Department of Labor to hold conflicts of interest hearing

The Department of Labor will hold a public hearing this week on a proposed rule it says will shield millions of Americans from conflicts of interest on the part of advisers who guide them in saving for retirement.

The proposed rule would require that any financial adviser being compensated for giving advice on investments in 401(k)s and IRAs put their client's best interest before their own.

The hearing, which runs Monday through Thursday, marks the latest step in what has been a nearly five-year journey to enact a rule that would mark the most significant change regarding retirement investment advice in 40 years.

But the debate over the potential regulation rages on. Supporters say it provides vital protection for Americans who currently lose roughly $17 billion a year to conflicts of interest by advisers more interested in their own profits than their clients' financial futures. Critics argue the proposal is cumbersome and will ultimately hurt the middle-class investors it's intended to protect, and may lead to them having a harder time finding professional guidance as advisers focus on higher-wealth individuals, and shift from commissions to costlier fees, to bolster their bottom line.

"It is impossible to overstate how important this rule will be to the standard of living of tens of millions of Americans in retirement,'' says Dennis Kelleher, CEO of Better Markets, Inc., a non-profit group that promotes the public interest in financial markets. "They are looking at the prospect of literally tens of billions of dollars more staying in their retirement accounts, and being available to them in retirement for their use, instead of being diverted into brokers' pockets due to commissions, fees and conflicts of interest.''

But the Financial Services Roundtable, an advocacy group for the financial services industry, disagrees.

"The (Department of Labor's) proposal is extremely complicated and impractical, and would adversely impact retirement savings, particularly for lower- and moderate-income Americans," Felicia Smith, FSR's vice president and senior regulatory counsel said in an emailed statement. "We should instead be enforcing the existing laws that are in place to remove and punish 'bad actors' while ensuring that all customers receive investment advice that is in their best interest."

The proposed rule is seeking to impose additional safeguards on a landscape that has dramatically changed in recent years, as pensions disappear and Americans increasingly have to figure out for themselves how best to fund their retirements.

Often they turn to brokers and other advisers for help, but some of those professionals might steer clients toward investments that have high costs or weak returns, but pay the adviser high fees or commissions, constituting a conflict of interest.

"If you go back 20 or 30 years, a large number of workers in this country had pensions,'' says Bill Harris, CEO of Personal Capital, a digital wealth manager, who supports the proposed rule. "This is now a responsibility that's been put on the shoulders of individuals and families. ... That's why I think there's an increasing reliance on brokers and advisers to guide them in this process (and) that's why it's so important to make sure that guidance is provided truly in the best interest of their customers.''

But some feel the proposed regulation needs an extensive rewrite.

"I think (the Department of Labor is) hearing that this rule has lots of problems,'' says Ken Bentsen, CEO of the Securities Industry and Financial Markets Association (SIFMA), which represents the U.S. securities industry.

He says that his organization favors a fiduciary, or best interest standard, but one that applies to all retail investments, not just tax-deferred retirement accounts. "These rules do have consequences if they're not done properly and our concern is the rush to get this done in the face of so many substantive comments creates a risk for market disruption, which is frankly unnecessary.''

This week's Department of Labor hearing comes on the heels of a 90-day period in which the public was allowed to issue comments. There will be another public comment period, and then the department will review all the input and consider any changes before publishing a final regulation.