HELP Subcommittee Hearing on Principles for Retirement Advice
House Education and the Workforce Subcommittee on Health, Employment, Labor, and Pensions
“Principles for Ensuring Retirement Advice Serves the Best Interests of Working Families and Retirees”
Wednesday, December 2, 2015
Key Topics & Takeaways
- Impact on Small Businesses and Investors: Reps. Joe Wilson (R-S.C.), Buddy Carter (R-Ga.) and Glenn Grothman (R-Wis.) asked the panel how the DOL’s proposed rule would impact investors and small businesses. Gaudreau commented that it would “drive people away from advice,” noting the failure of a similar rule in the United Kingdom. Doba continued that if the fiduciary rule was in place when she created her workplace retirement plan, she “wouldn’t have been able to do it” due to the added costs.
- Cost of Conflicted Advice: Rep. Phil Roe (R-Tenn.) commented that the formula the DOL used to reach its $17 billion a year cost to investors of conflicted advice could be transformed to “make the number whatever you wanted,” adding that the $17 billion “isn’t a real number.”
- Lawmaking Entity: Rep. Tim Walberg (R-Mich.) commented that Congress should be creating legislation and the DOL should be interpreting the law. Campbell agreed and added that by the DOL creating the rule there would be conflicted securities laws. He added that Congress expressly declined to expand fiduciary duty to individual retirement accounts because individuals are in control of their own accounts.
- Robo-Advisors: Rep. Mark Pocan (D-Wis.) stressed that robo-advice is not appropriate for all investors and added that it would be “unacceptable” if robo-advisors are seen as the solution for investors after the “final” final rule.
Witness
- Bradford R. Campbell, Counsel, Drinker Biddle & Reath, LLP
- Rachel A. Doba, President, DB Engineering, LLC
- Jules O. Gaudreau, Jr., President, The Gaudreau Group, Inc.
- Marilyn Mohrman-Gillis, Managing Director, Public Policy & Communications, Certified Financial Planner Board of Standards
Opening Statements
In his opening statement, Subcommittee Chairman Phil Roe (R-Tenn.) emphasized how low and middle income families will lose access to financial advice and have to either pay exorbitant fees or turn to robo-advisors should the Department of Labor’s (DOL) proposed fiduciary rule be implemented. He stated that the proposed rule is similar to the rule the DOL withdrew five years ago, with the only difference being that, “today, the Department is not interested in listening to bipartisan concerns.” Roe explained that he is working with colleagues on a bipartisan solution that will accomplish what the DOL has failed to do.
Ranking Member Jared Polis (D-Colo.) highlighted the need for transparency to make the final fiduciary rule successful. He stated that the rule will change the way financial advisors operate and the advice savers receive. Polis described his efforts in engaging with the DOL through several letters and affirmed that due to the enormous amount of feedback, an additional comment period would be beneficial in crafting a better rule. He acknowledged that he voted against H.R.1090, the Retail Investor Protection Act, and commented that while he is not opposed to the proposed fiduciary rule, it “simply needs to be done right.”
Testimony
Bradford R. Campbell, Counsel, Drinker Biddle & Reath, LLP
In his testimony, Campbell explained that if “the rule is promulgated as proposed, it would hurt the very people it is trying to protect.” Campbell stated that the rule is a violation of bipartisan principles as it reduces access to quality advice for small businesses and low to middle income savers, noting that the lack of access to financial advice costs investors $100 billion each year. He further explained that the Best Interest Contract Exemption (BICE) applies a large number of conditions new class action litigation risks, and is unworkable for advisors. Campbell explained that the BICE bans advisors from discussing investments not on the government’s list of assets despite the best interest of the investor. He noted his belief that Congress is the proper institution to address concerns versus “one agency regulating one body of law with a narrow focus.”
Rachel A. Doba, President, DB Engineering, LLC
In her testimony, Doba described the retirement plans that she as a small business owner provides to her employees and said that without a financial advisor, most of her employees would not contribute to a retirement plan. Doba stated that in order to attract good talent in a service-oriented business, retirement security is a “personal priority.” She advocated for small business owners’ access to advice, education materials and plans needed for retirement. Doba listed three issues with the DOL’s proposal that would have a negative impact on small business plans: 1) the sellers carve out discriminates against small business and undermines their sophistication; 2) the changes to the education carve out will limit investment education and recommendation, therefore forcing plan participants to make “blind” decisions; and 3) the BICE will increase cost of services for small businesses and limit access to products, resulting in “winners and losers.”
