DOL Fiduciary Threatens to Eliminate Advisor Flexibility

DOL Fiduciary Threatens to Eliminate Advisor Flexibility

    As part of our #FiduciaryFriday series this month, we asked Seth Miller of Cambridge Investment Research to provide his thoughts on how the Labor Department's fiduciary efforts will impact smaller broker/dealers. Miller believes that opportunities still exist to make the proposal workable, but says the current iteration is overly complex and burdensome.

This month’s celebration of the 75th anniversary of the Investment Advisers Act of 1940 brings to mind the Employee Retirement Income Security Act of 1974 (ERISA) as introduced by the U.S. Department of Labor. Over the last several years, the DOL has sought to increase retirement investor protection with a focus on expanding the investment advice fiduciary definition under ERISA.

As an independent, privately owned firm, Cambridge is affiliated with over 2,700 independent financial professionals throughout the country, and acts as an introducing broker-dealer and registered investment advisor serving more than 400,000 individual retirement accounts and retirement plans.  As a firm, we acknowledge and appreciate the DOL’s proposal to expand the definition of fiduciary as it relates to retirement investment advice – most specifically to protect the retirement investor. Cambridge supports the implementation of a thoughtful, well-crafted, and effective uniform standard of care applicable to all financial services professionals providing investment advice to retail clients.

While we believe the DOL has made considerable progress since its 2010 proposal, in attempting to significantly expand the ERISA definition of fiduciary, the 2015 proposal overhauls 40 years of carefully developed regulations. We do not believe the current proposal will further the DOL’s goal of providing affordable, high quality investment advice to retirement investors. Instead, the 2015 proposal, as introduced last April, will make it substantially harder for retirement investors to receive high quality, affordable, personalized advice – particularly for those with smaller account balances.

Contrary to best intentions for the retirement investor, the 2015 proposal and its expansive definition of fiduciary will eliminate the flexibility advisors and broker-dealers need to make decisions about which investments and payment models are in the best interest of each individual client. In order for Cambridge and our advisors to serve the best interests of their clients, we need the ability to treat each client individually and tailor investment strategies that meet each client’s specific circumstances. Flexibility in investment strategies and compensation structures allow our advisors to develop unique investment plans for each and every client. If the 2015 proposal is implemented in its current form, much of this flexibility will be eliminated and we believe it will not be financially viable for many advisors to provide retirement advice to clients with lower balances in their retirement accounts.

Broker-dealers such as Cambridge, and our independent advisors, are currently heavily regulated by a complex regulatory regime. We are subject to comprehensive legal obligations and regulations under federal and state securities laws, rules, and regulations. This includes the Securities and Exchange Commission (SEC) through the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940 along with respective rules and regulations. In addition, we are also subject to the Financial Industry Regulatory Authority (FINRA) self-regulatory organization rules, oversight, and examinations. We encourage the DOL to work with the SEC and FINRA on developing a carefully-crafted, uniform fiduciary standard of care that would be applicable to all professionals providing investment advice to retail clients in a unified manner. This is especially important given the DOL proposal is in motion as the SEC simultaneously considers a different fiduciary standard for broker-dealers and investment advisors based upon statutory language in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

While the 2015 DOL proposal is overly complex, unduly burdensome, and cost prohibitive – opportunities still exist to make the proposal workable and relevant with the retirement investor in mind. Cambridge shares a strong and committed interest with the financial services industry and the DOL in enhancing investor protections. Therefore, we support establishing a thoughtful and effective uniform standard of care and meaningful disclosures applicable to all financial services professionals providing investment advice to retail clients that preserves the existing broker-dealer regulatory framework. In keeping with being ‘client-first’ such a uniform standard and accompanying disclosures should be carefully considered and measured by its ability for advisors to provide affordable, high quality investment advice to all retail clients.

 

Seth Miller is General Counsel and Senior Vice President, Risk Management for Cambridge Investment Research, Inc.

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