1

TESTIMONY OF

KENT A. MASON

of

DAVIS & HARMAN LLP

before the

SUBCOMMITTEE ON HEALTH,

EMPLOYMENT, LABOR AND PENSIONS

of the

HOUSE EDUCATION AND THE

WORKFORCE COMMITTEE

for the hearing entitled

RESTRICTING ACCESS TO FINANCIAL ADVICE: EVALUATING THE COSTS AND 

CONSEQUENCES FOR WORKING FAMILIES AND RETIREES

June 17, 2015
2

My name is Kent Mason. I am a partner in the law firm of Davis & Harman LLP and I 

have worked in the retirement plan area for over 30 years. I am currently working with plan 

sponsors, plan sponsor trade associations, and a wide array of financial institutions on the 

concerns that have been raised with respect to the Department of Labor’s proposed regulation 

modifying the definition of a fiduciary.

I want to thank you, Chairman Roe and Ranking Member Polis, for holding this hearing 

and for inviting me to testify. It is important that the critical issues raised by the proposed 

regulation be addressed in a robust public dialogue.

I am speaking today on my own behalf based on extensive discussions with plan 

sponsors, plan sponsor trade associations, and numerous financial institutions. 

On April 14, the Department of Labor (“DOL”) issued a re-proposed definition of a 

fiduciary applicable to retirement plans and IRAs, along with a set of proposed prohibited 

transaction exemptions.

In brief, I will make the following points:

 Industry supports best interest standard. Contrary to indications from the 

Administration and statements in the press, most of the industry is completely fine with a 

best interest standard. The problem with the DOL proposal is not the best interest 

standard; the problem is the “prohibited transaction rules” that cut off low and middleincome individuals and small businesses from access to personal investment assistance. 

 Small businesses will lose critically needed help in setting up retirement plans. The 

seriousness of this problem is well illustrated by expressions of great concern from the 

U.S. Chamber of Commerce, NFIB, the U.S. Hispanic Chamber of Commerce, and the 

Small Business and Entrepreneurship Council. 

 Small accounts will lose all access to professional investment advice. It is well 

documented that this occurred in the United Kingdom under a very similar rule. 

 Under the current timetable, the following message will be delivered to many 

millions of individual IRA investors with small accounts in the fall of 2016: neither 

their current advisor nor any other advisor can service their accounts because of new 

government rules.

 The DOL proposal would eliminate any meaningful assistance for employees 

terminating employment regarding their distribution and rollover options.

According to a comprehensive study by former government economists, this would result 

in $20 billion to $32 billion more in annual leakage from retirement plans. 

 The DOL proposal significantly reduces the scope of permissible investment 

education. Even the 2010 DOL proposal did not do this. 

 The DOL proposal inadvertently applies to the simple marketing of health, life, and 

disability insurance to small businesses, making such marketing arguably 

impermissible. This inadvertent error is more evidence that the adverse ramifications of 

the proposal have not been fully considered.

 The 2015 proposal is far less workable than the 2010 proposal.
3

 All of this can be solved by legislation establishing a best interest standard, with 

workable rules that maintain access to investment assistance for low and middleincome individuals and small businesses. 

 In this context, we need bipartisan legislation. This proposal can fundamentally alter 

the private retirement savings system, and there are critically important disagreements 

about what those effects will be on the retirement security of low and middle-income 

individuals across the country. Fundamental policy decisions like this are the province of 

Congress, not the agencies charged with interpreting the law.

INDUSTRY SUPPORT FOR A BEST INTEREST STANDARD 

Under the DOL rules, an advisor’s treatment as a fiduciary has two main significances. 

First, a fiduciary is required to provide advice that is in the best interest of the fiduciary’s 

customer. There has been a lot of confusion in public discussions and media reports that state 

that the industry opposes a best interest standard. That is not the case. The vast majority of the 

financial services industry is completely fine with being required to act in the best interest of 

their customers. Advisors know that if they do not act in their clients’ best interest, they will not 

have those clients for long. 

The public policy dialogue regarding the fiduciary issue over the last 4 1⁄2 years has 

never been about the best interest standard. The real debate has been over DOL’s “prohibited 

transaction rules,” which under the DOL proposal would cut off access to investment and 

distribution assistance for low and middle-income individuals and small businesses. Under 

those rules, an advisor cannot provide any advice that could affect the advisor’s compensation, in 

the absence of a prohibited transaction exemption (provided by DOL). Assume, for example, 

that an IRA owner calls a broker/dealer for advice regarding whether to buy a particular stock. 

The advisor responds by saying that that stock is regarded as a good value and could help the 

IRA owner’s portfolio. The IRA owner buys the stock, which earns the broker/dealer a 

commission. Absent an exemption, if the broker/dealer is a fiduciary, the simple favorable 

statement about the stock purchase is a prohibited transaction under the DOL proposal, 

regardless of whether the statement is in the best interest of the IRA owner. That is because the 

broker/dealer earns a commission on the purchase; thus, the broker/dealer’s favorable statement 

led to the broker/dealer earning a commission. 

The Administration’s doctor analogy is a perfect analogy. The Administration has said:

When you go to a doctor, you expect that advice you get is in your best interest. If 

you have cancer, you don’t want your doctor telling you what’s suitable for you. 

Rather, you want your doctor telling you what’s best for you, and what will 

maximize the chances of saving your life. But when it comes to financial advice, 

conflicts of interest can lead to bad advice and hidden fees that too often keep us 

from getting investment advice that’s in our best interest. 

The industry is completely fine being subject to a best interest standard like doctors. But 

to picture the unworkability of the prohibited transaction rules, just imagine if those rules applied 

to doctors:
4

 A patient goes to a doctor with ankle pain. The doctor recommends an X-ray – which 

they do at the doctor’s office -- to determine if the ankle is broken. Under the DOL rules, 

the doctor would have committed a prohibited transaction because the advice to get an Xray leads to the doctor earning more money attributable to providing X-ray services for a 

fee. The doctor would be required to send the patient to another doctor for an X-ray. 

 A patient goes to a doctor with back pain. The doctor prescribes rest and antiinflammatories, and recommends the patient come back in three weeks for a follow-up 

visit. The doctor would have committed a prohibited transaction by recommending a 

follow-up visit, which will earn the doctor more money. The doctor would be required 

to send the patient to another doctor for the follow-up visit. 

HIDDEN FEE REFERENCES ARE FICTION

In 2012, the DOL issued rules making hidden fees illegal with respect to retirement 

plans, which were the product of work by both Democratic and Republican Administrations. 

Thus, it is somewhat mystifying to hear DOL make reference to hidden fees in 2015. In the IRA 

market, Richard Ketchum, the CEO of FINRA (which oversees broker/dealers) has noted that 

FINRA’s robust disclosure rules “require that principal trades, commissions, fees and expenses 

must be disclosed to the customer and . . . require that revenue sharing arrangements with mutual 

funds generally must be disclosed if they form a basis for the selection of funds that the brokerdealer recommends.” Where are the hidden fees?

OVERALL STRUCTURE OF THE DOL PROPOSAL

The DOL proposal has three basic components:

 Expansion of the basic definition of the term “fiduciary.” Under current law, a person 

is treated as a fiduciary if, for a fee, the person provides individualized advice regarding 

investments on a regular basis pursuant to a mutual understanding that the advice will be 

a primary basis for decision-making. In other words, there must be a mutual expectation 

of reliance on the advice. 

o Under the DOL proposal, a person is treated as a fiduciary if, for a fee, the person 

provides individualized recommendations regarding investments, rollovers, or 

distributions that could be considered in making decisions. Any recommendation 

that would be viewed as a “suggestion” that someone take an action – or not take 

an action – is sufficient. So any casual comment that could be considered would 

give rise to fiduciary status.

 Exceptions from the definition of a fiduciary. The proposal includes exceptions from 

fiduciary status, i.e., persons covered by the general definition above are not fiduciaries if 

they fall within certain exceptions, such as an exception for investment education 

(narrower than under current law or under the 2010 DOL proposal) and an exception for 

recommendations provided as a seller (not as an advisor) to large plans. 

 Exemptions from the prohibited transaction rules. For persons that are treated as 

fiduciaries, the proposal provides limited exemptions from the prohibited transaction 

rules. The main exemption is the Best Interest Contract Exemption (the “BIC 
5

exemption”). For reasons discussed below, the conditions required to satisfy the BIC 

exemption are so extensive and onerous as to make it unusable. Effectively there is no 

exemption. 

EFFECTS OF THE DOL PROPOSAL

The DOL proposal would have the following adverse effects. 

In general. The framework set up by the DOL could work conceptually, but in its 

current form, it would, like the original 2010 proposal, cut off the option for low and middleincome individuals and small businesses to receive personalized investment assistance, even if 

that assistance is in the best interest of the recipient. This is the case because the BIC 

exemption is unusable.

Small businesses could not get help setting up a retirement plan. When a financial 

institution talks to a small business owner about possibly setting up a 401(k) plan, the small 

business owner naturally wants to know if the plan can be established simply and inexpensively, 

with the financial institution taking care of almost everything. Today, that works well. The 

financial institution can, for example, provide the plan document, agree to do all the plan 

administration, and agree to help with all employee communications. 

One other key item is selecting the investment options for the plan to offer to employees. 

