Consumer Group Says Shift to Fee-Based Accounts Could Violate Fiduciary Rule 

One of the fiduciary regulation’s most ardent supporters has expressed both concerns – and skepticism – that brokerage firms are shifting investors into account structures that result in higher costs.

The Consumer Federation of America (CFA) this week wrote to Secretary of Labor Alexander Acosta, both expressing skepticism regarding reports that that the fiduciary rule is “causing brokerage firms to shift investors into fee accounts where they face higher costs than they would have in a commission account,” and cautioning that if that is happening, it “reflects a fundamental enforcement failure on the part of the Department and its fellow regulators at the Securities and Exchange Commission and FINRA, not a problem with the rule itself.”

After acknowledging that a number of industry groups opposed to the Department’s conflict-of-interest (fiduciary) rule have suggested that the rule is causing these shifts, the letter states that “There are good reasons to dismiss these arguments as nothing more than the misleading rhetoric of industry groups intent on watering down the rule’s strong investor protections,” since the authors note that those groups “…exaggerate the role of the Department’s fiduciary rule in prompting a migration to fee accounts that is several decades old, ignore evidence that most firms have chosen to continue offering commission accounts as an option under the rule, and provide no evidence that retirement investors who are moved to fee accounts are worse off as a result.” Rather, CFA states that those groups “…both exaggerate the supposed cost advantage of commission accounts and fail to consider the significant benefits of fee accounts for many investors.”

But, while arguing that the reports are likely exaggerated, CFA says they “…cannot dismiss out of hand the possibility that some firms are using the rule as an excuse to shift customers into fee accounts, even when that is not the best option for the investor, or charging them unreasonable fees as a result.”


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At which point, the authors – Barbara Roper, Director of Investor Protection, and Financial Services Counsel Micah Hauptman – state that if it is happening, it’s not the fault of the rule, but rather that of the regulatory bodies that are supposed to be keeping an eye on things: the DOL and SEC.

In addition to that call, the CFA notes that “in light of brokerage firms’ incentive to maximize income, industry groups’ claims that investors are being inappropriately shifted to fee accounts and charged excessive fees in those accounts should be investigated,” and – if verified – “the Department must act to end the practice.” Specifically, in the opinion of the CFA the Labor Department “should start by sending a clear message that it takes the rule’s requirements regarding both the reasonableness of fees and the appropriateness of account type recommendations seriously and that it is prepared to hold firms accountable for complying with these provision of the rule.”

CFA says they are issuing a similar request to the SEC and FINRA “to use their authority under securities laws to hold firms accountable for acting in customers’ best interests when determining whether to recommend a fee or commission account.”

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One Comment

  1. Posted October 6, 2017 at 10:20 am | Permalink

    We office in the Midwest, and we have seen exploitation of exactly what this article states, and the “wall street to main street” style broker dealers in these small towns are shoving every asset on the books into PROPRIETARY FEE BASED MODELS costing probably twice as much.

    The clients don’t understand that the costs are going up, but only told the regulators are behind this, and we’re required to get you into these type of accounts.

    I believe you are correct in your article. I hope you find and expose guilty firms.

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