A dispute is embroiling the financial services industry. On one side are the broker-dealers and the Chamber of Commerce. On the other are President Obama and various consumer groups. If the government wins, it will affect 401(k) plans, as well as Individual Retirement Accounts (IRAs).
A broker-dealer (B/D) is a firm in the business of buying and selling securities, operating as both a broker and a dealer, depending on the transaction. Merrill Lynch, Morgan Stanley & Co, and Wells Fargo Advisers are the three largest B/Ds.1 There are also many regional and independent B/Ds, such as LPL Financial, Ameriprise, and Raymond James.
The B/D vs. Prez dispute began in 2010 when the U.S. Department of Labor proposed that every person providing investment advice to retirement plans must be a fiduciary.2 (A fiduciary must disclose to its clients all material facts and conflicts of interest.) After much criticism from B/Ds, the original proposal was scrapped in 2011. But on February 23, 2015, President Obama told the Department of Labor to send a revised rule for review to the Office of Management and Budget.
The business model of many B/Ds usually includes some revenue sharing, in which a mutual fund company or some other fund manager pays the B/D to be on its platform. Some regulators contend that such a payment influences what funds get offered to clients.
In 2013, 87% of retirement plans had some form of revenue sharing.3 The B/Ds claims that these arrangements allow them to provide services to small and mid-sized accounts for which they would otherwise have to charge clients, or not provide services at all.
The Financial Services Roundtable, a leading advocacy organization for America’s financial services industry, says the rule change will increase costs and add regulatory burdens to an already highly regulated industry. This would make it difficult for brokers to provide retirement and investment services to small businesses or individuals with small IRA accounts.4
Paul Reilly, CEO of broker-dealer Raymond James, blasted the original proposal, calling it “an example of the biased and distorted research [that] impugns the integrity of the work our advisors do every day to help clients achieve their goals.”5
The Consumer Federation of America (CFA), a supporter of the rule change, believes the current rules are outdated, pointing out that they were written in 1974, when employers invested the retirement money for their employees. However, with employees now making those decisions, additional protections are needed. Supporters claim that the new rule will reduce the fees individuals currently pay in their 401(k) and IRAs, resulting in higher account balances, hence more money for employees at retirement.6
Supporters also claim that rules about IRAs need updating, given that, in 1974, when Congress wrote the current rules, nobody contemplated the amount of money moving into IRAs. Cerulli Associates, a Boston-based research firm, estimates that individuals will roll over $2.1 trillion from 401(k)s into IRAs from now through 2018.7
The Department of Labor is the point agency because they oversee the Employee Retirement Income Security Act (ERISA). Most IRAs, however, are not regulated by ERISA; instead, they fall under the jurisdiction of the Internal Revenue Service. But the IRS uses the Department of Labor’s definition of “investment advice,” so IRAs most likely get covered if the government prevails.
There is an alternative to broker-dealers. They are called investment advisers. Moreover, they are fiduciaries. They have a different business model than broker-dealers. They are usually paid a fee, as opposed to a commission.
The outcome of this B/D-vs.-the Prez dispute is important, so when it finally gets resolved, I will be sure to update readers about it in a future article. Remember: financial advisors are either registered representatives affiliated with broker-dealers or investment-adviser representatives working for investment advisers. I am dual-registered—that is, I am a registered representative of a broker-dealer and an investment adviser representative of an investment advisor.
1 “Broker Dealer Firms,” http://www.brokerdealerfirms.com/sortbyassest/tenthousand.php
2 Della, Gloria, “US Labor Department proposes rule defining ‘fiduciaries’ of employee benefit plans,” Oct. 21, 2010, U.S. Department of Labor, http://www.dol.gov/opa/media/press/ebsa/EBSA20101472.htm
3 Epstein, Chuck, “Are 401(k) Revenue-Sharing Deals on Their Way Out?”, July 8, 2014, ThinkAdvisor, http://www.thinkadvisor.com/2014/07/08/are-401k-revenue-sharing-deals-on-their-way-out?ref=hp
4 “Memorandum Concerning Expected Department of Labor Conflict of Interest Rule,” Financial Services Roundtable, http://issuu.com/fsroundtable/docs/debevoise-fiduciary-duty-regulatory/1?e=15806437/11673496
5 “Raymond James CEO Calls on Advisors to Fight DOL Fiduciary Definition,” onwallstreet, http://www.onwallstreet.com/news/regulatory_compliance/raymond-james-ceo-calls-on-advisors-to-fight-dol-fiduciary- definition-2691851-1.html
6 “DOL Fiduciary Questions and Answers,” Consumer Federation of America, http://ourfinancialsecurity.org/blogs/wp- content/ourfinancialsecurity.org/uploads/2013/11/Fiduciary-Questions-and-Answers-Final.pdf
7 Zweig, Jason, “Who’s Training Your Retirement Navigator?”, Feb. 14, 2014, The Wall Street Journal Moneybeat, http://blogs.wsj.com/moneybeat/2014/02/14/whos-training-your-retirement-navigator/?mod=wsj_valettop_email
These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
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