Typically, the financial institution has a large portfolio of possible investment options, such as, 

for example, 2,000 options, but the business likely may only want to offer, for example, 10 or 15

options to its employees. Accordingly, a critical step in setting up a plan is choosing the 10 or 15 

out of the 2,000 that the plan will offer. Today, the financial institution can provide “education” 

to the business owner about which 10 to 15 to choose, without the financial institution becoming 

a fiduciary. For example, the financial institution could provide examples of investment options 

offered to employees by similar businesses, including sets of options that are conservative, 

moderate, and aggressive. The financial institution can explain the difference between the 

different sets of options and provide additional information that the owner needs to make the 

right decision for him. (The financial institution will be clear that it cannot make the decision for 

the business owner and cannot act as a fiduciary, but can provide information and education.)

Under the DOL proposal, the assistance described above regarding the selection of the 10 

or 15 investment options would be treated as advice and thus make the financial institution a 

fiduciary. This would make the assistance a “prohibited transaction,” subject to severe penalties. 

Fiduciary advice is a prohibited transaction if the advice affects how much compensation the 

fiduciary earns. In almost all cases, the financial institution will make different amounts of 

money based on which investment options are chosen by the business owner. Some options may 

be proprietary funds and some may not be. Generally, the non-proprietary funds will pay the 

financial institution a fee, but the fee varies from fund to fund. Proprietary funds also vary in the 

management fee charged because certain investment strategies are more expensive to manage 

than others.1 So in short, even if the financial institution recommends the best possible funds for 

 

1 These fees are not hidden. The fees earned both for proprietary and non-proprietary funds are fully 

disclosed before the business owner adopts the plan under DOL’s fee disclosure rules.
6

the business owner to offer to his employees, the advice is a prohibited transaction because the 

advice affects how much the financial institution earns. 

So if the financial institution cannot help the business owner select the 10 or 15 

investment options, the owner has two choices: 

 Select the investment options himself without any assistance, subject to fiduciary 

liability. If the owner is not an expert on investments, this would subject the owner to 

liability, since ERISA holds fiduciaries to an expert standard. A fiduciary must seek help 

and guidance if the fiduciary is not an expert. 

 Conduct a diligent search, subject to fiduciary liability, for a qualified independent third 

party to do the selection for an additional fee.

Neither of the above choices is really viable in most cases, so that there would be far 

fewer small business plans established. The adverse effects of the original proposal would 

continue to apply, since the 2015 proposal is, with respect to the small business issue, effectively 

identical to the original proposal. The adverse effects were powerfully demonstrated by the 

results of a 2014 survey of small businesses by Greenwald & Associates (which our firm cosponsored, along with the U.S. Hispanic Chamber of Commerce). For example, the survey found 

that:

 Almost 30% of small businesses with a plan indicate that it is at least somewhat likely 

that they would drop their plan if this regulation were to go into effect. 

 Close to 50% of small businesses without a plan state that the regulation would reduce 

the likelihood of them offering a plan, with 36% saying it would reduce the likelihood 

greatly.

Small accounts will lose all access to an investment professional. There are two main 

ways that an IRA owner can get access to an investment professional: the brokerage model and 

the advisory model. Under the brokerage model, the amount of the payments to the advisor –

such as commissions and payments from a mutual fund (e.g., marketing, recordkeeping, and 

shareholder servicing fees) – varies based on the investment made. Thus, any advice made under 

the brokerage model violates the prohibited transaction rules unless an exemption applies. 

Because the BIC exemption is unusable, the brokerage model is effectively illegal with respect to 

IRAs and retirement plans under the DOL proposal. 

This means that the only source of personal investment assistance for an IRA owner is 

through an advisory account. However, advisory accounts are not available to small accounts. 

Under an advisory account, typically, the advisor takes full responsibility for managing the 

investments on an around the clock basis in exchange for a fee based on the amount of assets, 

such as a 1% of assets fee. Small accounts are not eligible for advisory accounts in part because 

the economics cannot work. An advisor cannot accept around the clock liability for $4,000 IRA 

for an annual fee of $40. Moreover, under the securities laws, an advisory account may not be 

suitable for a small account (or even a large account) under which the IRA owner simply buys 

and holds securities. It is not in the best interest of a IRA owner to pay a 1% a year on a security 
7

that will likely be held until retirement; it is much less expensive to pay a single commission 

when the security is purchased.

So small IRA accounts would be entirely cut off from personal investment assistance. 

This could have devastating effects, since it is advisors who encourage individuals to save, 

explain how IRAs work, explain how to open and maintain an IRA, explain investment 

diversification, and encourage individuals to stay in the market during down times and avoid the 

urge to sell low. In 2011, Oliver Wyman performed an extensive study of 40% of the IRA 

market, measuring the effect of the 2010 DOL proposal, which would have had the exact same 

effect as the 2015 DOL proposal. Oliver Wyman found that:

 Over 7 million IRAs could lose access to an investment professional (just within the 

study sample, which, as noted, was approximately 40% of the IRA market) because the 

brokerage model, which serves 98% of IRAs under $25,000, would become unworkable 

with respect to IRAs.

 As many as 360,000 fewer IRAs could be opened every year.

Lessons from the United Kingdom. The defenders of the DOL proposal maintain that 

the industry would never walk away from servicing small accounts because there is too much 

money to be made. The response is that somehow the industry will figure this out. That is a 

frightening basis on which to risk the retirement security of low and middle-income individuals: 

“if the brokerage model becomes illegal, industry will figure out some other way to service small 

accounts – we don’t know what it is, but they will figure it out.” 

That is effectively what the regulators in the U.K. said before new rules took effect as of 

January 1, 2013 that have an effect almost identical to the effect of DOL’s prohibited transaction 

rules – making payments from mutual funds illegal. Instead, advisors ceased servicing small 

accounts in droves, as shown below. Some of these practices were implemented before the U.K. 

rule went into effect but clearly in anticipation of the rule, as recognized by a study 

commissioned by the U.K. regulator itself. 

 U.K.’s “big four” banks (an important source of investment advice in the U.K.)

o HSBC: provided investment advice only for customers with at least $80,000 in 

total assets or $160,000 of annual income.

o Lloyds: provided face-to-face investment advice only for customers with at least 

$160,000 in assets.

o Royal Bank of Scotland: charged $800 to set up a financial plan, and made 

changes to gear investment advice services to high net-worth clients.

o Barclays: provides investment advice only for customers with at least $800,000 

in assets.

These banks previously had entire business arms or strategies providing 

investment advice to investors with less assets, but just prior to the U.K.’s 

implementation of its new rule, HSBC, Lloyds, and Barclays completely pulled 

out of offering investment advice to such investors, and, as noted, Royal Bank of 

Scotland overhauled its offerings to target high net-worth clients. For example, 
8

Barclays closed Barclays Financial Planning, leaving only Barclays Wealth to 

offer financial advice to individuals with at least $800,000 in assets. 

o Examples of other actions taken.

 Aviva: ceased offering face-to-face investment advice.

 AXA: ceased offering face-to-face investment advice.

 Advisor firm AWD Chase de Vere: stopped accepting clients with 

$80,000 or less in assets.

 Advisor firm Towry: stopped accepting clients with less than $160,000 

in assets.

 Millions of small investors will be told in the fall of 2016 that they will no longer be 

permitted to talk to their advisor. The Oliver Wyman study lines up exactly with the 

experience in the United Kingdom and leaves us with a clear picture of the future under 

the DOL proposal. Based on DOL’s time line, the applicability date for the new rules will 

be some time around January 1, 2017 or slightly earlier. That means that in the fall of 

2016 financial institutions will need to deliver the message to millions of small investors 

that they will no longer be permitted to consult with their advisor for assistance. 

Meaningful assistance regarding rollover and distribution options would be 

prohibited. Under the DOL proposal, financial institutions would be prohibited from providing 

any specific assistance to individuals seeking help with the rollover and distribution process. 

This is the case in large part because any financial institution providing IRA services would have 

a conflict of interest with respect to advice regarding the rollover decision, thus creating a 

prohibited transaction. Most read the BIC exemption in the re-proposal as not covering this type 

of assistance, thus rendering the assistance categorically prohibited. Others read the BIC

exemption as technically applicable to this assistance, but effectively unavailable because of the 

exemption’s unworkable conditions. Either interpretation denies assistance to many in need of 

help in navigating the retirement savings options that exist after termination of employment. 

Among many unfortunate consequences, this would cause a drastic curtailment of call center, 

brokerage, and other assistance to those terminating employment, leading to greatly increased 

leakage of assets from the retirement system. 

A study conducted by Quantria Strategies LLC found that this could increase annual 

cash-outs of retirement savings for employees terminating employment by $20 billion to $32 

billion. These withdrawals could reduce the accumulated retirement savings of affected 

employees by 20% to 40%. 

Elimination of the ability of financial professionals to continue to provide 

meaningful investment education. The DOL proposal would significantly restrict the type of 

investment education that can be provided without triggering fiduciary status and the prohibited 

transaction rules. Under current law, education includes (1) guidance on the extent to which an 

individual should invest in different asset classes (such as large and small cap equity funds, and 

long and short-term bond funds) based on her age and other factors, and (2) examples of 

investments that fit within such asset classes. This definition of education has worked very well 

for nearly 20 years, ensuring that a basic level of needed assistance was widely available to 

retirement investors often with no cost; moreover, this definition was explicitly preserved under 

DOL’s 2010 proposal. Under the 2015 proposal, providing examples of investments that fit 
9

within asset classes would be fiduciary advice, not education. Thus, education would be limited 

to hypothetical and abstract conversations about investment theory that will simply be of little 

use to most retirement savers. As a result, we will have less informed plan participants who will 

be less able to put investment education to practical use and will be much less able to make 

informed decisions about investing their 401(k) account assets. 

