Paul Ryan, Speaker of the U.S. House of Representatives
ON MARCH 8, 2016 PAUL RYAN, SPEAKER OF THE U.S HOUSE OF REPRESENTATIVES TWEETED THAT THE DEPARTMENT OF LABOR’S NEW FIDUCIARY RULE FOR BROKER-DEALERS TO ADDRESS CONFLICTS OF INTEREST IN RETIREMENT ADVICE IS “OBAMACARE FOR FINANCIAL PLANNING.” THE RULE IS SET TO BE RELEASED ON WEDNESDAY, MARCH 16. HE REFERRED TO IT AS AN “APRIL FOOLS – WORTHY JOKE.”
But according to the United States Department of Labor Employee Benefits Security Administration, loopholes in the retirement advice rule have led some advisors to recommend products that put their self-interest and profits ahead of their client’s best interests.
Broker-Dealers will now have to act as fiduciaries, from the Latin word “Fudica,” meaning “trust,” and now stop “self-dealing,” or creating “conflicts of interests” in which the potential benefit to the fiduciary is in conflict with what is best for the person who trusts him/her/it.
In other words, the broker-dealer must consider the best investment for the client and not buy or sell on the basis of what brings him/her/it the most commission.
It isn’t fair for broker-dealers to sell products with “backdoor” payments and “hidden fees” buried in fine print; and often the high costs and low returns are not disclosed to the client, while the broker-dealer receives incentives and high commissions.
For example, did you know when you buy or sell a bond there is a transaction cost, a “mark-up,” which is the difference between the price a broker-dealer pays for a bond and the price it is sold to you? Mark-ups are usually 1% – 5% and the broker-dealer is not obligated to disclose the cost of the mark-up. It is difficult to know how much of a markup you are paying, because the markup is built into the price of the bond.
A White House Council of Economic Advisors Analysis found that this and other conflicts of interests result in annual losses of about 1% for affected investors – or about $ 17 billion per year in total. They reported that a “one percent lower return could reduce your savings by more than a quarter over 35 years. In other words, instead of a $ 10,000 retirement investment account growing to more than $ 38,000 that period, after adjusting for inflation, it would be just over $ 27,500.”
One of the investments frequently offered to those with investment accounts are annuities.
In October 2015 Massachusetts Senator Elizabeth Warren released a report, “Villas, Castles, and Vacations: How Perks and Giveaways Create Conflicts of Interests in the Annuity Industry.”
Senator Elizabeth Warren
In April 2015 Senator Warren had opened an investigation, asking 15 leading annuity advisors (e.g. New York Life, Lincoln Financial, MetLife) for information on whether or not they offered non-cash incentives such as lavish cruises, luxury care leases and other perks (not to mention high commissions) to annuity sales agents to promote their products and whether their customers were aware of the agent’s compensation.
The Huffington Post – March 26, 2014
“Asking Tough Questions about Annuities.”
“Over all, 13 of the 15 companies – 87% – admitted to offering kickbacks directly to agents, indirectly through third party gift payments, or both. According to Senator Warren’s report, “current disclosure rules are inadequate to insure customers are informed about the incentives the agents receive for selling them specific financial products.
Further, the Report cited that more than $ 235 billion of annuities were sold to customers in 2014.
Of course, the National Association of Insurance and Financial Advisors (NAIFA), one of the nation’s oldest and largest financial services organizations representing the interests of insurance professionals from every Congressional district in the United States, has multiple reservations about the Department of Labor’s new fiduciary rule.
The retirement products most commonly offered by NAIFA members are annuity products (fixed and variable) and mutual funds.
It believes that “In its current form, the proposed rule presents major—and in some cases, insurmountable—obstacles for NAIFA members serving middle-market retail investors (i.e., those who need the most encouragement and assistance when it comes to retirement savings.)
We continue to have a savings crisis in this country, as the huge Baby Boomer population bulge reaches its retirement year. Impeding (obstructing) the provision of sound financial advice, delivered in the client’s best interest, will only exacerbate that problem. We are concerned that the DOL’s complex and expensive conflict of interest/fiduciary duty proposal – while well‐intended – will in fact create barriers to financial advice that will be insurmountable for many if not most middle‐income Americans.
As currently drafted, the proposal would impose a wide range of new, very expensive, and mostly unnecessary administrative requirements along with a “best interest” standard that invites litigation regarding what satisfies that standard. The proposal implicitly favors a fee‐for‐service model that does not work for most Americans of modest means.”
How does stopping “self-dealing,” or “conflicts of interests” create “barriers to financial advice” in which the potential benefit to the fiduciary is in conflict with what is best for the person who trusts him/her/it “impede or obstruct the provision of sound financial advice?”
As President Barack Obama said on February 23, 2015: “Today, I am calling on the Department of Labor to update rules and requirements that retirement advisors put the best interests of their clients above their own financial interests. It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first.”
President Barack Obama speaks at AARP in Washington D.C. on February 23, 2015
“Villas, Castles and Vacations: How Perks and Giveaways Create Conflicts of Interest in the Annuity Industry / October 2015 / Prepared by the Office of Senator Elizabeth Warren.