Marilyn Mohrman-Gillis, Managing Director, Public Policy & Communications, Certified Financial Planner Board of Standards
In her testimony, Marilyn Mohrman-Gillis stressed that legislation regarding a fiduciary standard is “not necessary” and would delay or derail the DOL’s proposed rule, adding that lawmakers allowing the DOL to “achieve” its rule “is best.” She noted that the Certified Financial Planner (CFP) Board has a fiduciary standard advisors work under and that the advisors have not had to “give up” their commissions like opponents of the DOL’s rule have claimed. Mohrman-Gillis continued that the CFP Board’s code of conduct contains similar requirements to those found in the BICE, proof that the exemption would be workable. She stressed that certified financial advisors are still able to serve middle class clients under commission-based model. Mohrman-Gillis concluded that while the legislative principles are “laudable,” the DOL’s proposal “already embraces these goals.”
Jules O. Gaudreau, Jr., President, The Gaudreau Group, Inc.
In his testimony, Jules Gaudreau stated that the DOL’s proposal is “fraught with problems,” making the creation of a bipartisan legislative alternative “critically important.” He explained that the DOL’s proposal is not in line with legislative principles, as the proposal only favors a fee-based model, resulting in fewer choices for investors that are unable to afford such advice. Gaudreau noted his disagreement that a robo-advisor can replace a human financial advisor and added that consumer choice is “critical.” While the DOL is “rushing” the release of the final rule prior to the administration changing, he stressed that it is “time for Congress to act now.” He concluded that the bipartisan legislation can have an enforceable best interest standard but that the DOL’s proposal would not be successful without “further review.”
Questions and Answers
Impact on Small Businesses and Investors
Reps. Joe Wilson (R-S.C.), Buddy Carter (R-Ga.) and Glenn Grothman (R-Wis.) asked the panel how the DOL’s proposed rule would impact investors and small businesses. Gaudreau commented that it would “drive people away from advice,” noting the failure of a similar rule in the United Kingdom. Doba continued that if the fiduciary rule was in place when she created her workplace retirement plan, she “wouldn’t have been able to do it” due to the added costs.
Wilson then asked if the fiduciary rule will have more of an impact on the lower and middle class than the higher. Campbell said it is his belief that it will and explained that the proposal will create additional costs for products and services to participants.
Polis asked how the proposed best interest standard will impact certified financial planners (CFPs). Mohrman-Gillis stated that CFPs have experience working under such a standard and that it would not prevent advisors from working under commission-based models.
Rep. Virginia Foxx (R-N.C.) asked what mistakes investors may make due to limited access to financial advisors. Gaudreau explained that investors would turn to “anyone” for advice, stressing the need for an advisor with the client’s best interest in mind.
Rep. Luke Messer (R-Ind.) asked if the exceptions found in the proposed fiduciary rule for large businesses should apply to small businesses. Doba said small businesses are being affected by the rule and expressed her distaste over the assumption that they are not as “sophisticated” as larger companies, adding that there is not a “cushion” available for small businesses.
Messer then asked about the account minimums required for the CFPs Mohrman-Gillis represents. She explained that many of the advisors have no or very low minimum assets required and that they continue to provide commission-based services. She added that account minimums will “not necessarily” increase with the passing of the proposed fiduciary rule. Gaudreau disagreed, commenting that account minimums will “absolutely” go up and that the average investor will not prepay to discuss finances with an advisor.
Financial Literacy
Polis mentioned his concern over financial literacy and asked how the proposed fiduciary rule will impact education and advice. Mohrman-Gillis explained that the proposal will not prevent educating clients, while Campbell disagreed, stressing that the proposed rule restricts and narrows rules for financial advice and is an “imposition” as proposed.
Costs of the Rule
Foxx asked Campbell about the methodology the DOL used in calculating the benefits of the proposed rule. Campbell said the DOL’s estimate for compliance costs is “laughable,” adding that the studies the DOL relied on focused on a narrow type of transaction.
Roe commented that the formula the DOL used to reach its $17 billion a year cost to investors of conflicted advice could be transformed to “make the number whatever you wanted,” adding that the $17 billion “isn’t a real number.”
Retirement Fund Protections
Rep. Bobby Scott (D-Va.) asked if retirement funds should have different protections than other types of transactions. Mohrman-Gillis commented that the DOL is “acting in its authority” to fix a marketplace problem. She continued that while the focus is on “bad actor” advisors, it is actually a structural problem that allows advisors to receive compensation incentives for certain products that are not in the best interest of the client.
