The Spinning Totem of DOL Uncertainty

I re-watched “Inception” last night and was once again intrigued by the twists and turns. Leonardo DiCaprio is a thief who steals corporate secrets by invading the minds of executives using dream-sharing technology. He must now “plant” an idea in the mind of a CEO to influence him to change major corporate strategy. The dreams are so action-packed and lucid, that he himself cannot be fully sure whether he is awake or dreaming and it’s possible to go so deep that you never awaken. A small spinning totem is sometimes his only clue to resolve the uncertainty, but does it always work?

The Obama administration’s seven-year crusade to turn every recommendation for disposition of qualified funds into a trust-officer-like fiduciary recommendation, and the resulting pushback by many in the financial services industry, has resulted in massive uncertainty. Four lawsuits are currently progressing, as yet, unresolved. The Trump administration has requested a delay in implementation so unintended harm to consumers and the financial industry can be assessed by the DOL (as they were clearly derelict in the process). While that 60-day delay may be granted by the DOL, especially under new Trump-appointed DOL leadership, nothing is 100 percent certain, and consumer groups are vocal in resisting.

In the latest bellwether, the DOL has quietly removed its consumer FAQs from their website. These were published in January, days before the inauguration by the outgoing deputy secretary, presumably to lay another brick in the rule’s permanence. So, the April 10 applicability date looms and the entire industry must be prepared for all eventualities: April 10? June 9? A day in November? (A rumored 180-day delay after the 60 days, since there is really no time to complete an effective analysis in 60 days.) Never? Yet the capital investment, planning, staffing, technology investment and fees for legal advice must all occur for the most imminent possible date. Hundreds of thousands of agents and IMOs must be re-contracted, entire product portfolios redesigned, relationships between IMOs and BD/RIAs renegotiated and diverse systems maintained (some carriers will be financial institutions, some not, some for only a limited period of time, some exclusively for insurance-only agents). Since the DOL-proposed IMO exemption is so egregious as to be a non-exemption for 98 percent of IMOs, what happens to their ability to support their insurance-only agents? All of this for what benefit?

But this is only level one of Mr. DiCaprio’s dream world. The dream-within-a-dream is another level of uncertainty. What is reasonable compensation? No one knows, but it is supposed to be market-based. Well, we already have a market available to all consumers, and a competitive one at that. Is 10-percent, all-in commission on an annuity sale reasonable? Some would say no, but ironically, that may be OK for a captive agent with no other alternatives. What is the “best interest” of the client? The DOL says it is not the very best possible product available, but it is more than suitable. Really? What is a material conflict of interest? The DOL says it is what a person exactly like you would recommend if they had no financial dog in the hunt. So, forget about your livelihood, your business and your family. You’re now a volunteer and all of your work is charity.

How much of a difference in commission on a product sale pits the agent against the client? .25%? .5%? 1% at sale? How can my agent compensation be leveled within these tolerances, given the large array of company products, carrier commission-level limitations, actuarial-based age-break pricing and by-state variations? Without a collusion-generated industry standard, either the agent or the financial institution will always be conflicted and subject to armchair quarterbacking. How can insurance-only agents give fiduciary advice with no ability to opine on securities either existing or proposed? There are dozens of other issues with no clear answers, but the ones above surely come with unlimited liability resulting from second-guessing trial lawyers.

Rule proponents have arrayed their arguments like the third-dream-level fortress. Who could be against best interest advice for everyone (or at least qualified money)? That’s like being against Mom and apple pie, right? John Bogle, $80 millionaire and founder of Vanguard says, “It simply doesn’t seem like a good business practice for Wall Street to tell its client investors, ‘We put your interests second, after our firm’s, but it’s close.’”

First, fiduciary advice is ubiquitous today (though even many of those don’t realize the complexities and liabilities the DOL has enhanced their practice with). Every registered advisor is a fiduciary, and they are on every street corner. Your 401(k) representative is a fiduciary. Does every provider everywhere need to be a fiduciary or can people have choices?

Bogle also says, “One must wonder how Wall Street—broadly defined—has been able to defy the interests of its millions of clients for so long.” Wow, this is effectively an argument against a relatively free enterprise that has propelled the U.S. for more than 250 years into a wealthy economic powerhouse. We had, and have, a diverse and innovative financial market that offers everything from DIY products and robo-advice to insurance sales and full-fledged planning in a well-regulated environment. But now, all of a sudden, we need to turn every professional into a trust officer. Bogle is even more DOL than the DOL, arguing this particular market is broken, not reasonable, somehow fooling consumers for decades and frankly all financial services should be fiduciaries. Strange, even the DOL seems to believe the market gives appropriate pricing signals, opining the reasonable compensation standard as defined under the fiduciary rule as whatever the market says it is.

Proponents of the regulation argue any delay is catastrophic for consumers. Barbara Roper, director of investor protection for the Consumer Federation of America, said “Labor’s proposal provides compelling evidence in favor of moving forward without delay. The estimated harm to investors from delaying the rule far outweighs the estimated cost savings to industry.” That is unsubstantiated and baseless, especially applied to insurance. Suddenly, overnight, after 40 years of market-based pricing and consumer choice, an administration fashions a baseless $17 billion loss number for non-ERISA qualified accounts due to conflicted advice? And, the situation is so bad a two-month delay, or longer, and a revisit of the real effects are national tragedies? These are hair-on-fire scare tactics, and when costs passed on to consumers, lack of advice and product availability inevitably occur, fiduciary proponents will lament the “unintended consequences” and propose more regulation. These are voices that deserve to be tuned out.

As in many areas of government intervention, the uncertainty can be more deleterious than the actual content of the proposed regulation (though it’s about a tie here). Delay and replace (preferably outside of the inappropriate DOL) is the appropriate approach.

In the meantime, spin the totem, are we awake or in a dream?

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