The Financial Services Institute would like to help the Department of Labor analyze the potential impact of a redefinition of fiduciary responsibility. However, FSI needs a bit more time to respond to data requests, and some of the requests seem off the mark, the organization said in a letter to the Labor Department.
“The timeline under which the Department has asked us to respond — starting with a Dec. 15 letter received on Dec. 18, a few days before the holidays when many of our members and FSI were operating with a reduced staff; a meeting on short notice on Jan. 27; a letter of Feb. 10 asking for a response by Feb. 17, which we received on Feb. 14; and ultimately the Feb. 24 response date — has severely constrained our ability to be responsive,” Dale Brown, president and CEO of FSI wrote in the Feb. 24 letter. FSI did include with the letter the data it did have available to respond to the Labor Department’s request, Brown notes.
The Labor Department withdrew its original rule in September after industry groups, including FSI, objected strongly to it on the grounds that as written, it would make getting even basic IRA advice too expensive for most U.S. investors.
FSI also has issues with the Labor Department’s apparent methodology, Brown said in the letter. “The data request suggests that the Department could draw conclusions … about the ‘impact, if any, of conflicts of interests faced by brokers or other[s] who advise IRAs ... from investment returns or trading histories of IRA accounts, analyzed against a … range of variables. We respectfully disagree,” Brown writes.
One reason cited for disagreement is that “investment activity and results do not by themselves capture the value of the services provided by financial advisers. … Financial advisers provide value to IRA investors in many ways other than the investment recommendations or advice they provide. They may …. give a fearful investor the confidence to set aside funds for retirement, [or] help an inexperienced investor fill out the paperwork to get started with an IRA,” Brown wrote. “They may coach an IRA owner on how best to prepare for retirement, balancing other financial needs and taking into account retirement savings in and out of the IRA.”
Furthermore, even within investment services, investment data and returns alone aren’t “a valid indicator of whether the IRA owner has been effectively and impartially served by a financial adviser,” according to the letter. “A financial adviser my be serving ably and with integrity both … a sophisticated 40-year-old with substantial outside assets aggressively seeking alpha in her IRA account through day trading of derivatives, and a retiree with limited assets seeking a risk-free IRA portfolio generating a reliable income stream.”
And “even if the Department had access to perfect information … in the end the Department inevitably would be making its own subjective, 20-20 hindsight judgment, from a paper record, about the professional advice and motivations of financial advisors. This is a treacherous basis on which to regulate,” Brown writes.
Finally, according to FSI’s letter, though some member firms are willing in principle to help, they still can’t provide the requested data, as the firms don’t have access to much of the data. For example, investment advisors and broker-dealers aren’t required to keep 10-year customer investment histories, so data that could be provided would be over a much shorter time span. And financial advisors do switch broker-dealers, often taking their customers with them, so “the history for a given IRA investor may be scattered across the records of more than one firm,” according to the letter.
And the data collection requested by the Labor Department would be expensive and time-consuming. “Estimates from our members to develop even a partial data set range from several hundred thousand to several million dollars, depending on the size of the firm,” Brown writes.
To access the letter, click here.
Danielle Reed writes for Financial Planning, a SourceMedia publication.
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