Compliance November 6, 2017

SEC and DOL Face Hurdles in Fiduciary Collaboration

When it comes to the possibility of a uniform advice standard for advisers and brokers coming from the SEC, one attorney argues “things are still very much in a wait-and-see mode,” despite increased chatter among lobbying organizations about the possibility.
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Larry Stadulis is a partner at Stradley and Ronon; he has been with the firm for 13 years after working previously for Morgan, Lewis & Bockius. Fresh out of law school he worked more than four years at the Securities and Exchange Commission (SEC).

Today, Stadulis’ practice involves mainly representing investment advisers and broker/dealers, as well as pooled fund vehicles. Primarily he focuses on “the areas that involve the interstices of regulation between advisers, brokers, retirement plans and others types of products and services that involve fiduciary and suitability issues.”

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It’s quite a relevant background in the current investment industry environment, wherein, as Stadulis explains, “it is very easy to imagine how complicating, shifting, overlapping regulatory issues can fall between the cracks.” When it comes to the possibility of a uniform advice standard for advisers and brokers coming out from the SEC in the near term, he “feels things are still very much in a wait-and-see mode,” despite increased chatter about the possibility among lobbying organizations and in the financial trade media. Much of the conversation has centered on mere speculation following the appointment of Jay Clayton as SEC chair by the Trump administration, Stadulis argues.  

“From my perspective, I don’t really think there is much hard news we can go on in terms of what the SEC may be planning for the next couple of years as it pertains to conflicts of interest and coordinating with the Department of Labor (DOL) fiduciary reforms,” Stadulis opines.  “Having said that, the industry is clearly evolving towards a new compensation structure—centered on asset-based compensation rather than commissions. Regardless of what the DOL and SEC are doing, or whether they are eventually able to work together more closely, this shift is already happening and is unlikely to stall.”

At the same time, Stadulis continues to hear regularly from clients about some core concerns, especially when it comes to smaller firms facing the DOL reforms. Many are committed to the new fiduciary future—but they are finding it difficult to source the time and personnel needed to shift their firm’s product delivery and compensation practices as demanded by the conflict of interest reforms. Full implementation of the DOL fiduciary rule may be delayed, but there is still very real pressure on firms to update their compensation and service strategies.

“It’s not as easy for smaller firms to shift their compensation models,” Stadulis argues. “I’m not saying it is easy for larger firms by any means, but they more often have the resources available to confront a constitutional challenge like this. For both sides of the market, there is no going back.”

Turning to the technical side of this debate, Stadulis commends the motivation behind strengthening conflict of interest rules, both at DOL or SEC, but he argues it will be “more difficult than a lot of people think for the SEC to effectively insert itself into the DOL’s own ongoing fiduciary efforts.”

“The SEC frankly is in a difficult position because of the source of its authority in the statues,” Stadulis explains. “Brokers registered with the SEC have their own distinct set of duties, and in a way these duties are ‘fiduciary’ in their own nature, but I think it’s difficult to see how we could fit a single standard around all advisers and all brokers. This would mean making all brokers into advisers, and that is simply a really difficult situation to picture. The point I’m trying to make is that the SEC is struggling to see a path forward because the responsibilities and duties of advisers and brokers have been somewhat different for a long time.”

Stadulis says he expects DOL and SEC will find some limited ways to work together as they shift and tweak their respective requirements for various types of financial services professionals, but a true uniform standard across all types of advisers and brokers is unlikely: “We may reach a juncture where DOL and SEC agree to come up with a solution that imposes different-but-comparable standards on both advisers and brokers while at the same time recognizing, validating and emphasizing the important differences between the two industries.”

Signals from inside the beltway are mixed

As noted by George Michael Gerstein, counsel with Stradley Ronon working closely with Stadulis on these issues, SEC Chair Clayton has confirmed to Congress that he is “dedicating significant staff resources to the very challenges we are currently discussion.”

“From what I have seen of the two of them, it seems SEC Chair Clayton and DOL Secretary Alexander Acosta have a similar, complementary outlook on these matters, and they are willing to work together,” Gerstein says. “I agree it is a real challenge that they face, but they appear to be in sync for the most part about finding a solution.”

Like Stadulis, Gerstein agrees that it will be difficult for the SEC to suddenly step up and take the lead role in the fiduciary reform conversation—or even for the regulator to take a more even role next to DOL. 

“Clayton has confirmed on the record that he does not believe the SEC should have exclusive jurisdiction here over policing conflicts of interest among advisers and brokers,” Gerstein says. “He apparently feels strongly that the DOL is rightfully enacting its own authority over retirement assets under the Employee Retirement Income Security Act (ERISA). Clayton appreciates that Congress went out of its way in 1974 to give DOL jurisdiction here.”

