NAIFA Blog

DOL fiduciary rule must consider impact on middle-market

The PBS Frontline story on “The Retirement Gamble” raises important points about the state of Americans’ retirement planning at a time when company-provided pensions are a thing of the past.

Among a number of issues raised about the usage of 401ks and IRAs in retirement planning, the program also cites the Department of Labor’s efforts to develop a fiduciary rule for advisors who serve retirement plans and individual retirement arrangements (IRAs). NAIFA opposed the fiduciary rule the DOL originally proposed, which would have been harmful to people trying to save for retirement and deprive them of access to products, services and advice.

Absent from the Frontline program is the potentially negative impact a new proposed DOL rule could have on consumers. If advisors are precluded from offering commission-based products, consumer choices will be limited, and many may not be able to afford advisor fees. Additionally, if advisors’ liability and costs increase, advisors may not be able to afford to work with small accounts or IRA holders. Middle-market consumers, who arguably have the greatest need for help and advice as they plan for retirement, may find access to advisors both expensive and difficult. Small employers may decide to scale back their employee benefits plans rather than pay the increased costs.

NAIFA's concern is not isolated, as there have been numerous bipartisan Congressional letters expressing concern, including the most recent effort by the members of the Congressional Black Caucus. They wrote: "We maintain concerns that if the re-proposal reflects the department's initial fiduciary proposal, it could disparately impact retirement  savers and investment representatives in the African-American community." NAIFA concurs that families in low- to middle-income communities could be disparately impacted. 

Middle-market investors must continue to have access to affordable professional investment guidance for their retirement planning. Any new proposal should adequately protect consumer access to retirement savings products and services while ensuring that consumers receive investment advice of the highest quality and reliability.

As NAIFA indicated in previously submitted comments to the Department, any DOL proposal should:

• Not extend ERISA-based regulation to individual retirement arrangements (IRAs),
• Include a robust seller’s exception to ensure retirement investors do not lose access to investment recommendations from broker-dealers and their representatives, and
• Not contradict the provisions of Dodd-Frank specifying that receipt of commissions and sales of proprietary products are not intrinsically fiduciary violations.

Survey: Lack of Professional Financial Advice Costly to Middle-Income Americans

More than half of middle-income Americans, those earning $30,000 - $100,000 a year, do not seek the help of a financial professional when managing their assets, according to a new survey by Primerica and the Consumer Federation of America.

As reported by Investment News, this lack of professional guidance often leads to costly mistakes. Two-thirds of those surveyed admitted that they have made at least one “really bad financial decision.”

The average assets of middle-income Americans decreased to $27,300 in 2010, from $37,000 in 2007. 

Of those in the survey who have not consulted a financial advisor, 15 percent said they do their own financial research using the internet and television. Another 17 percent make decisions without doing any research.

At a time when the middle market needs sound financial advice more than ever, federal regulations – if they are not written carefully – could limit the access of these investors to professional advisors.

As Investment News notes, the Department of Labor and the Securities and Exchange Commission are considering rules that would require all financial advisors to operate under a universal fiduciary duty, potentially increasing the regulatory and liability costs for advisors.

NAIFA and other groups have raised concerns that poorly drafted rules could drive advisors out of business, or force them to raise fees or shift their business to wealthier clients.

Robert Miller: "In defense of the financial professional"

NAIFA President Robert Miller

NAIFA President Robert Miller says in an InvestmentNews column that alleged abuses on Wall Street don't taint NAIFA members and other advisors who operate on Main Street. Mr. Miller writes:

"[N]ot all financial professionals are hewn from the same cloth. For instance, members of the National Association of Insurance and Financial Advisors and their colleagues serve clients in their hometowns across the country.

"They provide needed financial services and advice to people who lack the resources or desire to work with a multinational investment bank or even a wealth management firm. They are Main Street, not Wall Street.

"Nearly 60% of NAIFA members' clients earn $100,000 a year or less, according to research by LIMRA International Inc."

You can read the rest on the InvestmentNews website.

Facing Reality on Fiduciary

Michael Kitces, in an Investment News column, says that a letter to the Securities and Exchange Commission from the CFP Board, Financial Planning Association, Consumer Federation of America and several other groups lays out a “roadmap about how the SEC can proceed with a rulemaking” to impose a universal fiduciary duty on broker-dealers. The letter, he says, represents a turning point in the debate on the issue.

Mr. Kitces writes, “perhaps most significant in the letter was its statement that ‘the fiduciary duty is fully consistent with sales-related business practices, including receipt of transaction-based compensation, sale of proprietary products and sale from a limited menu of products.’”

In truth, the letter by the advocacy groups may not be a turning point so much as an acknowledgement of reality. SEC officials have indicated for months that the commission’s eventual fiduciary duty for broker-dealers and registered reps will be business-model- and compensation-neutral.

