The federal government wants to implement new rules that would ensure investment companies offering advice act in the best interest of their customers. That sounds simple enough.
But those rules, proposed by the Department of Labor, have been a source of pointed controversy for months among investment management firms, regulators, and consumer advocates. This week, they are the subject of four full days of hearings in Washington, featuring some 75 speakers from academia and unions as well as big retirement fund managers like Fidelity Investments and TIAA-CREF.
Two very different arguments emerged in hours of testimony before officials of the Labor Department Tuesday. Consumer advocates said investors need stronger protections against advisers charging big fees for biased advice. Investment firms insisted the new measures would be costly and burdensome, hurting the average investors they are intended to help.
The US Chamber of Commerce called the proposed fiduciary rule “Leviathan,” comparing it to the giant sea monster. A Boston College economist called the rule “carefully crafted.” Fidelity called parts of it “unworkable.”
Today, financial advisers are considered fiduciaries who must act in their clients’ best interests. Stock brokers and online brokers live by a looser standard, meaning they are supposed to deal with clients fairly.
Ralph Derbyshire, deputy general counsel for Boston-based Fidelity, said in testimony Tuesday that the investment giant supports a “best interest” standard for investment advice. But, he said, the rules as proposed are “unworkable and would prevent firms like Fidelity from providing the assistance that our customers ask for and need in preparing for retirement.”
As the largest US manager of 401(k) retirement plans and IRAs, Fidelity has much at stake in the fight. The company fields calls from thousands of American workers with questions about how to invest their workplace retirement accounts, and how and when to roll those accounts over to IRAs when retiring or changing jobs.
In one example, Derbyshire said, if an employee called to enroll in her company’s 401(k) plan and wanted guidance on which mutual funds to own, the answer would qualify as advice. Under the proposed rule, that would trigger a requirement to disclose fees, a potential bias for Fidelity funds over others, and the firm’s duty to act in the customer’s best interest.
In practice, Derbyshire said, it would mean interrupting a routine customer call to make legal disclosures and send the client a complicated document to sign. That could, in turn, make people delay their 401(k) investments, Derbyshire said, which would not be in their best interest.
“The real problem,’’ Derbyshire said, “is getting someone to sign something.”
Anthony Webb, a senior research economist at Boston College’s Center for Retirement Research, was not persuaded. He testified that the proposed regulation is a “carefully crafted attempt to address a serious problem.” The measure would improve industry conduct without hurting consumers’ ability to get advice, Webb said.
Similarly, Benjamin Cummings, an assistant professor at St. Joseph’s University in Philadelphia who also appeared at the hearing, said the assertion that average Americans would suffer under the new regulation was unfounded.
Cummings said more attention should be placed on changing the culture of investment firms that employ advisers, pressing them to do a better job of putting customer needs above their own desire for more compensation.
But Fidelity’s Derbyshire said that was unrealistic. The company wants to distinguish between selling, when a company clearly offers its own products, and advising, when a person is arguably offering broader advice.
He said that in an effort to shine light on conflicts of interest, the proposed rules were bumping up against “the perfectly normal and acceptable conflict of interest that exists in every commercial relationship between buyers and sellers. Buyers and sellers are, by definition, on opposite sides of every transaction.”
Fidelity is seeking an alternative approach to the proposed rules, which would require firms to acknowledge a fiduciary status and commit to being impartial in their advice and to receive only “reasonable” compensation.
Instead, Fidelity said it would pledge to act in the customer’s best interest and offer a one-page document disclosing fees, the scope of the company’s advice role, and its potential bias in product recommendations.
Ron Bird, senior regulatory economist at the US Chamber of Commerce, warned Labor officials of the unintended consequences that can come with a sweeping new measure, and advised them to conduct more research.
“A leviathan is a huge beast,’’ he said.
Beth Healy can be reached at beth.healy@globe.com.
Follow her on Twitter @HealyBeth.