LawmakingEntity
Rep. Tim Walberg (R-Mich.) commented that Congress should be creating legislation and the DOL should be interpreting the law. Campbell agreed and added that by the DOL creating the rule there would be conflicted securities laws. He added that Congress expressly declined to expand fiduciary duty to individual retirement accounts because individuals are in control of their own accounts.
Robo-Advisors
Walberg asked if robo-advisors will be able to replace human interactions in the retirement advice space. Gaudreau explained that while a small, “sophisticated” part of the marketplace may be able to use robo-advisors, the choice should be made by consumers. He continued that human advisors can “hold hands” with investors during turbulent markets, something robo-advisors cannot do.
Rep. Mark Pocan (D-Wis.) stressed that robo advice is not appropriate for all investors and asked what will be available to investors in need of advice. He added that it would be “unacceptable” if robo-advisors are seen as the solution for investors after the “final” final rule. Mohrman-Gillis agreed, adding that investors and small businesses “need financial advice.” She continued that the proposed rule allows a commission-based model for advisors if there are conflict mitigations put in policies and procedures.
Technical Issues
Pocan commented that there will be negative consequences from the proposed fiduciary rule and asked what recommendations Mohrman-Gillis would offer to the DOL prior to the final rule. She suggested that clients sign the BICE when the account opens and that any advice that was given prior to the contract should be covered retroactively. Mohrman-Gillis also recommended adjusting the enforcement timeline so firms can comply more easily.
Rule Adaptation
Rep. Brett Guthrie (R-Ky.) mentioned the claim that the financial industry will adapt to the rule, to which Gaudreau stressed that “no one in this industry could think that.” He continued that the rule will “decimate” the industry and restrict middle-America from investment advice.
Guthrie continued that the proposed rule has an eight-month implementation timeline and asked if this was a sufficient amount of time. Gaudreau stressed the “unworkable timeframe” and added that firms will restrict financial advisors from taking on small clients due to the “cascading fiduciary liability” that will result.
Best Interest Contract Exemption
Carter commented that a contract will not deter bad actors from giving conflicted investment advice. Mohrman-Gillis explained that the signed contract will ensure that firms have policies and procedures in place that prevent compensation incentives for certain products. Gaudreau disagreed, adding that the details of the rule make it “impossible” and that if it was “just a paper” that states advisors will work in the best interest of their clients, “we wouldn’t be here.”
For more information on this hearing, please click here.
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House Education and the Workforce Subcommittee on Health, Employment, Labor, and Pensions
“Principles for Ensuring Retirement Advice Serves the Best Interests of Working Families and Retirees”
Wednesday, December 2, 2015
Key Topics & Takeaways
- Impact on Small Businesses and Investors: Reps. Joe Wilson (R-S.C.), Buddy Carter (R-Ga.) and Glenn Grothman (R-Wis.) asked the panel how the DOL’s proposed rule would impact investors and small businesses. Gaudreau commented that it would “drive people away from advice,” noting the failure of a similar rule in the United Kingdom. Doba continued that if the fiduciary rule was in place when she created her workplace retirement plan, she “wouldn’t have been able to do it” due to the added costs.
- Cost of Conflicted Advice: Rep. Phil Roe (R-Tenn.) commented that the formula the DOL used to reach its $17 billion a year cost to investors of conflicted advice could be transformed to “make the number whatever you wanted,” adding that the $17 billion “isn’t a real number.”
- Lawmaking Entity: Rep. Tim Walberg (R-Mich.) commented that Congress should be creating legislation and the DOL should be interpreting the law. Campbell agreed and added that by the DOL creating the rule there would be conflicted securities laws. He added that Congress expressly declined to expand fiduciary duty to individual retirement accounts because individuals are in control of their own accounts.
- Robo-Advisors: Rep. Mark Pocan (D-Wis.) stressed that robo-advice is not appropriate for all investors and added that it would be “unacceptable” if robo-advisors are seen as the solution for investors after the “final” final rule.
Witness
- Bradford R. Campbell, Counsel, Drinker Biddle & Reath, LLP
- Rachel A. Doba, President, DB Engineering, LLC
- Jules O. Gaudreau, Jr., President, The Gaudreau Group, Inc.
- Marilyn Mohrman-Gillis, Managing Director, Public Policy & Communications, Certified Financial Planner Board of Standards
Opening Statements
In his opening statement, Subcommittee Chairman Phil Roe (R-Tenn.) emphasized how low and middle income families will lose access to financial advice and have to either pay exorbitant fees or turn to robo-advisors should the Department of Labor’s (DOL) proposed fiduciary rule be implemented. He stated that the proposed rule is similar to the rule the DOL withdrew five years ago, with the only difference being that, “today, the Department is not interested in listening to bipartisan concerns.” Roe explained that he is working with colleagues on a bipartisan solution that will accomplish what the DOL has failed to do.
