Fiduciary Changes Still Hard to Grasp

The DOL’s proposed fiduciary rule is complex and wide-reaching, one experienced ERISA attorney tells PLANADVISER, so the financial industry needs more time to digest the potential implications.

“My overall impression is that there is a ton of material to go through and that it’s going to take real time for business folks and other practitioners like myself to go through all this and fully digest it, and to understand and appreciate all the implications,” Russ Hirschhorn, senior counsel in the Employee Retirement Income Security Act (ERISA) practice center and the labor/employment law department of Proskauer, comments about the Department of Labor’s (DOL) proposed regulations about fiduciary investment advice. 

As a global benefits law firm with a substantial presence in the U.S. that extends into both the institutional and individual investing spaces, Hirschhorn notes that Proskauer is taking the new fiduciary rule language very seriously. “The DOL has limited its comment period to just a couple of months, so the pressure is on,” Hirschhorn says.

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“The firm works with clients across the retirement plan services spectrum, so we issued an in-depth client alert that will be helpful reading for anyone looking to get caught up on the rulemaking language,” he notes. But even after putting together the informative fiduciary rule language summary, he and other ERISA experts at Proskauer believe its “far too soon to know on net whether this is going to help things or hurt things overall,” or if a strengthened fiduciary rule will truly protect retirement plan participants on the ground and bring more transparency and fairness to the financial system in the way the DOL is hoping.

“Many of the people you see speaking in the media, they are up to their eyeballs in the language just like we are,” he continues. “They are at some amount of peril when they make broad statements about where this is all going to end up, not least because it’s still a proposed rule. The important to thing to understand now is that a lot of people are approaching this from a lot of different angles and points of interest. I don’t think the financial industry is prepared to say today whether this is a catastrophe or a victory, or somewhere in between, and from whose perspective and why.”

But some things are becoming clearer, Hirschhorn says. “For example, one concern that I still carry based off the things I’m reading is whether the business folks at advisory firms will be less inclined to keep serving the small balance markets, especially the small balance individual retirement account [IRA] market,” he says. “Whether that’s going to result in less advice or no advice, I can’t say yet, but the proposed rule does seem to put some pressure on there. It’s something that we are exploring further, and I expect to formulate a deeper opinion soon.” 

Something else that is clear, Hirschhorn says, is that the rule language has “changed pretty substantially since the highly controversial 2010 version,” and interestingly the text of the proposal itself explains a lot of this and the thinking behind it from DOL. These changes have caused some to opine that the DOL has capitulated in critical ways to industry lobbying pressure, but Hirschhorn is not committed to that opinion yet.

“I think that the industry and the lobbyists on both sides of the new rulemaking language have achieved some of the things they wanted, and perhaps have not achieved some of the other things they wanted,” he explains. “There is definitely a give and take going on.”

One example he cited: the initial 2010 proposal would have made employee stock ownership plan (ESOP) valuations a fiduciary action—much to the chagrin of the financial services interests—and this seems to have been directly addressed under the new rule language, such that ESOP valuations get a specific fiduciary “carve-out.”

“There are also numerous carve-outs and prohibited transaction exemptions and other forms of blanket exemptions that seem to be partly a response to earlier industry criticism,” Hirschhorn says. “In another example, it seems there is a new blanket exemption that will apply to call center employees fielding calls and answering general questions from plan participants. But will these call center employees be able to render specific advice on products or transactions? That’s less clear at this point, and the interpretation of these things could change under revisions to the language or through supplemental guidance, as well, so that’s important to consider.”

Hirschhorn continues: “Many of the changes that have been made since the 2010 version are being interpreted as industry successes—that industry lobbyists have successfully pushed back against the DOL in some areas—and I would agree with that to an extent. But did the industry get everything it wanted and will there be no hiccups for advisers and brokers from the business perspective? I doubt it—we’re going to have to see.” 

Hirschhorn agreed with speculation that, since neither consumer protection groups nor the financial services industry is claiming total victory or defeat in the fiduciary fight, it can be surmised that the DOL is slowly but surely closing in on a workable fiduciary redefinition. (See "Changes Plan Sponsors Would See Under Fiduciary Proposal.")

