Insurance Industry Reps Question Costs of DOL’s Proposed Fiduciary Rule
August 13, 2015 by Frank Klimko, Washington correspondent, BestWeek: frank.klimko@ambest.com
WASHINGTON – A proposed U.S. Department of Labor regulation overstates the benefits of tightening conflict of interest standards for retirement advisers while not recognizing that the new rules could cost investors up to $19 billion a year, insurance industry representatives said.
“You are the agent of Leviathan,” Ron Bird, senior regulatory economist at the U.S. Chamber of Commerce, told federal regulators. “A force for great good, but by its very hugeness, it brings forth great risk.”
Bird made the literary reference to Thomas Hobbes’ 1651 book at an Aug. 11 hearing at the DOL over the department’s proposed conflict-of-interest fiduciary regulation. After receiving criticism, the DOL scheduled public hearings this week to possibly amend the rules. DOL Secretary Thomas Perez has promised the new comments will be considered before the final rule is drafted (Best’s News Service, July 21, 2015).
Industry representatives at the hearing said the proposed rule would make it more difficult for middle-income Americans to plan for retirement. Bird advised the department to take a go-slow approach.
“Small steps, incremental steps are very useful,” Bird said. “These marginal steps actually mimic what the market does and gives protection against unintended consequence.”
Sean Collins, senior director of industry and financial analysts, Investment Company Institute, said the DOL’s regulatory impact analysis was deeply flawed. The ICI’s analysis of the rule’s impact shows that investors’ returns could be reduced by $1.1 billion the first year it is implemented. That total could rise to more than $11 billion a year over a decade from new additional fees that investors will pay to fee-based financial advisers. Factoring in additional costs, it is possible that annual losses to investors could mount to nearly $19 billion a year within 10 years, Collins said.
Carl Wilkerson, American Council of Life Insurers’ vice president and chief counsel, securities and litigation, said the DOL erred by basing its analysis on old or flawed data from 15 to 20 years ago.
“Fees and charges have fallen significantly since the data measured in the studies,” Wilkerson said. “The studies serve as a poor measure of the proposal’s benefits.”
Wilkerson also noted that the retirement advice market is already highly regulated.
“In calculating the proposal’s need, the RIA fully ignores comprehensive federal and state laws that directly protect retirement savers against the very abuses the rule seeks to rectify,” Wilkerson said.
Nick Lane, chairman of the Insured Retirement Institute board of directors, asked the DOL to preserve important exceptions for times when advisers seek to educate consumers. The proposal impairs the ability of advisers and financial institutions to provide meaningful investment education because it excludes discussions of specific investment alternatives from the definition of investment education. IRI wants the DOL to retain current rules that allow discussions about investment alternatives. Lane is also senior executive director and head of U.S. life and retirement for Axa.
However, there is substantial evidence that new fiduciary conflict-of-interest reforms are needed, said Antoinette Schoar, professor of finance, MIT Sloan School of Management. The school sent out “mystery shoppers” to make more than 250 financial adviser visits in the greater Boston and Cambridge area. They found that advisers who had fiduciary responsibility towards their clients provided better and less biased advice than those who were registered as brokers, she said.
“The brokers seemed to reinforce erroneous beliefs about how the markets functions, especially if it was in their own self-interest to sell products at a higher costs,” she said.
(By Frank Klimko, Washington correspondent, BestWeek: frank.klimko@ambest.com)