As a financial advisor, I have a love-hate relationship with regulations. Did I say “love”? That word may be a little too strong.
Frankly, I don’t need to be tightly regulated. The vast majority of financial professionals don’t need to be tightly regulated either. We look out for the interests of our clients because it is our professional responsibility, and because our success depends on getting and keeping our clients’ trust.
Yet, I understand that we need regulations. Government oversight of our industry not only safeguards our clients, it helps protect financial professionals whose reputations can be harmed by the careless or unscrupulous actions of others.
Regulations ensure that those who wish to be our colleagues are properly educated and abide by strict ethical and legal standards.
It is important for consumers who entrust their financial security to professional advisors to be confident that they are receiving competent and valuable advice. At the same time, it’s important that regulations allow advisors to do their jobs. Regulations should encourage market competition and refrain from restricting consumer choices or disrupting beneficial relationships between advisors and their clients.
The DOL Proposal
Unfortunately, I have grave concerns that the new “best interest” rule the Department of Labor (DOL) has proposed for retirement account advisors would do much more harm than good. The rule would require the vast majority of registered representatives in the retirement space to sign best interest contracts (BICs) with clients in order to receive third-party compensation, such as commissions from financial institutions.
BICs would make advisors vulnerable to lawsuits for alleged breaches of contract in state courts and alleged breaches of fiduciary duty under the Employee Retirement Income Security Act (ERISA) in federal courts. Increased liability would raise advisors’ errors and omissions insurance premiums. Also, the contracts, along with the proposal’s increased disclosure and reporting requirements, would create additional red tape and paperwork for advisors, their broker/dealers and their clients.
I am in the risk-assessment business and, from what I can tell, the BIC exemption is a risk that may not be worth taking for smaller accounts. The risk-reward is not great enough. Advisors would be forced to enact account minimums due to the added liability and other costs. Rather than helping small- and middle-market investors, the DOL proposal would likely leave many of them with nowhere to turn for advice as they prepare for retirement.
The proposal also could place a stumbling block in the crucial process of building relationships between advisors and their clients. For example, a simple educational conversation with a client would require a signed contract if the advisor mentions any product examples.
I know from experience that when you’re with a client or prospect, often your general conversation switches to recommendations quickly. To halt the conversation and have the client sign a contract would not be well received. It is particularly counterproductive during conversations that require clients to open up about their financial situations. Additional paperwork isn’t always perceived as more protection. Instead, it often shuts the client down.
A client in my hometown has been a “small account” for the last 15 years, and we have built a retirement plan for him. The company he worked for was sold recently, creating job uncertainty for him. After meeting three times and discussing a number of possible solutions, we agreed upon a plan of action and finalized his plan for the rollover funds that included a C share mutual fund, an index annuity and a variable annuity.
This alleviated my client’s concerns about ensuring a guaranteed income stream and reducing his market risk. It’s the type of solution he would not be able to devise or implement without the help of a professional. Yet, he is the type of client likely to be left out in the cold if the DOL proposal becomes final.
Fortunately, the proposal is not yet final. Along with my NAIFA colleague Terry Headley, NAIFA acting CEO Michael Gerber and other NAIFA staff, I recently met with officials from the White House and DOL to discuss our concerns about the rule. The administration seemed receptive to our input. DOL has invited us for a follow-up meeting. NAIFA is also working with industry partners and members of Congress on potential legislative remedies.
It is crucial that regulators get this right. When it comes to preparing for retirement, Americans need all the help they can get. I love the fact that I am in a respected profession where I can help people enjoy financial success. And I will admit that I owe part of that to the regulations that help give consumers the confidence to work with me. But I hate the fact that unintended regulatory consequences could prevent me from helping some of those who need my services the most.