Opinion

Don’t Turn Back This Clock: Fiduciary Regulation Harmed Consumers

A House Financial Services subcommittee hearing yesterday focused on consumer protections in financial transactions. It was an important topic to discuss. Sadly, the hearing included talk about approaches that would ultimately harm consumers.

At issue is the Securities and Exchange Commission’s proposed Regulation Best Interest, a sensible, principles-based approach to governing broker-dealer conduct that is consistent with the mission bestowed on the SEC by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Reg BI would require broker-dealers to put their clients’ interests above their own when providing guidance about a financial product. Reg BI codifies and further elevates financial professionals’ best practices.

Critics at yesterday’s hearing contended that the proposal doesn’t work. They promoted a fiduciary standard, such as the judicially vacated Department of Labor regulation, that the SEC should emulate.

Unfortunately for consumers, they’re wrong.

In its brief existence, the Department of Labor’s investment advice fiduciary regulation harmed the very people it purported to help. Many financial firms moved to a fee-for-service-only model, no longer working with consumers with account balances of less than $250,000. So, the regulation eliminated choice and access, unfairly treating small- and moderate-balance savers and typical buy-and-hold investors who rely on commission-based services for their retirement needs.

According to a survey by the market research firm LIMRA, if the Labor Department’s fiduciary regulation had remained in-force, 54 percent of advisers might have dropped or turned away small investors, resulting in as many as 4 million middle-class households losing access to information they need to ensure a secure retirement.

It especially hurt middle-income consumers who rely on annuities to provide a guaranteed stream of lifetime income in retirement. Most annuities are sold on a commission basis. According to the latest available data, the median annual household income of annuity owners is $64,000. Eighty percent have total annual incomes below $100,000, and more than a third (35 percent) have household incomes less than $50,000. 

By comparison, Reg BI raises the bar on existing consumer protections while preserving consumer choice and access to products and services they want and need. It would require financial professionals, when making a recommendation, to act in the consumer’s best interest — with care, skill, prudence and diligence — based on the consumer’s financial needs and objectives. It also directs broker-dealers to avoid, mitigate and disclose conflicts of interest.

In crafting Reg BI, the SEC drew from its decades of experience regulating investment advisers and broker-dealers to develop a constructive best interest standard that can be uniformly applied across all regulatory platforms. This would provide stronger protections for consumers regardless of where they live.

To be sure, the Reg BI alone cannot protect all consumers in all financial transactions. Its scope is limited to financial professionals who operate under the SEC’s purview.

That is why the SEC should coordinate with state insurance regulators, the Labor Department, FINRA and Congress to develop a harmonized and uniform best interest standard of care for investment advice. A collaborative approach would ensure all consumers receive retirement savings information and related financial guidance from financial professionals acting in their best interest, regardless of the financial products they purchase.

 

Carl B. Wilkerson is vice president and chief counsel — securities at the American Council of Life Insurers.

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