Prohibition on promoting your own products, services, or yourself. With respect to 

individuals and small businesses, there is no seller’s exception from the fiduciary definition, 

unlike the 2010 DOL proposal. So individualized marketing to individuals and small businesses 

would be treated as fiduciary advice. DOL’s rationale for this is the following: “Most retail 

investors and many small plan sponsors are not financial experts, are unaware of the magnitude 

and impact of conflicts of interest, and are unable effectively to assess the quality of the advice 

they receive.” This position is directly contrary to the structure of ERISA and to DOL 

enforcement positions which place a fiduciary duty on small employers to make prudent 

fiduciary decisions. It is also cutting off marketing to individuals. The DOL’s view seems to be 

that individuals are unable to process marketing. But if individuals are unable to process 

marketing, how are they expected to make decisions?

 Effect of absence of seller’s exception. Let’s translate the lack of a seller’s exception 

into real terms with a few examples. One could argue that these results were not 

intended, but after a four and a half year debate about the need for a seller’s exception, 

and the nature of any such exception, concern levels are high.

o Prohibition on promoting a company’s own products or services. A company 

should be permitted to market its own products and services if it is made 

completely clear that the company is not providing advice but is selling a product 

or a service. Unfortunately, such promotion is prohibited with respect to 

individuals and small plans. Almost any discussion of a company’s own products 

or services with any individual or small business plan is a fiduciary discussion. 

The result is that companies would be prohibited from, for example, promoting 

their own services, such as rollover services or managed account services. 

o Interviews to be hired. Assume that a broker is interviewing with a prospective 

customer and asking that she be hired to help with the customer’s IRA. She talks 

about her firm and her hard work and her dedication to her customers. She does 

not make any investment recommendations. Under the proposal, the broker is 

acting as a fiduciary. In fact, the individual would actually be committing a 

prohibited transaction by recommending that she be chosen. Obviously, that is an 

absurd result, but the fact that this result is inherent in the structure of the 

proposal says a lot about how the proposal is structured far too broadly. 

o How do we know the difference between the absurd results that are not 

intended and the very strange results that may be intended? It is not enough 

to say that the above examples were not intended and cannot be the law. There is 

no hint in the proposal regarding what promotion by a financial services provider 

is permissible and what promotion is prohibited, leaving all of us to make 

guesses. Unfortunately, this lack of clarity is built into the structure of the 

proposal. 
10

ADDITIONAL ANALYSIS AND CONCERNS

The BIC exemption is unusable. Initially, there was hope that the BIC exemption would 

address many of the concerns that had been raised with respect to the original proposal. For 

many reasons, however, as noted above, the BIC exemption is unusable. For example:

 The BIC exemption does not even apply to advice provided to small businesses.

With rare exceptions, small business 401(k) plans permit employees to direct the 

investment of their own account. The BIC exemption does not apply to advice provided 

with respect to any such plan.

 The BIC exemption only applies if a contract is entered into before discussions 

begin. So an individual who wants to interview different advisors, the individual would 

have to enter into contracts with all those advisors before talking to them, which simply 

would not happen. 

 The BIC exemption only applies to individual advisors who sign a contract. So if an 

individual advisor is on vacation or leaves her employer, a new contract would be 

needed. 

 The BIC exemption requires disclosure of an unimaginable amount of detailed 

information. The advisor’s company must maintain a webpage with detailed 

information – updated at least quarterly -- about all direct and indirect compensation 

payable to the adviser, his company, and all company affiliates with respect to every 

single asset purchased, sold, or held by a retirement customer during the last 365 days 

(excluding only certain assets not commonly purchased). In addition, the webpage must 

include the same information about all assets that a retirement customer could possibly

purchase (subject to the same exclusion). It is hard to imagine that almost anyone 

would be able to process this staggering amount of data, which would be extremely 

costly to provide.

 Inconsistent with existing DOL rules. Every year, the advisor must provide 

information to the customer about that year’s transactions, including the total dollar 

amount of all indirect compensation received by the adviser and his company during the 

year attributable to the customer. We understand that systems do not exist that could 

produce this data. Also, this data is very different from existing DOL requirements about 

disclosing indirect compensation. 

 Predictions of future investment performance required. Before a recommended 

purchase of an asset is made, the advisor must provide a chart to the customer with the 

“Total Cost” of the asset over 1, 5, and 10 year periods, as a dollar amount, which 

requires the advisor to make assumptions about future investment performance. 

.

There is no way to comply with the applicability date. The proposal provides eight 

months to analyze and understand lengthy final regulations and exemptions that we have not yet 

seen, make business decisions that affect the entire retirement business, restructure that business, 

revise compensation packages and structures for advisors, renegotiate fee arrangements, design 

and implement company policies and procedures, create and modify systems to produce an 

unprecedented amount of new data, draft contracts for IRA owners across the country, and enter 
11

into contracts with tens of millions of existing customers. That will take a minimum of two 

years; eight months is simply not realistic.

 Feasibility of entering into contracts with all existing customers. A financial 

institution has no way to compel existing customers who are not actively using their 

services to enter into any contract. So not only is the applicability date unrealistic, the 

entire contract requirement is problematic as a transition matter. 

 Transition rule inadequate. The proposed transition rule protects assets purchased by 

the applicability date but does not protect (1) assets purchased after the applicability date 

pursuant to advice given before the applicability date, or (2) advice provided after the 

applicability date that was paid for before the applicability date. 

None of the above issues, which have been raised for four and a half years, received 

the attention they deserved at OMB. OMB’s 50-day review of the re-proposal was startlingly 

brief: 

 The review period was almost a month shorter than the next shortest review period for 

any significant retirement regulatory proposal in the last 10 years. 

 It was less than half the average review period of other significant retirement regulatory 

proposals in the last 10 years (which was 109 days).

 Equally startling is that the review period after OMB received significant public input 

was actually just a few days. For example, a critical meeting to discuss new information 

was held on April 9, 2015, and the DOL proposal was issued on April 14, 2015, a mere 

five days later. 

Insurer promotion of its own health, life, and disability products. The proposal would 

convert the promotion by an insurer (or its agent) of the insurer’s own group health,2life, and 

disability insurance products to small businesses (or their fiduciary, such as a broker) or 

employees (of employers of any size) into fiduciary acts even in circumstances where no plan 

assets are held in trust. In other words, an insurer would be treated as a fiduciary with respect to 

certain welfare benefit plans simply by reason of promoting its own products. 

If the promotion of these insurance products to small businesses (or their 

broker/fiduciary) or employees does become a fiduciary act, (1) the insurer would be vulnerable 

to a lawsuit simply for selling its own product without sufficiently considering the advantages of 

competitors’ products, and (2) it is unclear whether a prohibited transaction exemption would be 

available to permit the continued sale by an insurer of its own insurance products to small 

businesses.

This result might seem counterintuitive, especially because DOL did not, in the preamble 

to the proposal, address this issue or provide any analysis of the economic effects of this aspect 

 

2 All references herein to health insurance also include dental, vision, and other similar forms of health-related 

insurance coverage.
12

of the proposal. Nonetheless, DOL’s proposal applies to the sale of common employment-based 

insurance. There are several steps in the analysis of this issue. 

 The ERISA definition of “fiduciary” applies by its terms to both retirement plans 

and welfare benefit plans. Under ERISA, the term “fiduciary” applies by its terms to all 

types of plans, including both retirement plans and welfare plans. Moreover, the DOL 

proposal explicitly defines a “plan” covered by the fiduciary proposal as including both 

retirement plans and welfare benefit plans. See § 2510.3-21(f)(2)(i).

 The DOL proposal applies to any “recommendation as to the advisability of 

acquiring . . . securities or other property.” Under the proposal and generally, it is 

clear that insurance contracts are “property.” For example, the DOL proposal uses the 

term “Asset” to refer to a specific subset of property both covered by the new definition 

and eligible for an exemption. The term “Asset” is defined to include insurance contracts. 

See Section VIII(c) of the Proposed Best Interest Contract Exemption. 

 The DOL proposal only applies to advice regarding the property of a plan or IRA; 

this requirement is satisfied too. Under longstanding DOL rules, if employees 

contribute toward the cost of benefits, such as health, life, or disability insurance, the 

employee contributions are considered property of a welfare benefit plan, even if the 

contributions are not held in trust. See 29 C.F.R. § 2510.3-102; DOL Advisory Opinion 

96-12A. Thus, in every case where employees contribute to the cost of a plan, advice 

regarding the insurance products is advice regarding the property of a plan. 

 The advice is rendered for a fee. Under the definition of fiduciary investment advice, 

the advice must be rendered for a fee or other compensation, direct or indirect. The DOL 

has long taken the position that this does not require a separate fee for the advice; on the 

contrary, it is sufficient for the advisor to receive compensation in connection with the 

recommended transaction, as clearly occurs when an insurer receives premiums for 

health, life, or disability insurance. If this were not the rule, financial institutions would, 

for example, be able to give free advice to purchase their own proprietary investment 

products and thus avoid fiduciary status. 