“Since suffering such a backlash in 2010, the DOL has recognized that it’s hugely important for it to at least present the image that it is listening carefully to all sides and considering what everyone has said on this fiduciary stuff,” Hirschhorn says. “They want the industry to know that they have heard the concerns, and that they have taken action to address the concerns in a way they thought was appropriate. Despite this, some folks in the industry clearly think this is going to turn into a no-advice rule, once it’s implemented, and still others have suggested the prohibited transaction exemptions are being set up as overly broad loopholes that will allow negative practices to continue. It’s all ongoing.”

One other area that’s becoming clearer, he concludes, is that the DOL isn’t the only regulatory body making consumer protection a priority. The Securities and Exchange Commission (SEC) has signaled it could move sooner rather than later on its own changes to investment advice and conflict of interest rules that would apply beyond the Employee Retirement Income Security Act.

Media reports have cited comments from SEC Chair Mary Jo White, to the effect that the SEC will “implement a uniform fiduciary duty for broker/dealers and investment advisers where the standard is to act in the best interest of the investor.” Few additional details have emerged about the effort, especially given the groundswell of attention following the DOL's new rule language.

“The SEC has said it is developing its own fiduciary rule, while DOL has said that it has consulted extensively with SEC and other federal regulators and self-regulation bodies like FINRA—to make sure it’s not making things unworkable for the industry it’s supposed to be improving,” Hirschhorn says. “At the moment it seems that we are still pretty far off, very far off from anything like a unified fiduciary standard across these bodies, but you can see the early stirrings of that type of an effort.”

Staff Discontent with Compensation and Benefits

A majority of advisory firm members are not satisfied with their compensation or their benefits packages, according to the “2015 Trends in Adviser Compensation and Benefits Study.”

When asked about their compensation, only 26% of advisory staffers said they are very satisfied, while just 27% reported the same about their benefits packages. Overall, the report, which was compiled by a number of industry research and advocacy groups, finds advisory firm members are putting pressure on firm owners and equity partners to keep benefits and compensation packages competitive, especially as an increasing number of older advisers leave the field and competition for younger talent heats up. (See “Seeking Out New Talent.”)

“The data highlights a need for the decisionmakers in any firm to ensure they have clear and objective feedback on what is most important for the team,” says Julie Littlechild, president of If Not Now Research and a contributor to the research effort. “This is an area where assumptions may hurt team engagement.”

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The financial advice profession is continually evolving to meet clients’ needs, she explains. But advisory firm owners cannot only focus on external client service: attracting experts and retaining satisfied workers is equally important.

The study finds 31% of firms feel their compensation package is highly competitive compared with other firms of their size and focus. That number drops to 22% when analyzing benefits, however. Other results reveal a disconnect between how firm members feel about their compensation and benefits and how they feel about their job in general—as more than three-quarters say they are satisfied with their jobs.

Taking a deeper look into the details of benefits, the statistics show 77% of firms offer some form of employee benefits beyond the paycheck. However, firms differentiating themselves to attract top talent add a broad range of other options beyond the typical health care, retirement planning and group life insurance offerings.

Importantly, the benefits considered most valuable by both decisionmakers and employees were health insurance, 401(k) plans and vacation time. For the approximately 70% of firms offering 401(k) plans, 80% match contributions up to a specified percentage amount, with 17% revealing they match 100% of employee contributions. Beyond these benefits the groups disagreed to a significant extent about the value of sick time, cited by management to be of greater importance, and the chance to earn equity in the firm, being of greater value to staff.

When discussing future plans for benefit offerings, less than a quarter of firms plan on making changes. However, 60% intend to boost compensation levels in the next year. Compensation is most often given as the primary reason non-decisionmakers leave their job, reported by 31%. More than half (55%) of firms plan on hiring within the next 12 months, with a focus on expanding their advisory and client service teams.

Additionally, job satisfaction is closely tied to one’s role within the company. The study found job satisfaction is highest among CEOs at the largest firms. Further, in comparison to all respondents, senior advisers/planners are those most likely to receive additional benefits. Job satisfaction is generally below average among junior financial advisers/planners.

“The war for talent in the advice space gets more cutthroat all the time, both between channels and within them,” explains Joan Warner, managing editor of Financial Advisor IQ, also a contributor-firm to the research. “By drilling down into what really drives team engagement, our study can help firms design compensation plans to attract and retain the [top talent].”

The study is the result of combined efforts from FPA Research and Practice Institute, a program of the Financial Planning Association, and Financial Advisor IQ, a news service of the Financial Times. Results comprise input from 694 U.S. advice professionals and decisionmakers. The survey was conducted online in February 2015 by Julie Littlechild of If Not Now Research.

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