Ranking Member Jared Polis (D-Colo.) highlighted the need for transparency to make the final fiduciary rule successful. He stated that the rule will change the way financial advisors operate and the advice savers receive. Polis described his efforts in engaging with the DOL through several letters and affirmed that due to the enormous amount of feedback, an additional comment period would be beneficial in crafting a better rule. He acknowledged that he voted against H.R.1090, the Retail Investor Protection Act, and commented that while he is not opposed to the proposed fiduciary rule, it “simply needs to be done right.”
Testimony
Bradford R. Campbell, Counsel, Drinker Biddle & Reath, LLP
In his testimony, Campbell explained that if “the rule is promulgated as proposed, it would hurt the very people it is trying to protect.” Campbell stated that the rule is a violation of bipartisan principles as it reduces access to quality advice for small businesses and low to middle income savers, noting that the lack of access to financial advice costs investors $100 billion each year. He further explained that the Best Interest Contract Exemption (BICE) applies a large number of conditions new class action litigation risks, and is unworkable for advisors. Campbell explained that the BICE bans advisors from discussing investments not on the government’s list of assets despite the best interest of the investor. He noted his belief that Congress is the proper institution to address concerns versus “one agency regulating one body of law with a narrow focus.”
Rachel A. Doba, President, DB Engineering, LLC
In her testimony, Doba described the retirement plans that she as a small business owner provides to her employees and said that without a financial advisor, most of her employees would not contribute to a retirement plan. Doba stated that in order to attract good talent in a service-oriented business, retirement security is a “personal priority.” She advocated for small business owners’ access to advice, education materials and plans needed for retirement. Doba listed three issues with the DOL’s proposal that would have a negative impact on small business plans: 1) the sellers carve out discriminates against small business and undermines their sophistication; 2) the changes to the education carve out will limit investment education and recommendation, therefore forcing plan participants to make “blind” decisions; and 3) the BICE will increase cost of services for small businesses and limit access to products, resulting in “winners and losers.”
Marilyn Mohrman-Gillis, Managing Director, Public Policy & Communications, Certified Financial Planner Board of Standards
In her testimony, Marilyn Mohrman-Gillis stressed that legislation regarding a fiduciary standard is “not necessary” and would delay or derail the DOL’s proposed rule, adding that lawmakers allowing the DOL to “achieve” its rule “is best.” She noted that the Certified Financial Planner (CFP) Board has a fiduciary standard advisors work under and that the advisors have not had to “give up” their commissions like opponents of the DOL’s rule have claimed. Mohrman-Gillis continued that the CFP Board’s code of conduct contains similar requirements to those found in the BICE, proof that the exemption would be workable. She stressed that certified financial advisors are still able to serve middle class clients under commission-based model. Mohrman-Gillis concluded that while the legislative principles are “laudable,” the DOL’s proposal “already embraces these goals.”
Jules O. Gaudreau, Jr., President, The Gaudreau Group, Inc.
In his testimony, Jules Gaudreau stated that the DOL’s proposal is “fraught with problems,” making the creation of a bipartisan legislative alternative “critically important.” He explained that the DOL’s proposal is not in line with legislative principles, as the proposal only favors a fee-based model, resulting in fewer choices for investors that are unable to afford such advice. Gaudreau noted his disagreement that a robo-advisor can replace a human financial advisor and added that consumer choice is “critical.” While the DOL is “rushing” the release of the final rule prior to the administration changing, he stressed that it is “time for Congress to act now.” He concluded that the bipartisan legislation can have an enforceable best interest standard but that the DOL’s proposal would not be successful without “further review.”
Questions and Answers
Impact on Small Businesses and Investors
Reps. Joe Wilson (R-S.C.), Buddy Carter (R-Ga.) and Glenn Grothman (R-Wis.) asked the panel how the DOL’s proposed rule would impact investors and small businesses. Gaudreau commented that it would “drive people away from advice,” noting the failure of a similar rule in the United Kingdom. Doba continued that if the fiduciary rule was in place when she created her workplace retirement plan, she “wouldn’t have been able to do it” due to the added costs.
Wilson then asked if the fiduciary rule will have more of an impact on the lower and middle class than the higher. Campbell said it is his belief that it will and explained that the proposal will create additional costs for products and services to participants.