This was never really in question, because the Dodd-Frank law plainly says that any new fiduciary standard will allow advisors to receive commissions and offer proprietary products.

Mr. Kitces continues that “the letter suggest that the best path forward is simply to expand the rules framework under the existing Investment Advisers Act.”

However, Barney Frank, himself, cautioned SEC Chairman Mary Schapiro in a letter dated May 31 last year against applying the 1940 act to broker-dealers.

“If Congress intended the SEC to simply copy the ’40 Act and apply it to broker-dealers,” Rep. Frank wrote, “it would have simply repealed the broker-dealer exemption – an approach Congress considered but rejected.”

The SEC needs to consider the real value that broker-dealers and their registered reps provide clients who have no need for or no ability to pay fee-only services. It must consider any unintended consequences that a new regulation would have on the ability of middle-market consumers to receive financial services and products.

NAIFA’s concerns about a fiduciary duty are, and always have been, twofold.

First, no one – not Congress, not the SEC, not the Consumer Federation of America – has given clear, unambiguous evidence that there is a real problem that needs to be addressed by a fiduciary duty for broker-dealers. The “pro-fiduciary” crowd and many in the media have portrayed suitability as a weak or lesser standard.

In fact, broker-dealers and registered reps are some of the most heavily regulated financial professionals on the planet. Every transaction they make is reviewed to ensure its suitability, they undergo frequent regulatory examinations, and they are subject to significant continuing education requirements.

No one has produced a shred of evidence that the services or products offered by fiduciary-bound advisors are somehow “better” than that provided by advisors under the suitability model. Certainly, no one has shown that fiduciary-bound advisors are more honest. 

Second, a poorly developed or implemented fiduciary regulation could end up hurting the consumers it is supposed to benefit. If a fiduciary duty increases the regulatory burdens or liability costs for advisors, will these financial professionals still be able to offer affordable products and services to middle-income investors? Even if the SEC’s rule says commissions and proprietary products are ok, will advisors be forced by simple economics and the need to make a living to either drop their securities licenses or shift their business to wealthier clients who can afford to pay higher fees?

Fee-only investment advisers, who often bill themselves as “wealth managers,” tend to cater to more wealthy clients than registered reps. Will lower-end investors be left out in the cold if the ranks of registered reps is diminished by a misconstrued regulation that doesn’t seem to be addressing a specific problem?

In the words of NAIFA President Robert Miller, “We don’t fear a fiduciary duty.” NAIFA members act in their clients’ best interests every day. As it is, they abide by a full course of regulatory checks to do so.

NAIFA encourages the SEC to follow its own roadmap towards any new regulation it decides is necessary. The Commission has announced that it will conduct an analysis to ensure any rule it proposes doesn’t cost consumers more than it benefits them. We are eager to help in any way we are able.

NAIFA Raises Questions Over Pro-Fiduciary Groups' Study

A new study, funded by organizations that have been vocal advocates for a strict, one-size-fits-all fiduciary standard for financial professionals, purports to refute statements NAIFA has made in encouraging the SEC to be cautious as it drafts a fiduciary duty rule that would affect broker-dealers and the consumers who rely on their services and products.

The study makes some bold claims, but in reality has serious flaws and adds little to the debate over the SEC’s anticipated fiduciary rule.

“The Impact of the Broker-Dealer Fiduciary Standard on Financial Advice,” was written by Michael Finke of Texas Tech University and Thomas Langdon of Roger Williams University and funded by the Committee for the Fiduciary Standard and the Financial Planning Association, among others.

It claims that four states currently mandate that registered representatives of broker-dealers have a fiduciary duty when advising clients, 14 states deny such a fiduciary duty, and 32 states and the District of Columbia have either limited or ambiguous fiduciary duty requirements. The authors compare statistics and survey results from states they label “fiduciary” and “non-fiduciary,” and claim to demonstrate that the fiduciary duty has had little, if any, impact on registered reps, their clients, or moderate-income investors as a whole.

The study’s overarching conclusion is that fiduciary duties imposed on registered representatives in California, Missouri, South Carolina and South Dakota have not resulted in fewer registered reps per capita, have not reduced the access of lower- and middle-income consumers to financial advice and have not limited the ability of advisors to receive commissions or provide a broad range of products.

“These results provide evidence that the industry is likely to operate after the imposition of fiduciary regulation in much the same way it did prior to the proposed change in market conduct standards that currently exist for brokers,” the study authors assure us.

Limitations of the Study

Yet, the entire study appears to rest upon a foundation of sand. The underlying premise, that a common-law fiduciary duty exists for registered reps in four states, is shaky to begin with. The authors make this claim based on a single court decision in each state.

