The Debate Over ‘New Evidence’ and the Fiduciary Rule

It's not often (never, frankly) that renowned advisor Harold Evensky sends me an email without my first soliciting a comment from him. He did so after I covered the recent U.S. Chamber of Commerce report that professed to have "new evidence" that the Department of Labor's fiduciary rule was harming low- and moderate-retirement savers. (See "New Evidence of Fiduciary Rule's Harm, Chamber Report Says" on ThinkAdvisor.com.)

The chamber's report was based on what it cited as "new information" coming out of a recent Labor comment period on its fiduciary rule, which kicked in on June 9 (when the Impartial Conduct Standards became effective).

The chamber report compiles survey statistics and other data submitted by various organizations in response to the recent comment period opened as part of President Donald Trump's Feb. 3 directive that Labor review the fiduciary rule.

The group argued that its survey indicates that the DOL "underestimated the negative effects of the rule, particularly in reducing access to advice for small retirement savers and small businesses," and then listed a bunch of "evidence" from the commenters.

Here's some of what the chamber listed as the most troubling evidence revealed in the comment letters submitted to DOL:

Up to 7 million individual retirement account owners could lose access to investment advice altogether.
A survey of insurance service providers shows 70% already have or are considering exiting the market for small balance IRAs and small plans, and half are preparing to raise minimum account requirements for IRAs.
A survey of advisors finds 71% will stop providing advice to at least some of their current small accounts due to the risk and increased costs of the rule.
Other surveys found that 35% of advisors will stop serving accounts under $25,000, and 25% will raise their client minimum account thresholds.
One large mutual fund provider reports that its number of orphaned accounts nearly doubled in the first three months of 2017, and that the average account balance in these orphan accounts is just $21,000; plus, it projects that ultimately 16% of the accounts it services will be orphaned this year because of the fiduciary rule.

Evensky told me in his email that he was disappointed that my "usual insightful commentary seems woefully missing" in the article. The "technical description of the chamber's sham 'study,'" he said, "would be somewhere between horse pucky and balderdash."

The chamber's report, Evensky continued, "is not remotely a legitimate study. Besides being statistically nonsense, the 'data' the chamber references is simply a compilation of responses from a membership that has already sued the DOL on this issue."

To ascribe "any credibility to it is absurd," Evensky's email said. Also "nonsensical" is the chamber pointing to the stats that 7 million IRA owners could lose access to advice, and one large mutual fund provider has nearly doubled its orphaned accounts, he explained.

"As you well know, brokers DO NOT provide investment advice! They only provide advice 'solely incidental to the sale,' certainly not the kind of advice implied in the statement 'individual retirement account owners could lose access to investment advice,'" Evensky's email said. "As for orphaned accounts not receiving advice; brokers can't even hang their hat on the 'solely incidental,' as the sale has already been made."

The ThinkAdvisor article I wrote also detailed objections from Barbara Roper, director of investor protection at the Consumer Federation of America, who stated, "There's nothing [in the chamber's report] that withstands close scrutiny."

A Mixed Bag

Before the Chamber of Commerce's report came out, I attended (and participated in a media panel) at fi360′s annual conference in Nashville and covered Phyllis Borzi's comments at the event on May 22. Borzi, former head of Labor's Employee Benefits Security Administration and chief architect of the Labor fiduciary rule, said that she saw a tough road ahead for the Trump administration in repealing the rule.

"If the administration decides to flip [the fiduciary rule] or make changes, they will be sued and the courts won't view this favorably," Borzi told attendees.

In comments to reporters after her remarks, Borzi said that "the courts generally are not willing to agree to let a new administration overturn an old administration's rulemaking with no new evidence" that the rule is causing harm.

In assessing a repeal of the rule, "the courts are going to look to see whether there's new evidence or whether the department did not do a thorough job in the evidence it had before it," Borzi continued. "We have now three district courts who have specifically held that we did."

Is it a coincidence that the chamber — which is among the nine groups appealing their case against the fiduciary rule in a Texas court — released its "new evidence" report after Borzi's comments?

I've covered Borzi as well as former Labor Secretary Tom Perez over the last six years as they've fought industry groups and members of Congress in Washington to get the fiduciary rule passed. I've chased them from Capitol Hill visits to industry conferences and heard their first-hand accounts of why, in their minds, it was so important to get the rule finalized.

Borzi's intentions have always been fixated on protecting retirement investors' money from unscrupulous advisors. Having said that, Borzi herself has admitted the rule isn't perfect, and my recent conversations with fee-only advisors who adhere to fiduciary rules cement those concerns about DOL's rule.

Robert Schmansky, a fee-only planner with Clear Financial Advisors in Lovania, Michigan, told me recently that he believes Labor's fiduciary rule "is going to harm the exact people it claims to help."

One of the rule's "unintended consequences" will be that advisors "are going to weigh the risk of working with clients." Advisors will "look deeper into potential risks before taking on a client," Schmansky said in a phone interview.

"Just because we are all going to be fiduciaries doesn't mean [clients] will all receive the same fiduciary advice." Also, he said, the industry has already seen "many stories about clients being dumped into high-cost management services because of the fiduciary rule."

Edward Vargo, a private wealth manager at Burning River Advisory Group in Westlake, Ohio, also voiced his concern that lower-income clients could be left without an advisor. "As with most things initiated by the government, the idea is well-intentioned but the execution will be sorely lacking."

The amount "of paperwork that this [rule] has created will do exactly the opposite of [what it] intends — it will push advisors away from working with low-income, low-asset clients because it's just not worth it," he said.

Where Things Stand Now

As of early June, the DOL has released a request for information seeking public input on further changes to the rule. The RFI was posted on the Office of Management and Budget's website, and as of press time was still being reviewed by OMB.

Labor Secretary R. Alexander Acosta told members of the House Appropriations Committee in early June that the RFI is asking people in the industry and consumers "about how the rule is being implemented, about the impact the rule has."

"We need that information, and we need that data in order to decide how to proceed," Acosta said.

Fred Reish, partner in Drinker Biddle & Reath's employee benefits and executive compensation practice group in Los Angeles, said he sees a "99%" chance that the rule will be changed "some, but not as much as people think," with "material" changes regarding the Best Interest Contract Exemption.

The Jan. 1 compliance date will also be extended, "possibly for a year," Reish said, with DOL likely communicating that extension "in August or September." After that announcement, DOL and the SEC "will work together on what the fiduciary rule and the exemptions should be. That could take a year."

— Read DOL Gave the Gift of Time. Use It Wisely on ThinkAdvisor.