Polis asked how the proposed best interest standard will impact certified financial planners (CFPs). Mohrman-Gillis stated that CFPs have experience working under such a standard and that it would not prevent advisors from working under commission-based models.
Rep. Virginia Foxx (R-N.C.) asked what mistakes investors may make due to limited access to financial advisors. Gaudreau explained that investors would turn to “anyone” for advice, stressing the need for an advisor with the client’s best interest in mind.
Rep. Luke Messer (R-Ind.) asked if the exceptions found in the proposed fiduciary rule for large businesses should apply to small businesses. Doba said small businesses are being affected by the rule and expressed her distaste over the assumption that they are not as “sophisticated” as larger companies, adding that there is not a “cushion” available for small businesses.
Messer then asked about the account minimums required for the CFPs Mohrman-Gillis represents. She explained that many of the advisors have no or very low minimum assets required and that they continue to provide commission-based services. She added that account minimums will “not necessarily” increase with the passing of the proposed fiduciary rule. Gaudreau disagreed, commenting that account minimums will “absolutely” go up and that the average investor will not prepay to discuss finances with an advisor.
Financial Literacy
Polis mentioned his concern over financial literacy and asked how the proposed fiduciary rule will impact education and advice. Mohrman-Gillis explained that the proposal will not prevent educating clients, while Campbell disagreed, stressing that the proposed rule restricts and narrows rules for financial advice and is an “imposition” as proposed.
Costs of the Rule
Foxx asked Campbell about the methodology the DOL used in calculating the benefits of the proposed rule. Campbell said the DOL’s estimate for compliance costs is “laughable,” adding that the studies the DOL relied on focused on a narrow type of transaction.
Roe commented that the formula the DOL used to reach its $17 billion a year cost to investors of conflicted advice could be transformed to “make the number whatever you wanted,” adding that the $17 billion “isn’t a real number.”
Retirement Fund Protections
Rep. Bobby Scott (D-Va.) asked if retirement funds should have different protections than other types of transactions. Mohrman-Gillis commented that the DOL is “acting in its authority” to fix a marketplace problem. She continued that while the focus is on “bad actor” advisors, it is actually a structural problem that allows advisors to receive compensation incentives for certain products that are not in the best interest of the client.
LawmakingEntity
Rep. Tim Walberg (R-Mich.) commented that Congress should be creating legislation and the DOL should be interpreting the law. Campbell agreed and added that by the DOL creating the rule there would be conflicted securities laws. He added that Congress expressly declined to expand fiduciary duty to individual retirement accounts because individuals are in control of their own accounts.
Robo-Advisors
Walberg asked if robo-advisors will be able to replace human interactions in the retirement advice space. Gaudreau explained that while a small, “sophisticated” part of the marketplace may be able to use robo-advisors, the choice should be made by consumers. He continued that human advisors can “hold hands” with investors during turbulent markets, something robo-advisors cannot do.
Rep. Mark Pocan (D-Wis.) stressed that robo advice is not appropriate for all investors and asked what will be available to investors in need of advice. He added that it would be “unacceptable” if robo-advisors are seen as the solution for investors after the “final” final rule. Mohrman-Gillis agreed, adding that investors and small businesses “need financial advice.” She continued that the proposed rule allows a commission-based model for advisors if there are conflict mitigations put in policies and procedures.
Technical Issues
Pocan commented that there will be negative consequences from the proposed fiduciary rule and asked what recommendations Mohrman-Gillis would offer to the DOL prior to the final rule. She suggested that clients sign the BICE when the account opens and that any advice that was given prior to the contract should be covered retroactively. Mohrman-Gillis also recommended adjusting the enforcement timeline so firms can comply more easily.
Rule Adaptation
Rep. Brett Guthrie (R-Ky.) mentioned the claim that the financial industry will adapt to the rule, to which Gaudreau stressed that “no one in this industry could think that.” He continued that the rule will “decimate” the industry and restrict middle-America from investment advice.
Guthrie continued that the proposed rule has an eight-month implementation timeline and asked if this was a sufficient amount of time. Gaudreau stressed the “unworkable timeframe” and added that firms will restrict financial advisors from taking on small clients due to the “cascading fiduciary liability” that will result.
Best Interest Contract Exemption
Carter commented that a contract will not deter bad actors from giving conflicted investment advice. Mohrman-Gillis explained that the signed contract will ensure that firms have policies and procedures in place that prevent compensation incentives for certain products. Gaudreau disagreed, adding that the details of the rule make it “impossible” and that if it was “just a paper” that states advisors will work in the best interest of their clients, “we wouldn’t be here.”
For more information on this hearing, please click here.