Common Sense

Department of Labor

A representative of the Department of Labor issued a statement this Tuesday concerning the much debated and watered down version of a proposed ERISA rule regarding a requirement for plan “advisors” to act with fiduciary care and obligation when selling . . . uh, excuse me, . . .”advising” investors concerning their employee retirement plans and IRA accounts.

Originally published on July 17, 2015

‘We aren’t wedded to any particular choice of words or regulatory texts,” Timothy D. Hauser, a DOL deputy assistant secretary, told a meeting of the Securities and Exchange Commission’s Investor Advisory Committee. “The point is to improve this marketplace, not to defend the details of our package. There will be changes – no doubt about it.”

Not surprisingly, the DOL continues to get significant pushback from industry heavyweights in the insurance, brokerage, and mutual fund industry. This has been an ongoing battle since the first proposal in 2010 and a subsequent study by the SEC, ordered pursuant to the Dodd-Frank Act. The following link is a fact sheet that describes the problem and the current proposed solution.

Department of Labor Proposes Rule to Address Conflicts of Interest in Retirement Advice, Saving Middle-Class Families Billions of Dollars Every Year.

I’m not a big Obama fan, but I appreciate his stance on this issue. You decide which side you are on.

Since the DOL invited public comment on the issue, I shared my view.


Ladies and Gentlemen,

I applaud the spirit and intent of the proposed rules regarding the fiduciary standard concerning retirement plans. I also understand why you are getting a lot of resistance from the big industry players.

Most of the investing public does not know what “fiduciary” means. However, they think their financial advisor is obligated to look out for their interest and trusts him/her to do so. They assume that whoever they decide to trust has the burden of fiduciary care. The industry marketing machine promotes this false sense of security with billions of dollars of TV and internet promotion designed to do just that.

The issue at hand is the public’s understanding of fiduciary vs suitability obligation and who is held to what standard. The public deserves to know whether they are being served or sold by their financial advisor. Under current rules, most representatives of the commission-based brokerage and insurance industry are dually registered. They are licensed and registered as an insurance agent, a registered representative, and an investment advisor representative. According to agency law, the insurance agent and registered representative both have a legal obligation of loyalty and service to their employer or principal (not their clients), and are trained, motivated, and compensated to sell products.

An investment advisor, according to the Investment Advisors Act of 1940, has a legal obligation to always serve/act in the best interest of the client. As such, charging a commission on product sales creates a direct conflict with clients’ interest. Clients have no way of distinguishing between advice and a pitch. The industry has perpetrated a great deception against the investing public by allowing dually registered sales reps to masquerade as advisors to build trust for the purpose closing the sale. All that is required to mitigate the conflict of interest is that the agent disclose that they are getting a commission from the sale of a product. The required disclosure doesn’t include the dollar amount they are paid and is usually buried in the mountain of paperwork that nobody reads.

The majority of successful “advisors” are honest, hard-working folks who just want to make a living helping people. However, sales reps are indoctrinated by the industry and led to believe they are serving their clients best interest by selling the most expensive products. At the same time, seventy-five to ninety percent  of reps struggle to meet quotas much less earn bonuses. That is what is required to keep their job, move up the career ladder, and get paid. The vast majority of the training received by sales reps is on leveraging the company’s brand, their credentials, and their personal relationships (brother-in-law, college buddy, neighbor, church members) in order to achieve “trusted advisor” status without actually being required to perform in that capacity.

You will not resolve this issue by creating legislation to make a wolf treat its prey more fairly. I know that sounds like a harsh analogy, and very few commissioned sales reps see themselves in this light. However, if a representative is dually registered and is selling products for a commission, he is deceiving himself and his clients if he thinks commissions have no influence on advice.

The best solution to this issue is to disallow dual registration. A representative is a fee-only fiduciary or a commissioned sales rep. He/she can’t be both. The next step is to require all market participants to clearly state their legal obligation in all advertising, marketing, and promotional material. Finally, any RIA that sells a commission based product should clearly state in a separate printed document (not bundled with the mountain of contract paperwork), the nature of the conflict of interest and the amount of the commission that the advisor and its representative(s) will receive if the client purchases.

Thank you,
Michael K. Harris, SR., IAR, CEO
River Wealth Management, LLC
225 North Memorial Drive,
Prattville, AL 36067

Office – 334 513-7200
Cell – 334 224-0751