GOP lawmakers are continuing their fight against the Department of Labor’s (DOL) fiduciary rule, released Wednesday, which many fear will inhibit low-and-middle income Americans from seeking professional financial guidance.
The DOL lightened the language from its initial proposal – which is aimed to prevent conflicts of interest – by taking out a provision that would have changed compensation for retirement advisers from a commission-based model to a fee-based model following bipartisan pushback. But critics say the red tape inflicted on financial planners in the 1,000-plus page regulation would still present major issues for investors and financial planners alike.
House Ways and Means Subcommittee on Oversight Chairman [crscore]Peter Roskam[/crscore] told The Daily Caller News Foundation an area of concern that jumped out at him while sifting through the rule was the best-interest-contract investors will be required to sign.
“The administration is saying in order to get advice, a modest saver has to sign a best interest contract – so think about that, you have somebody who comes and an investment adviser says, ‘I can’t talk to you until we sign this best interest contact, and you’re going to love it, this is really in your interest to sign’ – think about how off-putting that is,” the Illinois Republican said. “It creates a barrier and I think the likely result is people are going to say ‘I’m not going to sign your contract, I’m not into that.'”
Ahead of the agency’s release of the final rule, Roskam and Illinois Democrat Rep. [crscore]Richard Neal[/crscore] introduced the SAVERs Act, legislation aimed at raising standards on financial advisers by requiring them to act in their clients’ best interests without the crippling effects critics say will likely be seen with the implementation of the DOL rule’s top-down approach.
“My fear is, that by mandating this best interest contract, it actually creates the barrier for getting advice as opposed to lowering a barrier to get good advice. I think the better approach is to say ‘here’s the standard,’ if you are offering a product to an investor it has to be in their best interest, which is a higher than current law,” Roskam added. “Under current law, it only has to be suitable for an investor.”
Since the rule broadens the umbrella of who is held to the fiduciary standard, economists said it’s probable brokers will become more risk averse in the products they recommend out of fear of the legal repercussions they may face.
“I believe brokers will be less willing to take on lower dollar value accounts, just because the cost – both the out-of-pocket expense for compliance and the implicit cost of litigation risk – won’t make it worthwhile to pursue smaller investors,” Thaya Brook Knight, the associate director of financial regulation studies at the Cato Institute, told TheDCNF in an email. “I suspect that firms will invest more in developing algorithms that allocate investments (‘robo-advisors’) and will shift their low- and middle-tier investors into using these services instead of the services of a human broker. Whether that will actually change what any investor buys I’m not sure, but it will certainly change how investors interact with their brokers.”
Experts said the influx of investors placing their money in modest options could ultimately hinder economic growth.
“That is a big concern here, that what you actually end up doing is creating a self-creating prophecy, that is more modest savers end up in underperforming products and it perpetuates itself,” Roskam said. “What happens, it creates a crisis long term where people are not saving and accumulating at the rate that they need to and it puts more pressure on the government to do more, so I would concur with that admonition.”
The SAVERs Act received strong bipartisan support ahead of the regulation’s release, but it remains to be seen how Democratic lawmakers will react when the House returns from recess Monday following the debut of the finalized rule.
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