Fresh off the producer-licensing win in Washington earlier this summer, insurance broker groups are gearing up for their next big legislative battle around fiduciary standards and the responsibilities of financial advisors toward their clients.
But first, a few words about NARAB II.
The National Association of Registered Agents and Brokers Reform Act of 2013, also known as NARAB II, cleared a key committee and is off to the Senate for a full vote. NARAB II will create a national clearinghouse for insurance agents and brokers to obtain approval to operate in multiple states so that agents only have to pass licensing requirements in their home state and once for NARAB.
Now there’s plenty of behind-the-scenes action on both sides of the fiduciary standards issue as agent and broker groups prepare testimony and position papers to be delivered before the U.S. Department of Labor (DOL) and the Securities and Exchange Commission (SEC).
Those in favor of fiduciary standards for a broader swath of distributors of financial products and services say the broader standards can do nothing but benefit the end clients, which are the retail and institutional investors. They argue that these clients deserve no less than to have their best interests at the core of every financial transaction.
Opponents say that while this may be true in the abstract, a lower standard is suitable, particularly if it comes at much lower cost. Some professional advice always is better than no professional advice at all, they say.
Switching over to the criminal justice side of the fiduciary duty aisle, those very same regulatory agencies, SEC and DOL, have been just as busy filing complaints against financial advisors for breach of fiduciary duty in connection with raiding pension funds for private gain. The SEC has announced 65 legal actions so far against companies or individuals in the second quarter alone.
For its part, DOL also has been active. In fiscal year 2012, the Employee Benefits Security Administration closed 318 criminal investigations with the help of other law enforcement agencies, DOL statistics show. The investigations led to the indictment of 117 people – including plan officials, corporate officers and service providers – for offenses related to employee benefit plans, according to DOL.
Statistics kept by the Financial Industry Regulatory Authority (FINRA) show 294 people barred from the financial services industry in 2012, down from 329 in 2011. A total of 549 people were suspended last year, up from 475 in 2011. There were 1,541 new disciplinary actions last year, up 3 percent from the 1,488 disciplinary actions in 2011, according to FINRA.
Not every legal action sought by the SEC and DOL involves financial advisors. Some complaints target major institutions and their executives who often serve multiple masters: shareholders, customers and employees, for instance.
But it’s the cases where people have an explicit duty to protect the interest of their clients that do the most damage to an otherwise respectable calling, and where proponents of the fiduciary standard say investors and the industry at large can only benefit.
No one yet knows if broadening the fiduciary standard would lead to fewer enforcement actions against financial advisors, but those who favor applying the standard more broadly know that they would rather be safe than sorry.
Phyllis Borzi, assistant secretary of labor for employee benefits, is adamant about protecting consumer interests first and foremost.
A consumer, she said recently, has an “absolute right to believe” his or her interests come first. What that means in terms of expanding fiduciary standards definitions, the industry will have to wait until fall to see.
Currently, only fee-based independent Registered Investment Advisors are required to act in a fiduciary capacity toward their clients.
Agents or financial advisors working for broker-dealers or an insurance company are held to the lower “suitability” standard, in which they are required to match clients with investment products that merely suit clients’ needs.
The bulk of a financial advisor’s income is commission-based. Critics of the model say it is tempting for advisors to steer clients to products on which they earn a commission, thereby subverting the spirit of working in the best interest of clients.
But that’s not quite the whole story, according to the National Association of Insurance and Financial Advisors (NAIFA) and other groups opposed to fiduciary rule changes, because it ignores what consumers can realistically afford.
NAIFA has argued that imposing a fiduciary standard on advisors is more expensive and isn’t the right fit for NAIFA’s
“Main Street” clientele, 58 percent of whom earn less than $100,000 a year.
NAIFA isn’t alone in its opposition to the fiduciary rule.
“At the end of the day, we think this proposal would increase costs to participants, and we believe this would mean less choice,” said Lee Covington, senior vice president and general counsel of the Insured Retirement Institute.
“We think fees would be more costly for investors, and we think advisors would not provide that advice at that fee level. We believe some advice is better than no advice,” Covington told InsuranceNewsNet in a telephone interview.
SEC requests for information on the different approaches to fiduciary standards of care were expected in July, but reviewing the comments and the data is likely to take months, and the SEC isn’t expected to act before later this year at the earliest.
Broker-dealers and financial advisors are regulated differently and subject to different standards with regard to retail investors, but investors often are unaware that such differences even exist, and of the legal implications of such differences, according to the SEC’s Study on Investment Advisors and Broker-Dealers issued more than two years ago.
NAIFA has again cited the costs to Main Street investors as a potential issue with the SEC’s review of a fiduciary harmonization process. Higher costs are likely to restrict access to investment guidance for small investors, NAIFA said, noting that the sweeping financial reforms contained in the Dodd-Frank reform law protect commissions and propriety products.
So far there has not been adequate evidence of consumer harm to justify requiring fiduciary status, nor has there been any economic analysis to determine the impact of fiduciary standards on middle-market consumers, according to NAIFA.
But a coalition of organizations – which includes the Certified Financial Planner Board of Standards, the Financial Planning Association, the Investment Advisor Association and the National Association of Personal Financial Advisors – in a letter to SEC Chairwoman Mary Jo White urged the agency to establish a uniform fiduciary standard for broker-dealers and investment advisors that is “no less stringent” than the one under which registered investment advisors operate, which is to say a fiduciary standard.
Ultimately the question is how high a standard the government is willing to impose on financial advisors in the name of protecting investors. Cadillac advice is always available at a Cadillac price, but in the end, not all investors need or even want to drive a Caddy.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].