Changing the Behavior of the 99 Percent

I recently received an angry email from a State Farm sales associate who didn't like what I had to say about efforts in Congress to defund a Department of Labor rulemaking that we believe is necessary to improve protections for retirement savers.

The rule, which is currently out for public comment, would require all financial professionals to put their customers' interests first when providing retirement advice and would rein in common industry practices that encourage sales-based advisers to steer their customers into high-cost investments. Financial firms are doing everything in their power to kill the rule, including getting language inserted in a recently introduced House funding bill to prevent DOL from spending any money to implement it.

In his email, the State Farm agent, whose LinkedIn profile lists "retirement planning" as his top skill, accuses me of taking a position that would "strangle 99 percent of the people who do good work in the investor services industry just to stop the 1 percent." He then urges me to, "Let FINRA and the SEC do their jobs!"

But this is where he gets it exactly backwards. Our current rules are aimed at going after the "1 percent" of financial professionals who engage in conduct so egregiously abusive that it (sometimes) prompts a regulatory response. Those cases are more common, and less likely to result in effective enforcement, than some in the industry would like to admit. But they are not the target of the DOL rule.

Instead, the DOL effort is aimed at changing the behavior of the 99 percent, who are not only free under existing regulatory standards to put their own financial interests ahead of their customers', they are often actively encouraged to do so by deeply ingrained industry compensation and business practices. And therein lies the difference between the DOL and their counterparts at the SEC and FINRA.

  • Unlike the SEC and FINRA, DOL doesn't think it is consistent with customers' best interests for broker-dealers and insurance companies to impose sales quotas on their "financial advisers" and then base bonuses, payouts, and promotions on their success in meeting those quotas.
  • And, unlike SEC and FINRA, DOL is skeptical that advisers who are paid more by their firms to sell certain products, based on nothing more than the firm's desire to push those products, will remain entirely objective in assessing which of the available investments is best for their customers.
  • And DOL doesn't seem to believe that the profit bonanza financial firms can enjoy by rolling workers out of 401(k) plans and into IRAs justifies the higher costs to retirement savers who need every penny just to get by.
In short, DOL thinks it isn't enough to give lip service to a best interest standard. You also have to change the common industry practices that work against that goal. And that, of course, is why industry finds the DOL rule so threatening.