FALLS CHURCH, Va. – The Department of Labor’s proposed rules on investment advice would make it harder for financial professionals to provide investors with affordable services and products that would help them live independently in their retirement, according to comments submitted today to the DOL by the National Association of Insurance and Financial Advisors. The proposed rules would apply to financial professionals who provide investment advice to participants or sponsors of retirement savings plans, including 401(k) plans and IRAs.
“In its current form, the proposed rule presents major – and in some cases insurmountable – obstacles for NAIFA members serving middle-market retail investors,” NAIFA wrote in its comments. “The proposal portends a dramatic
shift in the way our members will interact with their clients and conduct their businesses, and a significant increase in the cost of conducting their business. NAIFA does not oppose a ‘best interest’ fiduciary standard for its members. However, any new standard must be operationalized in a fashion that is workable for Main Street advisors and their clients.”
Among the consequences of the proposed rule:
There will be fewer services and less education for small businesses and small account holders
Faced with a multitude of fiduciary obligations which entail substantial cost and administrative burdens, some advisors may no longer offer services to small plans or individuals with small accounts. The rule’s restrictive definition of investment “education” also would prevent advisors from providing any meaningful education to their clients. Finally, those investors who may be unwilling to sign a complicated and lengthy contract as required under the Best Interest Contract Exemption (BIC) and unwilling to pay upfront out-of-pocket fees will forgo advisory services all together. “The proposal could result in some advisors exiting the market entirely, which for some rural communities, could result in a complete void of professional financial services,” NAIFA said in its comments.
More expensive advice for small businesses and small account holders
Investment advice would become more expensive because of increased costs due to likely changes in advisors’ compensation model (from commission to costly upfront fees). The high cost of complying with the Proposed Transaction Exemptions (PTEs), particularly the unworkable best interest contract (BIC) also would limit access to affordable advice to small businesses and account holders. (NAIFA has filed a separate comment letter on the DOL’s proposed PTEs.)
Fewer guaranteed-income products will be sold
The Department’s proposal will result in fewer annuity products being sold, which is especially harmful to low- and middle-income consumers. The Department’s proposal foists a heightened burden on advisors who offer annuity products to non-fee-paying clients. In addition, the proposal’s structure for annuities is particularly complex and confusing, which will make offering these products more difficult and costly.
Confusion and uncertainty in the marketplace for financial institutions, advisors and investors
The proposal is dense, complicated, and confusing. It will take a substantial amount of time and resources for financial professionals and investors to fully digest and become comfortable operating under the Department’s new structure. In the meantime, the proposal threatens to introduce a substantial amount of uncertainty into the marketplace. Presumably, financial institutions will err on the side of caution and adopt overly conservative and restrictive policies and practices, rather than face potential liability for violations of the new rules. As a result, their agents and registered representatives will follow suit. Ultimately, these developments will likely result in a near-term contraction of services and advice.
“As it stands, nearly all of our members who become fiduciaries will have to alter their current compensation arrangements (for at least some clients and some products) or satisfy a PTE. Both options carry significant risk of harm to retail investors,” NAIFA states. “We believe that such risk can be partially mitigated if the Department addresses the specific points of concern.” The concerns to address are the following:
DOL should narrow scope of the proposed definition of fiduciary “investment advice”
DOL should adopt a seller’s exception that applies across all products, services and investors
The final rule should include a carve-out for advice on plan design
The final rule should allow for meaningful investment education
Advisors should be permitted to put reasonable limitations on the scope and duration of the fiduciary relationship
The comments also include results from a survey
of NAIFA members on how the proposed rules would impact their business.
Founded in1890 as The National Association of Life Underwriters (NALU), NAIFA is one of the nation’s oldest and largest financial services organizations representing the interests of insurance professionals from every Congressional district in the United States. NAIFA members assist consumers by focusing their practices on one or more of the following: life insurance and annuities, health insurance and employee benefits, multiline, and financial advising and investments. NAIFA’s mission is to advocate for a positive legislative and regulatory environment, enhance business and professional skills, and promote the ethical conduct of its members.