 The DOL proposal specifically treats individualized marketing to small plans and 

individuals as fiduciary advice, not as marketing. Under the proposal, individualized 

marketing to large plans can be selling, not advising; individualized marketing to small 

plans and individuals cannot be selling, but rather is treated as investment advice. See § 

2510.3-21(b)(1). DOL explains this rule in the preamble to the proposal: “in this retail 

market [for small plans and individuals], a seller’s carve-out would run the risk of 

creating a loophole that would result in the rule failing to improve consumer protections. . 

. .” It is this dramatic change in position, from both current law and the 2010 DOL 

proposal, that causes this issue to arise. 

Let’s put the above points together in the context of a simple example. An insurer markets 

its group-term life insurance product to employees of any size employer in a situation where 

employees are required to contribute toward the cost of the plan. The insurer, as expected, 

promotes the virtues of its product, as compared to its competitors’ products. Under the DOL 

proposal, this promotion is fiduciary advice because:

 Individualized marketing to an employee is advice under the proposal.
13

 The advice is for a fee, i.e., the premium that would be paid for the insurance.

 The advice relates to the acquisition of property, i.e., the insurance contract.

 The advice relates to the use of plan property, i.e., the employee contributions. 

 The advice is specifically directed to the employee for her consideration. 

 The advice relates to an ERISA plan, i.e., a group-term life insurance plan. 

DOL informally indicates that the above result was not intended. But the above result 

very clearly flows from the actual language of the proposal and is further evidence that the full 

adverse ramifications of the proposal are not fully understood. 

THERE IS A VERY STRAIGHTFORWARD SOLUTION

After 4 1⁄2 years and massive input, the DOL proposal got much worse between 2010 

and 2015.

 The 2010 proposal preserved investment education; the 2015 proposal significantly 

restricted such education.

 The 2010 proposal permitted financial institutions to do direct marketing of their products 

to individuals and small businesses; the 2015 proposal does not.

 The 2010 proposal permitted financial institutions to provide meaningful distribution and 

rollover assistance; the 2015 proposal does not.

 The 2010 proposal did not provide any prohibited transaction relief; the 2015 proposal 

provides unusable relief.

 There are very small improvements in the 2015 proposal, mostly addressing glaring 

glitches in the 2010 proposal, such as clarifying that ads on television are not fiduciary 

advice.

We need legislation establishing a best interest standard with workable rules that 

preserve access to investment assistance for low and middle-income individuals and small 

businesses. The industry is completely fine with a best interest standard and is ready to support 

legislation that would establish a best interest standard with workable rules that preserve 

consumer choice and access to information.

Bipartisan legislation is the right answer. The DOL proposal can fundamentally alter 

the private retirement savings system, and there are critically important disagreements about 

what those effects will be on the retirement security of low and middle-income individuals across 

the country. Fundamental policy decisions like this are the province of Congress, not the 

agencies charged with interpreting the law. 
Testimony

of

 

John F. “Jack” Haley, Jr.

Executive Vice President, Fidelity Investments

Before a hearing of the

House Committee on Education and the Workforce

Subcommittee on Health, Education, Labor, and Pensions

June 17, 2015
2

Chairman Roe, Ranking Member Polis, and members of the subcommittee, good morning, and thank 

you for this opportunity to testify.

My name is Jack Haley and I am an Executive Vice President at Fidelity Investments. I oversee a team of 

investment professionals dedicated to helping our employer clients and their workers have access to a 

wide array of high quality investment products and services to meet their investing needs. 

At Fidelity, we have the privilege of helping more than 25 million people save for their financial goals 

and serving more than 14,000 workplace clients, close to 8,000 of which are small businesses1 who offer 

retirement savings benefits to their workers. 

From our roots as a small mutual fund company, Fidelity has grown into a diversified financial services 

leader. We are a premier asset manager; the nation’s retirement leader in 401(k)s and IRAs; an award 

winning discount broker; and we provide clearing, custody, and practice management solutions to 

thousands of leading financial services firms as they help people and institutions invest for the future. 

We offer the nation’s largest mutual fund supermarket. With close to 700 fund families on our platform, 

we are at the leading edge of ensuring customers have the choice they desire when making investment 

decisions. For example, it may surprise you to hear that Fidelity is actually the largest distributor of 

PIMCO mutual funds. The team I lead sits at the nexus of investment products and our customers’ 

saving vehicles, such as 401(k)s and IRAs. 

Fidelity takes very seriously the responsibility of helping employers set up and offer robust and 

competitive retirement savings plans. I appreciate the opportunity to share with you our experiences 

helping small businesses provide retirement savings opportunities for their workers and to voice our 

 

1

Plans under 100 employees and under $100million in assets
3

concerns about the impacts of the Department of Labor’s proposed rule on our ability to continue 

helping small businesses and their workers. 

First, however, I want to answer a call from the Department of Labor, by stating directly, up front: 

Fidelity acts in the best interest of its clients and investors and we support a best interest fiduciary 

standard. We are proud of the services, products, and choices we provide to help customers achieve a 

secure retirement. Our data clearly show that access to financial guidance helps customers achieve 

better retirement outcomes. We fear the Department of Labor’s proposed regulation will severely 

restrict our ability to continue providing this assistance to small businesses and workers in 401(k) plans. 

We support a best interest fiduciary standard, but the details matter. A best interest standard must 

allow individual retirement savers and businesses offering retirement plans to have choice and access to 

the products and services that help them achieve a secure retirement. While the framework of the 

Department’s proposed rule would theoretically preserve different service models when acting in the 

customer’s best interest, the proposed Best Interest Contract (BIC) Exemption contains so many 

problematic conditions that the rule is unworkable as drafted and will have the effect of banning many 

well-established service models. Under the DOL proposal, access to affordable financial help will 

effectively be prohibited – even when it is in the investor’s best interest. Small businesses and lower- and 

middle-income investors will be harmed the most. 

We believe there is a balanced approach where savers can be protected by a best interest standard and

continue to have access and choice in their retirement products, services, and providers. We look 

forward to continuing to work with Members of Congress and the Administration to ensure this balance 

is reached.

I. Impact on small businesses
4

Small business remains the lifeblood of our economy. According to the Small Business Administration, 

99 percent of U.S. employers are small businesses. These companies produce 63 percent of all new 

private-sector jobs and include everything from your family doctor and local construction companies to 

entrepreneurs who may be the large employers of the future. Ten years ago, Facebook had only 15 

employees. Today, it has grown to more than 9,000.

At Fidelity, small businesses make up close to 60 percent of our workplace clients for whom we help 

create, manage, and maintain retirement savings plans. These hardworking entrepreneurs and 

businesspeople bring significant expertise and passion to their work. We see a very strong desire from 

these employers to offer competitive, high-quality retirement savings benefits to attract and keep a 

highly-skilled workforce. Not surprisingly, with all they have to do to manage their businesses, there is 

little time, expertise, or desire to manage their retirement savings plans. 

That is why small businesses turn to us. Every day we provide a range of critical services to ensure these 

employers and their workers have access to retirement savings plans. We help these companies 

understand and select the right savings vehicle -- whether it is a 401(k), SEP, or IRA -- and provide all of 

the critical functions to keep a plan running smoothly including:

 trustee and custodial support;

 recordkeeping;

 compliance testing and reporting;

 assist in selection of investment offerings;

 ongoing monitoring of investments; and,

 perhaps most importantly, participant education and guidance services.

Fidelity provides comprehensive, end-to-end investment services for new and existing clients. From the 

beginning of the relationship, a prospective client is given key insights for developing and designing an 
5

optimal plan line up for its employees. This includes a framework on how to design a plan for different 

levels of employee engagement, the number and types of investments to include, and how these should 

be structured in the plan investment lineup. For example, best practices suggest Target Date funds as 

the default option and starting place for most investors.

Next, Fidelity’s research team provides a curated list of funds (“Funds for Discussion”), which helps the 

employer narrow from hundreds of funds available to a short list from which to select. This scalable 

process allows small plan sponsors access to quality information otherwise only affordable to larger 

employers.

Once an employer becomes a client, they continue to have access to Fidelity’s research, investment 

consulting, thought leadership and best practices. For example, Fidelity produces over 14,000 clientspecific Investment Reviews per year. 

These reviews ensure the employer has the best high-quality investment products to meet their 

investment policy statement requirements and that their employees are well positioned to invest for 

their futures. If changes are required, Fidelity would provide the information needed to help the 

employer meet their fiduciary duties.

Every year, Fidelity receives an additional 1,500 new requests for help from small businesses who want 

to offer a plan. 

Additionally, on a day-to-day basis, Fidelity offers best in class operational support, including 

contribution calculations, participant notifications, plan testing and reporting, as well as assistance with 

plan amendments. Employees receive employee education and financial planning advice through a 

variety of channels including Net Benefits, employee meetings, digital and mobile access, and one-onone assistance with guidance representatives skilled in the client’s specific plan design. 
6

Unfortunately, the Department of Labor’s proposal would put a stop to these offerings. The Labor 

proposal would classify the assistance we provide to small businesses (which today is education) as 

fiduciary investment advice. 

Curiously, the rule’s BIC Exemption, which is intended to preserve different service models, does not 

apply to assistance provided to small business plans (defined as plans with less than 100 employees or

less than $100 million in assets.) In other words, the proposed DOL rule specifically prohibits service 

providers from assisting small businesses. The result would have a devastating impact on retirement 

coverage and savings for millions of workers employed by small businesses across the country. This, at 

a time when policymakers on both sides of the aisle are looking for opportunities to provide American 

workers with access to retirement savings plans.

