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Three myths confuse conflict-of-interest rule

The phone rang very early on a cold Monday morning a few weeks ago. “Chris,” the woman’s voice began, “today’s the day! Did you see the news?” Of course I had. For more than three decades I’ve been joyfully working in the world of the registered investment adviser. Over the last five years, I’ve been writing, reporting and speaking about all things “fiduciary.”

It was no surprise, then, that my publicist called with giddy excitement the day the White House announced its support for broadening the so-called “fiduciary standard” to include all retirement plan advisors, not just registered investment advisers. (That’s not a typo. There really is a difference between an “advisor” and an “adviser.”) Within hours I was speaking non-stop to media outlets across the nation. It quickly became apparent that the war rooms of the Wall Street giants had inundated these naïve newsrooms with talking points, which immediately blossomed into dangerous myths. And by dangerous I mean the kind of misinformation that can wreak havoc on the compliance goals of the typical 401(k) plan sponsor.

I like talking to radio hosts from one end of the nation to the other. It gives me a better sense for the prevailing thoughts of America in general. Over the course of the several days following the White House announcement, I discovered through these voices exactly how the public has misframed the issue in three ways:

  •  Public Misunderstanding No. 1: “The Greedy Industry will fight this conflict-of-interest proposal.” This is wrong. The fight over the Labor Department’s proposal is not an example of the industry vs. the regulators. What’s occurring is nothing less than a civil war within the financial services industry. It’s the “Big Box” financial services firms vs. the “Mom and Pop” neighborhood advisers. Quite frankly, we don’t know on which side the regulators will fall, but for all their lip service to the Moms and Pops, in the end many feel money rules the day. In this case, “money” means the same thing as “Big Box.”
  •  Public Misunderstanding No. 2: “The Greedy Industry is stealing money from my retirement plan.” Chances are this is certainly not true for the vast majority of 401(k) plans. A recent study concluded that only about a third of 401(k) plan assets run the risk of being exposed to conflicted advice. What’s more, the conflicts of interest that do occur are specifically permitted by the Labor Department—so, technically it’s not stealing (although it’s also not necessarily in the retirement saver’s best interest, either). Many feel these same self-dealing exemptions will continue to be permitted in the proposal submitted by the DOL.

One final comment on this notion: The idea that commissions are evil is also misplaced. The commission-based business model is a critical element for agency transactions. This is the traditional brokerage function and is essential for the continued success of our capital markets. The DOL is not prohibiting this business model.

 Public Misunderstanding No. 3: “Why do we need a new rule? Don’t things always get worse whenever the government makes a new rule?” OK, I’ll admit the second half of this might have some merit, but the premise that this is a new rule is misleading and incorrect. The Fiduciary Standard currently exists and, as mentioned above, is being enjoyed by a vast majority of 401(k) plans now. (IRA plans? That may be another story …) The rule is not new. What is new is the sense that businesses providing identical services be subject to the same government regulations. That’s fair. That levels the playing field. That removes the corporate cronyism that currently exists.

What’s missing from this discussion is the real impact of this issue on the personal fiduciary liability of the individuals responsible for their company’s 401(k) plan. While interviewing famed ERISA attorney Fred Reish for an article, he told me, “Since ERISA requires that plan sponsor fiduciaries evaluate and mitigate conflicts, the fact that an IRA fiduciary adviser does not have any conflicts obviously helps the plan sponsors fulfill that responsibility—by eliminating the issue.”

It’s very tempting from plan sponsors to view the fiduciary policy debate as nothing more than “inside baseball.” But, as Reish rightly points out, plan sponsors have a meaningful stake in the game. They ignore it at their own peril.

Christopher Carosa, CTFA, operates a registered investment adviser headquartered in Mendon. He is the author of five books, including his latest, “Hey! What’s My Number?—How to Increase the Odds You Will Retire in Comfort.”

3/20/15 (c) 2015 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.


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