Stadulis agrees with that assessment, adding that there is another entirely distinct regulator that also has some skin in this game—and that is FINRA. In addition, more states are following the example set by Nevada and are attempting to craft their own local conflict of interest rules to add to the protections already in place.  

“What does best interest ultimately come to mean? It depends on whether you’re looking at DOL’s standards versus the SEC versus FINRA’s own interpretation of suitability rules,” Stadulis concludes. “The standard in the end is going to have to be some amalgamation of the interests of all of these stakeholders. They all want to ensure a strong regulatory system remains in place that promotes client’s best interest while also making sure not to over-burden advisers and brokers.”

Data & Research October 17, 2017

Investing Optimism and Health Care Cost Challenges

The head of Wells Fargo Institutional Retirement and Trust reflects on a strong boost in investor optimism measured in a recent survey published by the firm—and on the specter of ballooning health care cost projections.
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The 2017 Wells Fargo Retirement Study denotes a “20-point surge in optimism” about the equity markets.

As explained by Joe Ready, head of Wells Fargo Institutional Retirement and Trust, this impressive one-year jump in optimism is about as strong as any bump the firm has measured in its annual retirement surveys. As he sees it, the results show the financial crisis of 2008-09 continues to recede into the background for most investors.

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Indeed, as measured by the 2017 survey update, an investor who stuck with the markets since the last downturn has enjoyed one of the longest bull markets measured in American history.

“As part of our research we considered the power of compounded savings and market returns for a participant with a $50,000 401(k) account balance in the beginning of 2009. That balance would be $180,000 by September of this year, assuming modest returns and modest contribution rates,” Ready explains. “Had investors allowed the correction to scare them off, they would have missed out on that growth opportunity.”

And so one of Ready’s main takeaways from the latest run of the annual retirement survey is the “ongoing importance of reminding people to stay invested and to think about the long-term when making portfolio decisions.” He suggests right now is a sensible time to talk with participants about the importance of regular rebalancing and ensuring strong market returns—positive or negative—do not throw one out of alignment with their carefully considered risk tolerance or investing timeline.  

Also notable in the data, this year fully half of retirees say they are spending more than expected on health care, and just over one in three say their standard of living went down measurably once they retired. But even with these challenges, the percentage of workers who say they will “have enough savings to live on comfortably” throughout retirement increased to 62%, compared to 52% in 2016.

“In addition, 46% say they will need to work until at least age 70, which is down from 50% last year,” Ready says. “This is a positive because there is ample data to show that most people cannot actually continue working until 70—and that most people retire before they were planning to.”

In spite of increased optimism, Wells Fargo finds a sizeable portion (38%) of workers still say they do not think they will reach their savings targets, and 48% say they believe their “standard of living will fall.” 

“Again, one of the greatest hurdles appears to be healthcare costs,” Ready adds. “Fully 61% of workers say healthcare costs prevent them from saving more for retirement today.” 

Heath care concerns across generations 

Asked to choose the greatest threat to their current retirement savings, four out of 10 workers age 40 and over cite rising healthcare costs or catastrophic illness; on the other hand, four out of 10 workers in their 30s cite losing their job or not saving enough as their biggest threat.

The data also carves out members of the “sandwich generation” in between Millennials and Baby Boomers, tasked with taking care of both aging parents and their own younger children. This group is much more likely to cite rising healthcare costs as a major challenge compared with those people who do not have this dual set of responsibilities.

“Sandwich generation members are also more likely to cite higher health care costs as a reason they don’t save more right now for retirement,” Ready notes. “The sandwich generation is not a small group of people, keep in mind. This is something like 36% of the whole population—43% of women and 30% of men.”

In conclusion, Ready observes a simple truth about retirement savings in America: “Not surprisingly, workers who have had consistent access to tax-advantaged savings in the workplace have saved much more for retirement than those who do not have similar access. Among near-retirees, due to the power of compounding, the gap is quite large.”

He adds that he is optimistic about the future because there is strong evidence that Millennials are getting themselves on track to be a very success 401(k) plan generation. In rough figures, the average actively investing Millennial in the sample started saving nearly a decade earlier in life in a 401(k) than one measures among the Baby Boomers.

“People understand increasingly the importance of saving early for retirement,” Ready says. “Time is the biggest asset for retirement savers, so it’s good to see consistent savers getting a head start. For the 50-somethings in the survey, it’s getting harder to bend the curve as retirement closes in. This is why it’s important for those who are playing catchup to also understand what they can do to optimize their savings. They can do this by modeling when they take Social Security, the age they will retire, and how much they can afford to withdraw each month. All of these can have a meaningful impact.” 

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