To reiterate, we support a best interest fiduciary standard. But without exemptive relief from ERISA’s 

strict rules, Fidelity would be prohibited from providing these critical services to our small business 

clients – even when the help we provide them is in their best interest. 

II. Why guidance matters

Just as important as the services we provide to small businesses is the critical education and guidance 

we provide to their employees every day. Let me tell you a personal story which underscores the 

universal need for this kind of education.

I began my career here in Washington as a research analyst at the Government Finance Research Center

where I had a retirement account with TIAA-CREF. At 26, I accepted a job at Fidelity, and what did I do 

with my retirement savings? I did the worst thing someone could do – I cashed out. 

I might not have made that decision had I talked to a financial professional who would have explained 

the negative consequences of cashing out – such as taxes, penalties, and a smaller retirement nest egg. 
7

At Fidelity, standing up for the best interests of our customers means more than just meeting a legal 

standard. It includes encouraging workers to keep their savings in-plan when we know their investment 

options are better and providing a human experience – from ushering new workers into our community 

of retirement savers to helping a new widow decide her next steps in protecting her own future. 

Some have suggested that technological developments have negated the need for the personalized 

support we provide to employers and their workers. We wholly support innovation, but I can assure 

you, a robo-advisor will not have a discussion with you about the perils of cashing out. And our 

representatives know acting in a client’s best interest means being able to help workers plan for the 

long-term when they are facing important decisions today. 

Today, the average worker has more than 11 employers over the course of his or her career. With job 

mobility on the rise, education and guidance at the time of job transitions is more critical than ever to 

protect the retirement security of these workers. The importance of this education is underscored by a 

recent study from the Boston College Center for Retirement Research, which found that individuals 

prematurely withdraw nearly $200 billion annually from their retirement savings2. Without access to 

critical assistance at the time of a career transition, this number would be even higher.

Under the proposed rule, many of these ordinary conversations could now be considered personalized 

investment advice, even if the conversation is merely educational and there is no discussion of 

investments or advice given. A best interest standard must ensure job changers are not disadvantaged 

at these critical transition periods in their lives.

III. Contract requirement

 

2

The Impact of Leakages from 401(k)s and IRAs, BC Center for Retirement Research, February 2015
8

Our assistance to small businesses and their employees also includes basic everyday assistance to 

ensure workers are on the right path to a secure retirement. Today, we are able to help these workers 

by discussing potential product and service offerings with them. The proposed DOL exemption would 

require a signed contract before a conversation could even occur. And since our customers speak to 

different phone reps each time they call, the rule would require each of our customers to have a signed 

contract with each of our phone reps in order to get answers to these basic questions. For Fidelity, 

requiring our nearly 25 million customers to sign contracts before we can continue to service them 

would be a significant impediment to ongoing engagement with them, potentially suppressing their 

savings levels and retirement security.

IV. Unworkable disclosures

Not only are the logistics of entering into a contract with all plan participants and IRA holders 

unworkable, but the proposal is also unworkable because it requires an unreasonable amount of 

confusing disclosures. The proposal requires three separate types of disclosures: (1) a point of sale 

disclosure of the total cost of each recommended investment projected over one-, five-, and ten-year 

periods; (2) an annual disclosure of the compensation payable to the advisor in dollar amounts for the 

preceding year; and (3) maintenance of a publicly available website showing information about 

compensation payable to the advisor with respect to all assets that can be purchased by a plan, 

participant, or IRA investor. 

These disclosure requirements, some of which conflict with existing FINRA requirements, are completely 

unworkable, would confuse workers, and do nothing to help them better understand potential conflicts.

We believe a single disclosure of material conflicts of the advisor, including compensation payable to the 

advisor in connection with the recommended transactions, will best support the purpose of a best 

interest standard.
9

The contract and disclosure requirements are clearly not in a workers’ best interest.

Closing

These are just a few of the examples of the critical services we provide to small businesses and their 

employees and the real concerns we have with parts of the proposal which would harm the very people 

the rule intends to protect. There is a much longer list of additional issues which will be outlined in more 

detail next month when we file official comments with the Department on its proposal.

Fidelity feels strongly that a balanced approach which provides investors with fiduciary best interest 

protections but retains existing service models critical to ensuring retirement preparedness is 

achievable. This is the commitment the Administration gave earlier this year when the President 

announced his support for the proposal. Unfortunately, the DOL proposal does not deliver on this 

commitment. We look forward to working with you in the coming months to ensure that a best interest 

standard preserves financial assistance and choice for individual retirement savers and businesses 

offering retirement plans. 

Let me close by stating unequivocally that we support a best interest fiduciary standard but it must be 

crafted in a way that allows workers to the choice and access to the services they need and desire.
Testimony of

Dean Harman

Founder and Managing Director

Harman Wealth Management, Inc.

and

Member, Board of Directors

Financial Services Institute

Before the

United States House of Representatives Committee on Education & the Workforce

Subcommittee on Health, Employment, Labor, and Pensions

On

“Restricting Access to Financial Advice:

Evaluating the Costs and Consequences for Working Families and Retirees”

June 17, 2015
Testimony of Dean Harman

June 17, 2015

Page 2 of 26

Introduction

Good morning, Mr. Chairman, Ranking Member Polis, and members of the Subcommittee. 

I am Dean Harman, Founder and Managing Director of Harman Wealth Management in The 

Woodlands, Texas. I am a CERTIFIED FINANCIAL PLANNERTM with over 20 years of experience in the 

financial services industry. I am here representing the Financial Services Institute (FSI). FSI is the 

only organization advocating solely on behalf of independent financial advisors1 and 

independent financial services firms. Since 2004, through advocacy, education and public 

awareness, FSI has successfully promoted a more responsible regulatory environment for more 

than 37,000 independent financial advisors, and more than 100 independent financial services 

firms who represent upwards of 160,000 affiliated financial advisors. We effect change through 

involvement in FINRA governance as well as constructive engagement in the federal and state 

regulatory and legislative processes, working to create a healthier regulatory environment for our 

members so they can provide affordable, objective advice to hard-working Main Street 

Americans.

Independent financial advisors, such as me, are in the business of helping hard-working 

Americans achieve their financial goals. This entails helping our clients plan for a dignified

retirement, pay for their children’s education, support loved ones in old age, deal with healthcare 

issues, and the many other life situations that require financial resources. In my practice, 

approximately 60% of the accounts that I service are retirement accounts. Furthermore, 

approximately 90% of the accounts that I service are under a fee-based advisory model. The 

other 10% are accounts that I service under a commission-based model. These commission-based 

accounts belong to smaller investors, including the elderly and many young adults who are just 

starting their careers, who need the advice, products and services I can provide.

As our retirement system has moved towards a defined-contribution model and traditional 

pensions are becoming a thing of the past, it is critical that these lower net-worth investors be

able to obtain professional guidance as they prepare for retirement. It is because of this that I 

am here today. I want to ensure that any rule written by the Department of Labor (DOL), or any 

 

1 The term “financial advisor” is used to denote registered representatives of broker-dealers, investment adviser 

representatives of investment advisers, and persons who are dually registered in both capacities.
Testimony of Dean Harman

June 17, 2015

Page 3 of 26

other regulator in the retirement savings sphere, will make it easier, not harder for investors to 

receive high-quality, retirement services from a trusted financial advisor.

My testimony will touch on three main points. First, FSI and many independent financial 

advisors support a uniform fiduciary standard. Second, the current DOL proposal regarding the 

definition of the term “fiduciary” for purposes of the Employee Retirement Income Security Act of 

1974 (ERISA) is based on flawed assumptions that lead it to be too complex, too cumbersome, 

and too costly. Finally, because of these shortcomings, FSI and I believe that the DOL’s proposal 

will result in small- and mid-sized investors losing access to the retirement advice and products 

that they need to secure a high-quality of life in their retirement years.

DOL’s Proposed Rule Creates Vast, Sweeping Changes to the Retirement Savings Landscape

On April 20, 2015, the DOL published its proposed rule on conflicts of interest and the 

definition of the term fiduciary under ERISA. The DOL previously attempted to pass a similar

regulation in 2010. Because of concerns expressed by the industry and Congress, DOL withdrew 

its previous proposal on September 19, 2011. However, they promised to issue another 

proposal. To their credit, the DOL took its time and attempted to address the concerns with the 

2010 proposal raised by the industry and Congress. Unfortunately, while the proposal being 

discussed today is one that looks and functions very differently from the 2010 proposal, it

delivers virtually the same results – an unworkable, complex and costly rewrite of ERISA and IRS 

regulations that will harm retirement investors more than it helps them.

DOL’s proposal would institute a broad new definition of the term “fiduciary” for the 

purposes of ERISA. Under this new proposed definition, an individual who provides investment 

advice or recommendations to an employee benefit plan, plan fiduciary, plan participant or 

beneficiary, IRA, or IRA owner would be treated as a fiduciary in a wider array of advice 

relationships than under current requirements. Under this much more expansive definition, more 

advisors will be considered fiduciaries when providing services to retirement savers. This is an 

extremely important change because fiduciary status brings with it prohibitions and limitations on 

compensation and other arrangements that are essential to those who service retirement accounts.
Testimony of Dean Harman

June 17, 2015

Page 4 of 26

Under current laws and regulations that have been in place since 1975, a person who 

does not have discretionary authority or control with respect to the assets of a plan will not be 

treated as a fiduciary by virtue of providing investment advice unless:

1) Such person renders advice as to the value of securities or other property, or makes

recommendations as to the advisability of investing in, purchasing or selling securities 

or other property;

2) On a regular basis;

3) Pursuant to a mutual agreement, arrangement or understanding, with the plan or a 

plan fiduciary;

4) That the advice will serve as a primary basis for investment decisions with respect to 

plan assets; and

5) The advice will be individualized based on the particular needs of the plan.

