With everything else going on in the world, you might have missed the recent demise of the Department of Labor’s latest fiduciary rule (labeled by some the Fiduciary Rule 2.0). This is at least the third attempt by the DOL to impose fiduciary standards on product salespeople, brokers and agents who recommend investments and rollovers into and from qualified plans.
Are the sales agents who move assets out of 401(k) plans (whose assets are protected by ERISA’s fiduciary standards) required to live up to fiduciary standards as they touch the money on the way out? Can sales agents earn a commission for selling products that would be included in qualified plans that are protected by a fiduciary standard?
The answer from the courts and the current Presidential Administration (and its DOL leadership) appears to be no and yes. This is the result of vigorous lobbying by SIFMA (the trade organization of brokerage firms) and the Financial Services Institute (the trade organization of independent broker-dealers) who argue that ERISA was never intended to regulate salespeople’s activities. The sales world has no shortage of financial resources and lobbying might—and, as Michael Kitces has pointed out recently—they also have a pretty good argument.
Come again? Those of us who wish that every financial consumer could receive non-conflicted advice tend to be blind to the idea that brokerage firms and sales agents have a right to exist in our society, just like car salespeople and insurance policy peddlers. That was directly acknowledged back when the ’40 Act was created and during the legislative formation of ERISA. In those days (hard to remember now since few of us were alive) there was a clear distinction between stock ‘tipsters and touts’ (as they were described in the legislative apocrypha around the ’40 Act) and ‘honest advisers’ (from the same source).
Today the lines are deeply blurred; brokerage firms routinely market themselves as trusted advisors, and the SEC has given them broad cover with the ‘best interest’ standard. The lines become even blurrier when it comes to rollovers. The recommendation to move assets out of a qualified plan doesn’t really mean that the sales agents are actually touching the money, but they are definitely moving those assets out of ERISA protection into a regulatory scheme that is much more permissive of conflicts.
As Kitces points out, the DOL has repeatedly failed in its efforts to stretch the ERISA fiduciary blanket over sales activities outside the qualified plan world, and whenever it’s tried, the unintended consequence was some very messy requirements for fee-only (fiduciary) RIAs who had to justify their rollover recommendations.
One size fits all inconveniences fiduciaries and doesn’t hold up when the sales organizations furiously lobby, litigate and (in the case of DOL and SEC staff) coerce. With our experience going back a decade or more, we are (perhaps too slowly) learning that this solution doesn’t work.
So what’s a better approach? Give up?
In part, yes. I think it’s fair to argue that the fiduciary world—NAPFA, the FPA and the CFP Board—should stop trying to impose fiduciary standards on the wirehouses and independent broker-dealers. They’re bigger and stronger, and they have a winning argument on their side.
A better approach would be to take us back to the days when the lines between a sales agent and an ‘honest adviser’ were clearer and more distinct. That is, lobbyists might argue that anyone who earns commissions beyond some de minimus amount (term insurance recommendations are generally fiduciary in nature) be clearly labeled, perhaps not as a ‘tipster’ or ‘tout,’ but as a sales representative. There could be specific rules for sales representatives which would not apply to fiduciary RIA firms—thus finally avoiding the blowback of requiring advisors to live up to sales agent regulations. (Sales agents would have to justify moving money out of ERISA protection, while advisors who already have to live up to fiduciary standards would be assumed to already provide those protections to the client assets.)
And, of course, this snatches the winning argument away from the lawyers representing SIFMA and the FSI. They are constantly arguing that these fiduciary impediments are limiting ‘choice’ in the marketplace. The DOL is trying to impose restrictions on sales when, in fact, sales is a legal activity.
So let’s proudly stand up for sales. Instead of requiring sales agents to live up to the higher standards of fiduciary advisors, we can acknowledge their right not to—and highlight the ‘choice’ that consumers can avail: they can work with somebody who embraces higher standards that protect the consumers’ interests, or they can work with somebody whose firm openly (grudgingly) acknowledges that they aren’t required and don’t intend to give advice that benefits the consumer more than the broker and the firm.
There would be furious opposition to requiring people earning commissions to call themselves sales agents. But I’d love to hear the arguments why this is a bad thing. Do the brokerage firms want to disguise their sales agenda from the investing public? Is that what this is all about? If there’s no prohibition against sales in the marketplace, then let’s highlight the ‘choice’ and allow the sales agents to live under standards that pose a danger to consumers, so long as the public understands that as part of the ‘choice.’
In this sense, the final demise of the DOL Rule might be a good thing for the advisory profession. It might crystallize what is really important at the absolute core of the debate over consumer protection, choice and standards in the profession. And it might give the fiduciary lobbyists an argument that the brokerage firms, for all their money and power, can’t defeat.