Sen. Warren Warns DOL About Adviser Conflicts of Interest

The Democratic presidential candidate tells Department of Labor Secretary Scalia she fears the DOL is considering standards of conduct that would permit advisers providing advice on retirement savings to engage in conflicts of interest.

Senator Elizabeth Warren (D-Massachusetts), has written a letter to Department of Labor (DOL) Secretary Eugene Scalia stating how she fears that in rewriting the fiduciary rule, the DOL is “considering standards of conduct that would allow advisers providing advice regarding retirement investments to engage in conflicts of interest that would harm working families saving for retirement.”

Specifically, Warren expresses her concerns that the DOL will copy the Securities and Exchange Commission’s (SEC’s) Regulation Best Interest (Reg BI), which she calls “wholly inadequate.”

She writes: “That would be a costly mistake—those standards not only allow broker/dealers to give clients advice that is not in their best interest, but significantly water down the longstanding fiduciary standards that has protected the clients of the investment advisers for decades.”

She cites a 2015 study by the Council of Economic Advisers that found American families lose $17 billion in retirement savings every year as a result of advisers’ conflicts of interest. She says her office conducted a study of the annuity industry in October 2015 and February 2017 that found “13 of the 15 leading annuity providers offer their agents lavish, secretive kickbacks for sales to often-unwitting purchases, including all-expenses-paid vacations, iPads, professional sports tickets and more.”

Following the DOL’s passage of the fiduciary rule in April 2016, which  stood partially enforced for only a short time before a lawsuit vacated it, Warren says, investors saw positive results. “Firms eliminated their highest-fee products and cut prices on funds,” Warren writes. “Some firms eliminated commission-based sales practices entirely. A study conducted by Morningstar found that ‘flows into mutual funds paying unusually high excess loads declined after the DOL proposed its fiduciary rule in 2015,’ a shift that was statistically significant.”

Warren says that Reg BI is very vague about what constitutes a “best interest” standard and that it “is similar to the inadequate FINRA ‘suitability’ standard. Given this ambiguity, it is unlikely that Reg BI will make any significant difference in protecting investors. Reg BI imposes a limited requirement to disclose conflicts. In addition, Reg BI only suggests broker/dealers ‘should consider’  reasonable alternatives for high-priced products, and allows them to still recommend a higher-cost option that pays the broker/dealer more.”