In three of the cases, courts actually ruled in favor of stock brokers accused of wrong doing. The study authors claim the court decisions nonetheless establish common-law fiduciary obligations on advisors because they loosely make reference to the “fiduciary” nature of the defendants’ relationships with their clients. In the fourth case, the court ruled against the defendant on numerous fraud and other criminal charges and similarly merely mentioned fiduciary obligations in its ruling.

None of these cases is remarkable in any way, and the use of the term “fiduciary” had no real significance and no effect on the outcomes. None of the cases creates a nebulous fiduciary duty or a new standard of care.

There are absolutely no laws or regulations establishing a fiduciary duty for registered reps in any of the four states the study labels “fiduciary states.”  It’s not surprising that the supposed “fiduciary duty” did not impact consumers or affect the way advisors do business. It’s doubtful whether advisors or consumers in the states actually know about the court decisions.

At least for three of the states, the study cites no cases of advisors found to have violated their alleged fiduciary duties.  

Notably, the researchers’ survey did not ask whether registered reps thought they were bound by a fiduciary duty to their clients – in fact, it doesn’t seem to have mentioned the term “fiduciary” at all. It did ask whether they “act in the best interest of clients.” In the so-called “non-fiduciary states,” 96.3 percent affirmed that they do.

It’s Not So Simple

If determining the impact of a fiduciary duty on registered reps and their clients was as simple as this study suggests, the SEC would not be trying to figure it out nearly two years after the passage of Dodd-Frank.

It is farfetched that a vague, common-law fiduciary obligation in several states based on findings in obscure court cases would have the same effects as an SEC regulatory standard. We find it even harder to assess this conclusion, because the SEC has not even proposed its regulation.  

NAIFA is not necessarily opposed to a fiduciary duty, but we have concerns that a poorly conceived fiduciary rule with no clear compliance guidelines could increase compliance and liability costs and open advisors to the threat of lawsuits.

That’s why NAIFA encourages the SEC to proceed with its economic analysis, and NAIFA is willing to assist in any way possible.  

In the words of NAIFA President Robert Miller, “We’re not afraid of regulation, but it has to be intelligent regulation.”

NAIFA's Terry Headley: Dodd-Frank Hits Main Street

NAIFA Past President Terry Headley

The federal Dodd-Frank financial reform law has broad implications affecting insurance and financial advisors and their clients across the country, NAIFA Immediate Past President Terry Headley told the Minnesota House of Representative Commerce and Regulatory Reform Committee during a Feb. 15 hearing.

Click to listen to Terry Headley's testimony

“NAIFA members are community-based, independent business owners,” said Mr. Headley. “They serve the middle-income market. … Our members are clearly Main Street and not Wall Street.”

“The target (of Dodd-Frank) was really Wall Street, but unfortunately the collateral damage has been on Main Street,” he continued. “The law of unintended consequences is fully at work here.”

Specifically, Mr. Headley told the legislators that, if not done properly, the Securities and Exchange Commission’s forthcoming fiduciary rule, which comes under the auspices of Dodd-Frank, could threaten to disenfranchise middle-market investors by increasing the cost, liability and regulatory burden of the advisors who serve them. NAIFA has been working diligently to ensure that the final SEC rule protects the business model of advisors who serve middle-market investors.

Headley also said that NAIFA is watching to ensure that “regulatory creep” associated with the Federal Insurance Office and Consumer Financial Protection Bureau, both created under Dodd-Frank, does not threaten the state-based regulation of insurance that has served consumers well for decades.

Mr. Headley finally commended the Minnesota legislature for passing the North American Securities Administrators Association model act and the National Association of Insurance Commissioners’ model on senior designations for financial advisors.

He urged the legislators to adopt the NAIC model on annuities suitability, and answered several questions on annuities and the model. Following Mr. Headley’s testimony, the Committee voted unanimously in favor of the NAIC model, which now goes on to consideration by the full House.

•   Headley PowerPoint Presentation

 

Poll: Investors Find Financial Advisors Trustworthy

Who do investors trust? A new survey by John Hancock Financial found that investors place greater trust in financial advisors than in Federal Reserve Chief Ben Bernanke, President Barack Obama, the financial news media or the U.S. Congress.

Of the investors surveyed, 82 percent said that have a high level of trust in advisors. Only 5 percent of investors said they distrust advisors (13 percent were "neutral"), while 40 percent said they distrust Mr. Bernanke, 54 percent distrust President Obama, and 68 percent distrust Congress.

The findings on financial advisors echo those of similar studies, including a NAIFA poll that found 73% of consumers who have worked with a financial advisor say the advisor provides valuable service and 75% say their financial advisor works in their best interest.

