CFA Urges Skepticism Regarding Industry Fiduciary Rule Concerns

The Consumer Federation of American (CFA) frequently lobbies and comments on a variety of issues peripheral to the retirement investing industry—but this week the organization directly addressed a topic of paramount concern, for advisers and sponsors, in the Department of Labor (DOL) fiduciary rule.

Specifically, the CFA published an open letter detailing what it believes is an emerging issue: DOL enforcement standards related to the recommendation of fee-based versus commission-based account structures. As laid out in the letter, which was published online as well as mailed to DOL Secretary Alexander Acosta, a number of retirement industry groups opposed to the fiduciary rule reforms have suggested that changes already implemented have “caused brokerage firms to shift investors into fee accounts where they face higher costs than they would have in a commission account.”

“There are good reasons to dismiss these arguments as nothing more than the misleading rhetoric of industry groups [that] are intent on watering down the rule’s strong investor protections,” the CFA contends. ”After all, those making the claim exaggerate the role of the Department’s fiduciary rule in prompting a migration to fee accounts that is several decades old, ignore evidence that most firms have chosen to continue offering commission accounts as an option under the rule, and provide no evidence that retirement investors who are moved to fee accounts are worse off as a result.”

Instead, the organization argues, to the contrary, these firms “both exaggerate the supposed cost advantage of commission accounts and fail to consider the significant benefits of fee accounts for many investors.”

Important to note, the CFA makes this concession: “Despite our skepticism, we cannot dismiss out of hand the possibility that some firms are using the rule as an excuse to shift customers into fee accounts, even when that is not the best option for the investor, or charging them unreasonable fees as a result. If this is occurring, however, that reflects a fundamental enforcement failure on the part of the Department and its fellow regulators at the Securities and Exchange Commission [SEC] and FINRA [Financial Industry Regulatory Authority], not a problem with the rule itself.”

The CFA letter points to a recent statement from one major retirement plan and investment provider to the SEC, suggesting that investors are being forced by the DOL rule to “pay an asset-based fee to receive exactly the same services that were previously provided to them for no additional fee under a transaction-based fee structure.” The CFA says these are “either gross misrepresentations or, if true, offer strong evidence that some firms at least are flouting the rule’s requirements.”

The organization goes on to clarify that, in the “relatively rare instance” where firms have chosen to offer only fee accounts to retirement investors, they are still obligated under the DOL rule to ensure that fees are reasonable in light of services offered.

“Where investors do not require the same level of service traditionally provided to fee accounts, the firm should lower the fees accordingly, and it is our understanding that some firms have done just that,” the CFA warns. “After all, the level of fee charged to these investors is entirely within the control of the firm. [Advisers] should not be allowed to act opportunistically to maximize their fee income, then point to their willingness to disadvantage customers in this way as evidence of the rule’s harmful impact.”

The CFA concludes, as long as the fees charged are reasonable, fee accounts even under the fiduciary rule reforms offer significant benefits for many investors.

“That presumably explains why the SEC has, in the past, gone to considerable lengths to encourage their adoption and why some of the same groups making this argument today once identified fee accounts as a best practice that offered broad benefits even for buy-and-hold investors,” the CFA says. “It is certainly true, however, that firms may have an incentive to recommend fee accounts even for investors who would be better off in a commission account, or to charge excessive fees. Moreover, when it comes to determining what type of account is best for the customer, the Department’s rule has changed the equation.”

The full letter is available for download here.