The DOL proposal would eliminate this current five-part fiduciary test. In its place, the 

proposal would institute a vastly expanded fiduciary definition. Under this proposed rule, an 

advisor would be deemed a fiduciary if two different conditions are met.

First, the individual receives a direct or indirect fee for providing directly to a plan, plan 

fiduciary, plan participant or beneficiary, IRA, or IRA owner any one of the following:

 A recommendation as to the advisability of a plan investment holding or transaction, 

including a recommendation to take a distribution or as to the investment of a rollover 

of that distribution;

 A recommendation as to the management of securities or other property;

 A verbal or written appraisal, fairness opinion, or similar statement concerning the 

value of securities or other property in connection with a specific transaction; or

 A recommendation of a person to provide, for a fee, any of the above three services.

Second, the individual directly or indirectly represents or acknowledges that he/she is 

acting as a fiduciary, or he/she renders the advice pursuant to a written or verbal agreement,

arrangement, or understanding that the advice is either individualized or specifically directed to 

the recipient for consideration in making investment or management decisions with respect to plan 

or IRA securities or property.
Testimony of Dean Harman

June 17, 2015

Page 5 of 26

Not only does this new definition expand the activities that would render an individual a

fiduciary, but it also expands the universe of accounts that are covered by the regulation to 

include IRAs and other accounts such as HSAs that were previously not considered to be under 

ERISA’s umbrella. The proposal does provide eight narrow carve-outs to the above definition. 

Unfortunately, these carve-outs tend to be so narrowly tailored that they are of little to no help to 

most financial advisors.

Because of the expansive definition and the narrow nature of the carve-outs, the vast 

majority of interactions that a financial advisor, whether registered with a broker-dealer or 

investment adviser firm, will have with plans, plan fiduciaries, plan participants or beneficiaries, 

IRAs, or IRA owners would fall under the new fiduciary definition.

As ERISA fiduciaries, financial advisors are prohibited from receiving variable 

compensation or commissions unless an exemption applies. Under the proposal, a fiduciary

advisor may still receive these types of compensation if the advisor’s activities fall under one of 

the Prohibited Transaction Exemptions (PTEs) like the newly proposed Best Interest Contract 

Exemption (BICE).

The DOL has stated its intention is for BICE be the primary method by which advisors and 

firms would be able to receive otherwise prohibited compensation for services provided in 

connection with the purchase, sale, or holding of an asset subject to the proposed fiduciary 

standard. BICE would require that both the financial advisor and the firm enter into a pre-advice, 

pre-point-of-sale contract with a potential investor. In this contract, the financial advisor and the 

firm would have to make various warranties and acknowledgements to consumers that amongst 

other things include: acknowledging their fiduciary status; agreeing to provide advice that is in 

the best interest of the investor; agreeing to not recommend assets when compensation for those 

assets would exceed “reasonable compensation;” and disclosing any conflicts of interest.2 

 

2 The full contract requirements are as follows: the advisor and the firm acknowledge that they are fiduciaries; the 

advisor and the firm agree to provide advice that is in the best interest of the investor and will not recommend an 

asset if the total compensation would exceed “reasonable” compensation for the total services provided; the advisor 

and the firm agree to not make misleading statements regarding the asset, fees, conflicts of interest, and any other 

matters related to investment decisions; the advisor and the firm warrant that they will comply with all applicable 

federal and state laws, the firm has adopted written policies and procedures to mitigate conflicts of interest, the firm 

has identified all potential conflicts of interest and has adopted measures to prevent the conflicts from impeding the 

advisor and the firm from providing advice that is in the best interest of the investor, and the firm and its affiliates (to 

the firm’s knowledge) do not engage in practices that encourage advisors to not provide advice that is in the best 

interest of the investor; any conflicts of interest have been identified and disclosed; the investor be advised of the 
Testimony of Dean Harman

June 17, 2015

Page 6 of 26

Furthermore, while the contract may call for arbitration of individual claims, it may not contain any 

provision disclaiming liability from a violation of any contractual term or any waiver or 

qualification of the investor’s ability to enter into a class action suit against the financial advisor or 

the firm for any violation of the contract’s terms.

Along with the contract briefly summarized above, BICE also contains various onerous 

disclosure, website, and recordkeeping requirements, as well as a list of approved investments 

that may be sold to retirement accounts. In a later section, I will dive further into these 

requirements and explain various troublesome aspects of BICE and its multitude of costly 

requirements.

I wish to emphasize that my concern, and the concern of FSI members, is not that DOL’s 

proposal would expand the universe of retirement advice interactions that would be held to a 

fiduciary standard of care. Both FSI and I believe that a carefully-crafted, uniform fiduciary 

standard of care would be beneficial for investors, so long as it preserves the business and fee 

models that make it possible for all Americans to receive affordable retirement and other 

financial advice. Instead, our concern lies with all of the additional requirements contained in the

proposal that would create serious disruptions to the retirement savings landscape and make the 

proposal unworkable for retirees, financial advisors, and financial institutions. These extra 

requirements will drive up costs and will make it more difficult for me, and countless other 

advisors, to provide retirement advice to the millions of Americans that have modest retirement 

savings accounts. Without access to these services, I fear that many Americans will delay investing 

for retirement, respond emotionally to fluctuations in the markets or cash out their retirement 

savings to satisfy short-term needs. Most especially, I fear for my own low net-worth clients who I 

could no longer service under the new requirements.

FSI Supports a Uniform Fiduciary Standard

Since 2009, FSI has publicly supported a carefully-crafted, uniform fiduciary standard of 

care applicable to all professionals providing personalized investment advice to retail clients. 

 

right to complete information regarding all fees associated with the asset; and there be a disclosure as to whether 

the firm offers proprietary products or receives indirect compensation, and directs the investor to a publicallyavailable website where the information can be viewed.
Testimony of Dean Harman

June 17, 2015

Page 7 of 26

While our industry is already held to high standards of care and there is a robust enforcement 

regime to ensure that we are working properly on behalf of our clients, there is a lack of 

uniformity with regards to the standard of care that different advisors must adhere to when 

advising clients. Because of this, FSI supports the creation of a uniform fiduciary standard of care 

that would be applicable to all advisors and all asset classes.

Advisors all over this country have worked hard to grow their businesses and help their 

clients. We are in a business that is built on a foundation of trust. Our clients trust us to help them 

reach their life goals and help them weather the difficult moments in their lives. We are in a 

service profession and we take immense pride in being entrusted to help our families, our friends, 

our neighbors, our colleagues, and other members of our communities. Having these people’s 

financial hopes and dreams placed in our hands also gives us a deep sense of responsibility. It is 

because of this pride and responsibility that we hold ourselves up to high standards and we 

would welcome further codifying our commitment to our clients through a uniform fiduciary 

standard of conduct. This uniform standard of conduct should consist of the following:

 A professional should act in the best interest of the customer;

 A professional should provide advice with skill, care, and diligence based upon 

information that is known, about the customer’s investment objectives, risk tolerance, 

financial situation, and other needs;3 and

 A professional should disclose material conflicts of interest, avoid them when possible, 

and obtain informed customer consent to act when such conflicts cannot be reasonably 

avoided.

The standard of care described above is designed to address the same investor protection 

goals that have motivated the DOL to release the proposal that the Subcommittee is analyzing 

today and it goes a step further by making this the standard for advice regarding all investment 

products, not just retirement savings. There are two other key differences between this uniform 

fiduciary standard of care and the DOL proposal – (1) this uniform fiduciary standard of care 

would not create the same disruption to the current retirement savings marketplace, and (2) it 

 

3 FSI believes that a financial advisor should use reasonable diligence to obtain the necessary information to provide 

advice.
Testimony of Dean Harman

June 17, 2015

Page 8 of 26

would give advisors and firms the necessary flexibility to make the proper decisions regarding 

what investments and payment models are in the best interest of each individual client.

What I have outlined is truly a principles-based approach to investor protection, whereas 

the DOL proposal is one that is overly-prescriptive in its approach. Advisors need the flexibility 

to treat each client as an individual and tailor investment strategies that meet a client’s specific 

circumstances. Flexibility in investment strategies and compensation structures allows me to 

develop unique investment plans for each and every one my clients. Should the DOL proposal be 

implemented, as currently proposed, I fear that much of this flexibility will be gone and I will be 

unable to provide retirement advice to all of my clients, especially those with lower balances in 

their retirement accounts.

The DOL has premised its proposal on flawed assumptions made about financial advisors, 

the financial services industry, and retirement savings products

In crafting its proposal, the DOL has made several flawed assumptions regarding our 

industry and the retirement savings products commonly used by investors. These assumptions 

cause the proposal to include additional requirements that I believe will prove to be too complex, 

too cumbersome and costly. These extra requirements will drive up costs and will make it more 

difficult for me, and countless other advisors, to provide retirement advice to the millions of 

Americans that have modest retirement savings accounts. I want to highlight three of the most 

troublesome misunderstandings that have colored the DOL proposal.

