Anticipating an omnibus spending bill that includes riders to defund the Department of Labor's fiduciary rule, the Consumer Federation of America released Monday a "fact sheet" detailing how compensation practices encourage advisors to steer customers into higher-cost, higher-risk investments.
"When you look beneath the surface of financial firms' opposition to the Department of Labor's conflict of interest rule, it quickly becomes apparent that one of their primary objections is to provisions in the rule that would require them to limit or abandon common practices that encourage and reward harmful advice," said Barbara Roper, CFA's director of investor protection, in releasing the fact sheet. "In other words, they give lip service to supporting a best interest standard while opposing the reforms needed to make that standard more than an empty promise."
CFA's fact sheet points to three ways financial services firms' "payout grids" encourage advisors to steer clients into higher cost products.
— Advisors can easily earn twice as much recommending one mutual fund over another. Since higher-risk funds typically pay more than lower-risk funds, this creates incentives to increase the risk in investor portfolios.
— When advisors recommend a variable or fixed indexed annuity or a nontraded REIT, the pay premium for the advisor goes up even more, but so do the investor's costs. And the liquidity of the investor's portfolio is reduced.
— Under some of the most egregious payment schemes, known as ratcheted payout grids, an advisor who is approaching the next rung up on the grid can make more money on a single investment recommendation than the entire value of the recommended investment. Advisors who face conflicts of that magnitude will be hard-pressed to set aside their own financial interests and do what is best for the customer.
Financial firms are seeking to kill DOL's rule to amend the definition of fiduciary under the Employee Retirement Income Security Act "in order to preserve their toxic and perverse compensation practices, and members of Congress should recognize who that harms — their constituents who are saving for retirement," added CFA Financial Services Counsel Micah Hauptman.