"Selling the Insurance Story" - An InsuranceNewsNet Q&A with NAIFA President Robert Miller

In an extensive, broad-ranging interview with InsuranceNewsNet, NAIFA President Robert Miller speaks on such diverse topics as the estate tax, taxation and life insurance, fiduciary proposals for registered reps, the influence of NAIFA, the political landscape in Washington, and the important role NAIFA members play helping Main Street Americans.

"We are a business that develops relationships, and it happens again and again in big cities and small towns across this country.

"We sit down with families and small businesses and discuss issues with them that nobody else wants to discuss. Those issues are if anything happens to a significant partner in this business – let’s say it’s the partner who holds the key to getting bank loans – how are you going to stay in business or if anything happens to the breadwinner in a household, how are you going to be able to educate your children, stay in your house or continue on in a life that you expect to have?

"We bring in those dollars when the going is its toughest. We can’t replace the love of a lost family member, and we can’t replace a significant partner in a small closely held business, but what we can do is bring in money that buys their future.

"Once legislators understand the significance of what we do and they realize that insurance products represent 20 percent of all savings in this country, Congress is set up to make intelligent choices and to understand what potential unintended consequences would be if the rules were changed and families had to buy twice as much insurance in order to get the same kind of protection because they’re taxing the death benefit."

- NAIFA President Robert Miller in InsuranceNewsNet

Read the rest of the Q&A online.

Current tax policy ‘invaluable’ incentive for Americans to invest in financial future

One of the “greatest challenges” we face as a nation is the ability to make smart decisions and create sound policy that effectively will address the U.S. deficit, Sen. Jon Tester (D-MT) told NAIFA members today during the National IFAPAC and APIC Training Meeting in Washington.

Tester, a member of the Senate Banking Committee, said officials need to create policy “that will encourage all Americans to save and make plans for their future.” The current tax rules that apply to insurance and annuity products “have been an invaluable incentive to encourage Americans to make smart decisions in their financial planning.”

Tax treatment of insurance products was among the issues NAIFA members discussed in the nearly 170 meetings held with legislators and their staff during today’s “Day on the Hill” event. Other issues on the agenda included the negative impact the healthcare reform law’s “medical loss ratio” rules have had on the ability of agents to serve their clients; and the important role NAIFA members play in providing advice, services and products to middle market investors and Main Street Americans.

In his remarks, Tester also commented on the following issues:

Department of Labor’s reproposal to define the term “fiduciary”: “The original proposal would have curtailed investors’ ability to receive investment advice. Thankfully the DOL is reconsidering. At a time of uncertainty, this is not the path we should be headed down.”

SEC standard of care:  “As a member of the Banking Committee, I worked to make sure (that Dodd-Frank) provided the right context to standard of care. I did not want to force advisors into a single standard. Efforts to harmonize should result in better protection for consumers … and should not increase costs.”

The role of the insurance agent and financial advisor:  “The role you play is essential to providing peace of mind for families and small businesses, and to keeping communities strong. … You wouldn’t be successful in your jobs unless you cared about advising your clients.”

On Wall Street: “On Wall Street, some went too far in betting against their clients’ interests. Main Street should not have to pay for the sins of Wall Street. Main Street did not cause the (U.S. financial) crisis.”

The State of the Union: A Focus on the Middle Class

A recurrent theme in President Obama’s State of the Union address last night centered on the importance of promoting the financial success of the middle class. The President spoke of “the basic American promise that if you worked hard, you could do well enough to raise a family, own a home, send your kids to college, and put a little away for retirement.”

Of course, these are goals that NAIFA members help their clients achieve with regularity. Most NAIFA members are small business owners located in communities around the country. Nearly 60 percent of their clients have household incomes of less than $100,000. The insurance and financial products, services, and advice they provide help middle class people with nowhere else to turn for these things achieve financial security and prosperity.

Yet increasing regulatory burdens on their businesses at both state and federal levels threaten the ability of these advisors to effectively serve this segment of the market.

NAIFA agrees with the President’s broad statement that “we need smart regulations to prevent irresponsible behavior.” In fact, it echoes the sentiments of NAIFA President Robert Miller, who recently told InvestmentNews, “We're not running from regulation. There is room for intelligent regulation in the marketplace.”

The key is making sure regulations are intelligent (or “smart,” depending on which president’s phrasing you prefer). An SEC fiduciary rule that would endanger the business model that has allowed NAIFA members to successfully help their middle-market investor clients for decades would not be intelligent. A DOL fiduciary rule that would make it more expensive or difficult for people investing for retirement to get professional advice would not be smart. The health care law’s MLR rule, structured in a way that makes it impossible for many insurance brokers to continue customer services to their individual and small business clients, is not intelligent.

NAIFA shares the President’s concern for the well-being of the middle class – in fact, it’s our members’ business! We look forward to working with the administration in the coming year to ensure that regulations affecting NAIFA members and consumers provide needed protections but do not do unintended harm to Main Street America.