First, the proposal is premised on a belief that retirement investors are unprotected by the 

current regulatory system. This is simply not true. My business is heavily regulated by the 

Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), 

and 50 state securities regulators. Furthermore, my broker-dealer also routinely monitors my 

activities and examines my business to ensure that I am in compliance with the many rules and 

regulations that I am subject to as a financial advisor. Adding new levels of regulatory 

requirements and legal burdens on to this structure, as this proposal does, will not further protect 

investors. Instead, it will drive up compliance costs on financial advisors and, ultimately, drive up 

the costs of retirement advice for investors.
Testimony of Dean Harman

June 17, 2015

Page 9 of 26

Second, the DOL has stated that “conflicted advice” causes consumers to lose 

approximately $17 billion on an annual basis. In reaching this conclusion, the DOL relies on an 

unreliable figure from a report published by the White House Council of Economic Advisers.4 The 

figure is an estimate that is not directly found in any academic research and is an estimate

calculated by the authors of the report. In arriving at this estimate, the authors of the report 

make largely unsupported generalizations and extrapolations. Their calculation is a simplistic one 

where they take the total value of load mutual funds in IRAs and the total value of annuities in 

IRAs, and multiplying that number by their estimated losses to consumers of 1% per year due to 

“conflicted advice.”

This approach is flawed in the following ways: (1) academic literature suggests a more 

nuanced and complex set of findings than the simplistic claim of 1% in annual losses; (2) the 

academic studies that the report’s authors rely upon only look at the first year of a fund’s 

performance, when costs are highest; and (3) the report ignores the value to consumers added by 

brokers in the form of customer service, broader diversification, risk reduction, and other 

intangible benefits. Furthermore, the figure does not provide a true cost-benefit analysis because 

it only looks at the supposed costs to consumers of “conflicted advice.” The study’s authors did not 

take into account what would happen to the retirement savings marketplace if the DOL proposal 

is put into place. Therefore, the DOL is unable to quantify what positive and/or negative effects 

will result from the rule proposal.5 By using such an unreliable figure to justify the need for the 

proposal, the DOL is doing a disservice to investors, especially those of modest means who will 

benefit from professional advice when planning for retirement.

Third, the DOL proposal assumes that financial advisors direct their clients to the highest 

priced investment options to line their pockets to the detriment of their clients. As a financial 

advisor, I can tell you that isn’t how my practice, or those of my fellow financial advisors, 

operates. But you don’t have to take my word for it. Investment Company Institute research 

demonstrates that the opposite is true. Financial advisors tend to lead investors to funds whose 

 

4 Council of Economic Advisers, The Effects of Conflicted Investment Advice on Retirement Savings (February 2015), 

available at https://www.whitehouse.gov/sites/default/files/docs/cea_coi_report_final.pdf.

5 For a more detailed analysis of the shortcomings Council of Economic Advisors’ report, See, Berkowitz, Jeremy, et. 

al., Review of the White House Report Titled “The Effects of Conflicted Investment Advice on Retirement Savings,” NERA 

Economic Consulting (March 2015), available at

http://www.nera.com/content/dam/nera/publications/2015/PUB_WH_Report_Conflicted_Advice_Retirement_Savin

gs_0315.pdf.
Testimony of Dean Harman

June 17, 2015

Page 10 of 26

expense ratios are far lower than the average expense ratio for all funds.6 The following chart 

demonstrates the point:

Unfortunately, these and other flawed assumptions cause the DOL to offer a proposal that is 

poorly designed for investors and unduly burdensome for financial advisors and financial 

institutions. The result is that the proposal will drive up costs putting retirement advice out of the 

reach of many investors.

The DOL Proposal Will Inhibit Financial Advisors’ Ability to Provide High-Quality, 

Individualized Retirement Advice

When looking at implementing any potential final rule in this space, it is imperative that 

the DOL ensure that all investors maintain affordable access to the significant benefits that 

financial advisors provide. Investors working with a financial advisor to save money for 

retirement are better positioned to reach their goals than investors that choose to forge their own 

investment path. This is because advisors are able to focus investors on their long term goals and 

help them navigate the many different and complex ways by which investors can save for both 

long- and short-term goals. This focus helps investors weather the ups and downs that accompany 

 

6 Letter from David Abbey and Brian Reid, Investment Company Institute, to Howard Shelanski, Administrator, Office 

of Information and Regulatory Affairs, Office of Management and Budget (April 7, 2015), available at

http://www.ici.org/pdf/15_ici_omb_data.pdf.
Testimony of Dean Harman

June 17, 2015

Page 11 of 26

our financial markets, thus preventing investors from chasing returns, buying high and selling low, 

and making rash emotional decisions during both bear and bull markets. Financial advisors also 

assist investors in resisting the temptation to cash out their retirement accounts to meet short-term 

needs.

There have been many studies conducted that demonstrate the positive impact of financial 

advisors working with investors, especially with regards to building retirement savings. Here is a 

small sampling of these studies:

 According to a 2012 study by the Investment Funds Institute of Canada7 and a 2010 

survey by the ING Retirement Research Institute,8 individuals who spent at least some time 

working with a financial advisor had saved, on average, more than twice the amount for 

retirement than those that had not worked with an advisor.

 An April 2014 study by Quantria Strategies found that retirement savings balances are 

33% higher for individuals who have access to financial advice; employees are less likely 

to take cash withdrawals out of their retirement savings if they discuss their distribution 

options with an advisor; and limiting access to this assistance could increase annual cash 

outs of retirement savings for employees leaving a job by $20-32 billion, thus reducing 

the accumulated retirement savings of affected employees by 20-40%.9

 A 2012 survey conducted by LIMRA found that investors working with an advisor are more 

likely to be saving for retirement at higher rates (defined as contributing more than 7% of 

their salary to a retirement plan) with 61% of investors who worked with an advisor 

saving at the higher rates compared to 36% of investors that were not working with an 

advisor.10

 

7 Cockerline, Jon, New Evidence on the Value of Financial Advice, The Investment Funds Institute of Canada, 2012, 

available at https://www.ific.ca/wp-content/uploads/2013/08/New-Evidence-on-the-Value-of-Financial-AdviceNovember-2012.pdf/1653/.

8 ING Retirement Research Institute, Working with an Advisor, Improved Retirement Savings, Financial Knowledge and 

Retirement Confidence!, 2010, p. 6, available at http://voyacdn.com/file_repository/5151/help_wanted_wp.pdf.

9 Quantria Strategies, Access to Call Centers and Broker Dealers and Their Effects on Retirement Savings, April 2014, 

available at http://quantria.com/DistributionStudy_Quantria_4-1-14_final_pm.pdf.

10 LIMRA, Advisors Positively Influence Consumers' Behavior and Sentiment Toward Preparing for Retirement, July 2012, 

available at

http://www.limra.com/Posts/PR/News_Releases/LIMRA__Advisors_Positively_Influence_Consumers__Behavior_and_

Sentiment_Toward_Preparing_for_Retirement.aspx.
Testimony of Dean Harman

June 17, 2015

Page 12 of 26

 A 2010 study by Prudential found that African Americans with a financial advisor were 

significantly more likely to participate in employer sponsored retirement plans, have a 

savings account, life insurance, long-term care insurance, annuities, and mutual funds. That 

same study also found that African Americans who worked with a financial advisor were 

more financially confident than those who did not.11

 A 2013 Morningstar study found that by working with a financial advisor, a retiree can 

be expected to generate 22.6% more certainty-equivalent12 income. This has the same 

impact on expected utility as an annual return increase of 1.59%, which represents a 

significant improvement in portfolio efficiency for a retiree.13

 A 2012 study conducted by the Investment Funds Institute of Canada found that 

households working with an advisor have substantially higher investible assets than nonadvised households, regardless of household income level, because advisors helped 

investors choose the right plans and asset mix to fit their individual circumstances, 

objectives, and risk tolerance.14

Unfortunately, the DOL appears to have been unaware of these positive effects or the 

importance of ensuring that all investors, regardless of their wealth, retain access to professional 

retirement advice.

I do not question the DOL’s intentions. Protecting investors is a laudable goal and one that 

FSI and I share, but no matter how well-intentioned the DOL is in this matter, their proposal has 

severely missed the mark and it will lead to millions of Americans losing access to retirement 

advice. FSI does not want to see this happen, which is why we have been involved in constructive 

dialogue with the DOL to try and improve their proposal so that it achieves their investor 

protection goals in a manner that is truly workable for all parties.

 

11 Prudential, The African American Financial Experience (2014), available at

http://www.prudential.com/media/managed/aa/AAStudy.pdf.

12 Certainty-equivalent is defined as a guaranteed return that an investor would accept, rather than taking a chance 

on a higher, but uncertain, return.

13 Blanchett, David and Kaplan, Paul, Alpha, Beta, and Now...Gamma, Morningstar Investment Management, August 

2013, p. 16, available at

http://corporate.morningstar.com/ib/documents/PublishedResearch/AlphaBetaandNowGamma.pdf.

14 The Investment Funds Institute of Canada, The Value of Advice Report, 2012, available at https://www.ific.ca/wpcontent/uploads/2013/02/IFIC-Value-of-Advice-Report-2012.pdf/1650/.
Testimony of Dean Harman

June 17, 2015

Page 13 of 26

The following are our biggest concerns with the proposal – the areas where we feel the 

proposal will do the most harm to investors and their access to retirement advice, products, and 

services. These are areas that must absolutely be fixed if this proposal is going to work as we 

believe the DOL intends it to work.

