- The Washington Times - Tuesday, February 21, 2012

Financial firms are warning that a Department of Labor proposal designed to reduce conflicts of interest among investment advisers could hurt their ability to market and sell popular retirements products such as IRAs.

The department has been trying for several years to expand what’s known as the “fiduciary rule” setting out the relationship between investment professionals and their clients to include products such as IRAs.

The department says the expanded rule would bring greater transparency to the process. But the insurance industry warns it would limit the kind of financial advice and services it can offer, hurt small investors and raise prices.

“We’ve had concerns from Day One about this,” said John Little, senior vice president of federal affairs at the Insured Retirement Institute. “We are full-court press trying to make the department understand there are problems with this rule.”

Labor Department officials say many of the concerns are overblown, and that the rule as written provides exemptions to meet many of the concerns over compensation.

“The proposal’s goal is to ensure that potential conflicts of interest among advisers are not allowed to compromise the quality of investment advice that millions of American workers rely on so they can retire with the dignity that they have worked hard to achieve,” the department said in a statement supplied to The Washington Times.

“It is hard to believe that a rule designed to protect employers and workers from conflicted investment advice would cause the entire financial industry to voluntarily walk away from a multitrillion-dollar market,” the department said.

But Mr. Little called the rule a “solution in search of a problem.”

“The need for this rule in the first place is in question,” he said. “We’ve [asked] them to show us data that consumers are being wronged on a daily basis. They really haven’t showed us that data.”

The controversy centers on redefining the term “fiduciary.” The agency is considering expanding the term to cover firms that give advice on IRAs.

But to avoid this - and the reporting burden they say will go with it - many firms say they would consider not offering retirement advice altogether.

“For some advisers and companies, it would make it not cost-effective enough for them to do it at all,” said Lillian Vogl, counsel for federal relations at the National Association of Insurance and Financial Advisors. “They might tell their advisers, ‘The compliance costs are too high for us to deal in the retirement space. We don’t want you giving retirement advice anymore.’ “

Mr. Little agreed that many retirement advisers might “exit the market.”

The rule could also have a major effect on how retirement advisers get paid. There are many advisers who charge commissions, rather than upfront fees, to make it more affordable for low-income investors. But the rule, as it was originally proposed, would not allow this.

Critics say the losers would be the smaller, lower-income savers.

“Upfront fees, if they have to pay them, they’re not going to get any professional advice at all,” Ms. Vogl said. “They’ll just go on the Internet or ask their uncle or something.”

The rule could also raise costs for customers.

“If you’re worrying about getting sued all the time, you’re going to have to raise fees to cover that possibility,” Mr. Little explained. “The cost of that service will go up.”

The Labor Department recently sent letters to top insurance industry trade groups requesting information on how the proposal would affect investors. They have until Friday to reply.

The Insured Retirement Institute said it was pleased the Labor Department is reconsidering the rule.

“We’re glad that they’re at least studying the issue, that they’re trying to get information and doing an analysis,” Mr. Little said.

Ultimately, the industry is hoping for a more workable proposal for advisers, he said. The new proposal is expected sometime in the first half of this year.