At the heart of the Department of Labor's effort to finalize a new rule requiring advisors to act as fiduciaries to most 401(k) plans and IRAs is the need to clarify which entities in the financial services world are actual fiduciaries, and which merely imply that they are.
That line has been blurred, argued Labor Secretary Thomas Perez, in testimony to Congress defending the Department's effort to post a rule by the end of the Obama Administration, in spite of wide-ranging criticism from stakeholders, and a growing number of lawmakers, that the rule, as proposed, would have massive unintentional consequences for small workplace retirement accounts and IRAs.
One witness at this week's public open meeting over the DOL's proposal testified to the extent of how blurry the line between fiduciary and broker has become.
In his capacity as head of the Public Investors Arbitration Bar Association, a nonprofit association of attorneys that represents plaintiffs in securities arbitration hearings, Joseph Peiffer testified that brokerage firms routinely advertise themselves as fiduciaries when they clearly are not.
"One thing is clear," Peiffer told a panel of DOL representatives. "Right now, the very same brokerage firms that advertise like fiduciaries routinely contest that they owe a fiduciary duty to their clients."
In some of the most personal testimony offered in the four days of hearings at the DOL, Peiffer detailed several horror stories in his time representing more than 500 clients that he says were victims of conflicted advice.
"Almost every week, we see a retiree come into our office who has lost a substantial amount of his life savings," said Peiffer.
"These retirees often break down in my office when I explain to them how their investment was lost to conflicted advice. I have had clients that ran out of money and had to rent a room from his ex-wife. I have had clients live with me because they couldn't afford the gas and lodging to stay at a protracted arbitration hearing. I have, unfortunately, even had clients attempt suicide," he added.
Along with his testimony, Peiffer submitted a report he coauthored this year that compares the advertising claims with the arbitration stances made by nine of the country's largest broker-dealer brands.
"Brokerage firms now engage in advertising that is clearly calculated to leave the false impression with investors that stockbrokers take the same fiduciary care as a doctor or a lawyer," claims the report, which was co-authored by Christine Lazaro, director of the St. John's School of Law securities arbitration clinic.
"But, while brokerage firms advertise as though they are trusted guardians of their clients' best interests, they arbitrate any resulting disputes as though they are used car salesmen," wrote the attorneys.
Their report claimed that Merrill Lynch, Fidelity Investments, Ameriprise, Wells Fargo, Morgan Stanley, Allstate Financial, UBS, Berthel Fisher, and Charles Schwab all advertise "in a fashion that is designed to lull investors into the belief that they are being offered the services of a fiduciary."
