Fixing The Fiduciary Standard Rule Proposal To Truly Protect Investors

Daniel L. Goodwin CEO, Inland Real Estate Group
Font Size:

The best intentions sometimes yield the worst regulatory policies — just ask anyone who has spent significant time in our nation’s capital. The federal government often develops well-intentioned policies that only result in a bureaucratic morass. Unfortunately, the Obama administration is once again headed down that flawed path.

If the Department of Labor (DOL) implements its proposed fiduciary standard under the Employee Retirement Income Security Act, millions of Americans with Individual Retirement Accounts (IRAs) and 401k plans will have their access to financial advice and investment options drastically limited by the government.

Like many of my investment sector peers, I respect DOL’s desire to protect hard-working Americans as they prepare for retirement. But the agency’s proposal is flawed, unworkable and will unintentionally hinder the very groups it purports to safeguard.

The current version of the rule — which was discussed earlier this month during DOL hearings and is now subject to a two-week comment period — stands to adversely impact investors in three ways.

First, the rule aims to shackle financial advisors with duplicative regulations and limit the list of assets to which IRA owners and plan participants would have access. Investors could lose access to non-listed real estate investment trusts (REITs) as well as other alternative assets that offer diversification and steady yield. These drawbacks translate to fewer options for investors and ultimately undermine optimal portfolio construction.

Second, the rule’s proposed liabilities would discourage or completely prevent brokers from providing comprehensive advice. This means many investors are likely to lose access to valuable insight that helps them reach retirement goals.

Lastly, burdensome requirements represent a death sentence for the commission-based retirement advisory model. Many advisors operating as broker-dealers would need to transition from commission-based models to fee-based models that can be more expensive for investors. As this occurs, millions of Americans with modest incomes may be forced to find either a new advisor or a costlier retirement savings plan.

As one of the real estate investment sector’s longest tenured executives, I recognize the value in pragmatic regulation that requires financial advisors to serve their clients’ best interests. This concept of a “best interest standard” is something that financial services leaders and many regulators are already aligned on.

Unfortunately, DOL’s proposal ties an agreed upon standard to several hundred pages of onerous conditions and stipulations. The proposal comprises an enormous amount of information and an array of proposed changes to long-standing regulations. It is enough to give even the savviest attorney a major headache.

Clearly, financial advisors and ordinary Americans eyeing their own retirement can agree on the flaws in DOL’s proposal. Now is the time for us to begin forging an alternate path forward. In my view, there are three imperatives that must be addressed through a collaborative redrafting process:

The SEC must take the lead.

DOL is the wrong federal agency to drive this reform. As our nation’s top financial regulator, the SEC has the right authority to develop and uphold a feasible best-interest standard that protects retail investors. This point was recently backed by Congress when the House of Representatives voted to block DOL from implementing its new rule until 60 days after the SEC finalizes its own proposal. The SEC, which has jurisdiction over broker-dealers and registered investment advisors (RIAs), must take the lead in working with the White House, federal and state agencies, and the public to put the proper regulation in place.

We must balance investor protection with access to options.

I support a best-interest standard that enhances investor protection, but we cannot tie that standard to superfluous regulations that jeopardize Americans’ access to affordable financial advice, products and services. The SEC should advance a re-proposed rule that focuses on a uniform fiduciary standard covering both brokers and RIAs across all investment accounts. A universal rule prioritizing compensation governance and frequent advisor disclosures mitigates the need to arbitrarily shrink the list of assets investors have access to.

We must empower financial advisors to deliver best-interest counsel. 

The Securities Industry and Financial Markets Association (SIFMA) recently introduced a proposal for a uniform fiduciary standard. While DOL’s proposal would create a confusing two-tier system for retail and retirement accounts, SIFMA outlines “best interests” protections for all investors. The association’s advisor–specific recommendations include substantive disclosure, monitoring, examination, and enforcement by the SEC, FINRA and state securities regulators. This shows we can bolster oversight without creating new liabilities and redundancies that prevent highly-regulated financial advisors from doing their jobs.

As this debate evolves, we cannot forget that government and financial services leaders have a moral obligation to the American people. This is about more than politics and profits. With public pension plans on the ropes and the Social Security Administration facing billion-dollar shortfalls, now is the time to implement policies that encourage long-term retirement planning and investment. We can reach this goal by veering off the path mapped out by DOL.

Daniel Goodwin is chairman and CEO of The Inland Real Estate Group of Companies, Inc., one of the nation’s largest commercial real estate and finance groups.