Compliance October 31, 2013

House Puts Lid on Fiduciary Update

The House voted Tuesday to pass the Retail Investor Protection Act, which would delay any fiduciary updates issued by the Department of Labor (DOL) or the Securities and Exchange Commission (SEC).
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House members voted 254-166, largely along party lines but with some Democratic support, to approve the Retail Investor Protection Act. Passage of the act into law is widely deemed impossible, given the political makeup of the U.S. Senate and the White House.

During hours of debate, many House members took up arguments warning additional limits placed on advisers and broker/dealers would do more to damage their clients’ retirement preparedness than stamp out conflicts of interest.

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“Due to technological advances and the relatively low cost associated with operating an online platform … brokers can offer trade and investment advice for as little as seven dollars,” said Jeb Hensarling, a Texas Republican and chairman of the House Financial Services Committee. “Should a fiduciary standard be applied to these online brokers, the impact on investors could be … higher fees per trade, higher fees for investment advice, or brokers may simply stop providing this investment advice to less affluent customers altogether.  That is not fair.” 

Democratic members opposed to the bill argued that a unified fiduciary standard would ensure advice in retirement planning settings is given in investors’ best interests.

Advisers and broker/dealers have long worried a regulatory update could force all financial professionals providing advisory or brokerage services to retirement plan participants into a fiduciary relationship.

Within such a relationship, advisers or broker/dealers are required by law to put the investors’ interests ahead of their own. For example, an adviser could be prohibited from promoting IRA rollover services to existing clients if he or she would receive more in fees because of that promotion.

Raising the Stakes for Brokers/Dealers

Many advisers working with retirement plans are already held to such a fiduciary standard. Broker/dealers could have more to lose as they are required by law to offer service and advice that is deemed only “suitable.”

Another stipulation in the bill would force the DOL to wait until the SEC has released a fiduciary update before issuing its own. That tactic could significantly lengthen the time before an update is enacted, as the DOL’s new definition could be released soon—perhaps within the next few weeks.

According to the Retail Investor Protection Act, “the Secretary of Labor shall not prescribe any regulation under the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1001 et seq.) defining the circumstances under which an individual is considered a fiduciary until the date that is 60 days after the Securities and Exchange Commission issues a final rule relating to standards of conduct for brokers and dealers pursuant to the second subsection (k) of Section 15 of the Securities Exchange Act of 1934.”

The bill goes on to say the Securities and Exchange Commission (SEC) cannot issue its final rule until determining whether retail investors are being harmed by the differing standards and whether adopting a uniform fiduciary definition of would adversely impact retail investors’ access to personalized investment advice.

During a recent speaking engagement, Assistant Secretary of Labor Phyllis Borzi of the DOL’s Employee Benefits Security Administration (EBSA) said the agency is “very close to finishing” a new definition of fiduciary She assured the audience that EBSA is working closely with the SEC on the regulations.

For input from industry groups on the pending definition updates, see “Groups Urge SEC to Uphold Fiduciary Standard.”

Text of House bill H.R. 2374 is here.

Data & Research October 31, 2013

Investments: No. Except for Mutual Funds

U.S. households are showing the same reluctance to take on investment risk that they did after the 2008 financial crisis, a study found.
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Three in 10 mutual fund-owning households were willing to take substantial or above-average risk for financial gain in May 2013, compared with 36% in May 2008, according to an annual survey of U.S. households by the Investment Company Institute. Older investors continued to report a much lower tolerance for investment risk overall when compared with younger investors.

ICI’s annual survey, released in two studies, “Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2013” and “Characteristics of Mutual Fund Investors, 2013,” also reported that in 2013, an estimated 57 million, or 46% of, U.S. households representing more than 96 million individual investors owned mutual funds. While mutual funds are the most commonly held type of fund, 6 million households reported owning exchange-traded funds (ETFs) and 4 million households reported owning closed-end funds in 2013.

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More than twice as many U.S. households owned mutual funds through tax-deferred accounts as owned mutual funds outside such accounts. In 2013, 52.9 million households owned mutual funds through employer-sponsored retirement plans, individual retirement accounts (IRAs), and variable annuities, compared with 18.5 million owning funds outside such tax-deferred accounts.

Almost all mutual fund investors were focused on saving for retirement. Saving for retirement was one of the household’s financial goals for 92% of mutual fund-owning households, and almost three-quarters indicated that retirement saving was the household’s primary financial goal.

Most U.S. mutual fund owners had moderate household incomes and were in their peak earning and saving years. Fifty-six percent of households owning mutual funds had incomes between $25,000 and $99,999, and two-thirds were headed by individuals between the ages of 35 and 64.

Performance of fund investments continues to be the most influential of the many factors that shaped shareholders’ opinions of the fund industry. Two-thirds of mutual fund shareholders indicated that fund performance was a “very” important factor influencing their views of the industry, and more than 40% cited fund performance as the most important factor.

Funds Gain Favor

Mutual fund companies’ favorability rating tends to move with stock market performance. As the stock market trended upward, mutual funds’ favorability among shareholders was 68% in 2013, an increase from 65% in 2012. In 2013, older mutual fund investors reported higher favorability ratings compared with younger investors and more recent investors.

Mutual fund–owning households often used the Internet for financial purposes. More than nine in 10 households owning mutual funds had Internet access in 2013. Among that group, more than eight in 10 used the Internet for financial purposes.

The Investment Company Institute based its 2013 Annual Mutual Fund Shareholder Tracking Survey on a sample of 4,001 U.S. households selected by random dialing, of which 1,853 households, or 46%, owned mutual funds. The survey collected information on households’ ownership of closed-end funds and ETFs. Overall, 47.1% of U.S. households owned shares of mutual funds or other U.S.-registered investment companies in 2013, representing an estimated 57.7 million U.S. households and 97.9 million investors. All interviews were conducted over the telephone with the member of the household over 18 who was the sole or co-decision-maker most knowledgeable about the household’s savings and investments.

“The dramatic stock market decline from October 2007 to March 2009 appears to still linger in investors’ minds,” said Sarah Holden, ICI senior director of retirement and investor research. “Nevertheless, equity mutual funds continue to be the most commonly owned type of fund, held by 86% of mutual fund–owning households.” 

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