padding: 5px 10px; clear: both; color: #fff; font-weight: bold; } .premium-promo .btn:hover { background: #034c92; } */ Section 913 of Dodd-Frank states that any rule promulgated by the SEC “cannot make the receipt of commissions, in and of itself, a violation of the fiduciary duty and that such a rule cannot make the sale of proprietary products, in and of itself, a violation of the fiduciary duty and that Section 913 does not require the ongoing monitoring of investments,” Tittsworth explained.

While the law “does not necessarily mean that there will be two different fiduciary standards — the existing fiduciary standard under the Advisers Act and a fiduciary standard for brokers that provide investment advice to retail customers,” that result is “possible.”

IAA, Tittsworth said, “has warned the SEC that establishing different fiduciary standards would not be in the interests of clients. Obviously, it would exacerbate the current confusion that exists about differences between brokers and advisors and the standards that govern their activities.”

As to states getting more involved in retirement planning issues, Graff says about 12 to 13 states are “seriously” looking at the issue of not enough workers having a retirement plan at work. He said that some states are mulling adopting “mandates,” which require, for instance, as in the case of California, that “any employer with five employees” provide a payroll deducted IRA.

Graff said that state-run plans can be problematic in that “they usually don’t have competitive prices,” and stressed “the important role that the private sector needs to play here to make sure that products are innovative.”

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