The proposal is too restrictive with regards to what activities are permissible “investor education” 

activities.

One of the most important aspects of my job as an independent financial advisor is 

improving the financial literacy of my clients and those in the community that I serve. For people 

to make educated decisions regarding their financial futures, it is imperative that they are given a 

solid foundation of understanding. Too many individuals do not have this foundation. Many do 

not know the difference between a growth and a fixed income mutual fund or do not understand 

the need to diversify their portfolio to reduce risk. Sadly, there are many people in this country 

that have never been taught the basics of investing.

There are few places where the effects of a lack of financial education can be more 

harmful than in the retirement savings sphere. For decades, large sections of our nation’s 

workforce did not need to be concerned with how they would fund their retirement years. The 

twin pillars of the pension and Social Security systems provided millions of Americans piece of 

mind. They knew that if they worked hard, then they would be able to enjoy their retirement 

years. All of that has changed in today’s world. The pension system now represents a small 

fraction of the retirement model for the American workforce. It has been replaced by a definedcontribution model where individuals now bear a greater responsibility for funding their 

retirements. Furthermore, as Americans are living longer lives, it takes more money to live 

comfortably in retirement. This means that, now more than ever, it is critical that Americans are 

given the proper tools and information to make informed decisions. Therefore, any regulation in 

the retirement savings sphere must make it easier for individuals to receive vital education 

regarding their investments and retirement savings.

In some ways the DOL’s proposal achieves this goal. Under current regulations, as stated 

in DOL Interpretive Bulletin 96-1,15 advisors have a hard time being able to clearly illustrate 

longevity risks and the effects of “decumulation” on retirement savings. In this instance, the DOL 

 

15 Interpretive bulletin relating to participant investment education, 25 C.F.R. § 2509.96-1.
Testimony of Dean Harman

June 17, 2015

Page 14 of 26

listened to feedback from advisors and other industry representatives regarding the 2010 

proposal. It is great to see that the DOL made a positive improvement from its prior proposal 

and have made it clear in this version that educational materials regarding longevity risks and the 

effects of “decumulation” are allowable as “investor education” pieces.

Unfortunately, not all of the DOL’s proposed changes to the “investor education” carve out 

are positive. One of the most significant negative changes to “investor education” lies in the 

proposal’s prohibition on referencing specific investment products in educational pieces. This 

change will lead to investors having less knowledge regarding their investment options. In my 

practice, I use asset allocation models and other similar illustrations to show plan participants, 

current, and potential clients how they can diversify their portfolios to manage risk. To a great 

extent, investor comprehension is contingent upon being able to identify what funds or other 

investment options available to them align with a category of investment. By removing the ability 

for me and other advisors to provide the proper context on these education materials, the DOL 

will be curtailing the effectiveness of these important educational resources. Sadly, this will likely 

lead to confusion among investors and a decrease in the overall financial knowledge of

individuals when making important decisions regarding their retirement investments.

BICE is rife with problems and will not serve its intended purpose unless it is substantially altered.

Beyond the problems with “investor education,” the DOL proposal has fundamental flaws 

at its core that make it currently unworkable for advisors, such as me, and the rest of the financial 

services industry. I want to focus in on the BICE, which the DOL has crafted with the intention of 

preserving compensation models, such as commissions, that many advisors and firms rely upon 

when providing retirement advice to small accounts.

First, let me give a brief explanation of why it is important that these compensation 

models be preserved. In my practice, I currently advise 618 clients whose accounts have a total 

of approximately $200 million in assets. Of those total assets, approximately $10 million are 

held in 331 different accounts that have an average of around $30,211.

16 These typically are 

the accounts that benefit from a commission-based account. For these accounts, it makes no sense 

for me to be paid under an advisory fee model because the asset management fee would be 

 

16 Nearly 40% of IRAs in a 2010 survey conducted by Oliver Wyman had less than $10,000. See, Oliver Wyman, 

Assessment of the impact of the Department of Labor’s proposed “fiduciary” definition rule on IRA consumers, April 

2011, available at https://www.dol.gov/ebsa/pdf/WymanStudy041211.pdf.
Testimony of Dean Harman

June 17, 2015

Page 15 of 26

cost-prohibitive for the client. Because these accounts are mainly owned by lower net-worth 

clients, young professionals just beginning their careers, and the elderly, these individuals cannot 

afford to come out-of-pocket to pay up-front financial planning fees for my advice. A 

commission-based model eliminates, or significantly reduces, these issues, thus providing a way for 

small to mid-size investors to pay for the advice, products, and services they need in a way that 

makes economic sense for these individuals. Because of this, I, and countless other advisors, 

recommend commission-based accounts for many younger or lower net-worth investors.17

In 2010, the DOL proposed a complete ban on commission payments on retirement 

accounts. Thanks to their willingness to listen to the many concerns regarding that approach, the 

DOL’s current proposal does not repeat that mistake. The DOL has created a new exemption, 

BICE, with the intention that it be the primary method by which advisors and firms would be able 

to receive commission payments, 12b-1 fees, revenue sharing, marketing allowances and other 

variable forms of compensation. Unfortunately, BICE has missed the mark and, as currently 

proposed, would lead to the same unwanted consequence as the 2010 proposal – an effective 

ban on commission payments, 12b-1 fees, and other variable forms of compensation – by hugely 

increasing the burdens on financial advisors and financial institutions.

Problems with the Pre-Advice Contract:

BICE would require that both the financial advisor and the firm enter into a pre-advice, 

pre-point-of-sale contract with a potential investor. It is here that we encounter the first problem 

with BICE. As written, BICE would require a financial advisor to have a potential client sign a 

contract prior to any meaningful conversation about their financial situation in order to ensure 

they do not inadvertently offer retirement advice. As currently written, this contract would be 

presented to a potential client at a stage in the engagement process when I am not making any 

recommendation. At this early stage, I am just outlining the different things that the individual can 

do with his or her assets. I want to ensure that the individual fully understands all of the available 

options, feels comfortable with me as a person, and has some time to digest the information 

presented before I ever make a recommendation regarding how the individual should be 

 

17 Of all the IRAs in existence in year-end 2010, 99% of those with less than $10,000 in assets were held in 

commission-based accounts, over 90% with assets between $10,000 and $25,000 were in commission-based 

accounts, and over 80% with assets between $25,000 and $50,000 were in commission-based accounts. See, Oliver 

Wyman, Assessment of the impact of the Department of Labor’s proposed “fiduciary” definition rule on IRA consumers, 

April 2011, available at https://www.dol.gov/ebsa/pdf/WymanStudy041211.pdf.
Testimony of Dean Harman

June 17, 2015

Page 16 of 26

investing his or her retirement assets. Requiring me to put a contract in front of an individual I 

have just met and having to tell him or her that I cannot provide even basic information regarding 

retirement savings options is counterproductive. In my experience, individuals who are 

interviewing financial advisors would not be willing to sign a contract with a financial advisor they 

have just met and haven’t decided to do business with yet. As a result, I believe this “preengagement” contract will create an unnecessary hurdle to individuals engaging financial advisors 

to help them prepare for retirement and other financial goals.

Problems with BICE’s “Approved Assets” List:

Another requirement of the BICE is that in order to qualify for its protections, an advisor 

may only provide retirement advice regarding investments that are contained within BICE’s list of 

approved investment options available to plans and IRAs.18 Among the products that are not 

included in the list of approved investments are non-traded Real Estate Investment Trusts (nontraded REITs), and Business Development Companies (BDCs), and other non-exchange listed equity 

securities and commodities futures. By creating a limited universe of investments that an advisor 

can recommend with regards to retirement accounts, the DOL has taken a cookie-cutter approach 

that assumes that products excluded from the “approved list” would never be in the best interest 

of an investor.

Financial advisors are in the best position to work with their clients to understand their 

clients’ unique retirement savings needs and recommend investments that best match the goals, 

risks, and circumstances of each individual investor. Furthermore, I not only help my clients save 

for their retirement, but I also advise them on the benefits of receiving some of their savings in the 

form of lifetime income. Individuals nearing retirement need to consider supplementing their 

Social Security with an additional level of guarantee, so that they won’t outlive their savings. 

Unfortunately, this proposal has the impact of preventing me from advising those near retirees on 

the benefits of annuities and assisting them with product selection, putting that individual at risk of 

 

18 As per the proposal, the approved list of assets “includes only the following products: bank deposits, certificates of 

deposit (CDs), shares or interests in registered investment companies, bank collective funds, insurance company 

separate accounts, exchange-traded REITs, exchange-traded funds, corporate bonds offered pursuant to a 

registration statement under the Securities Act of 1933, agency debt securities as defined in FINRA Rule 6710(l) or its 

successor, U.S. Treasury securities as defined in FINRA Rule 6710(p) or its successor, insurance and annuity contracts, 

guaranteed investment contracts, and equity securities within the meaning of 17 CFR 230.405 that are exchange 

traded securities within the meaning of 17 CFR 242.600.” The proposal also specifically excludes “any equity 

security that is a security future or a put, call, straddle, or other option or privilege of buying an equity security from 

or selling an equity security to another without being bound to do so.”
Testimony of Dean Harman

June 17, 2015

Page 17 of 26

running out of their savings in their older years when they can least afford it. The approach taken 

by the DOL in the BICE prevents advisors from having a full range of investments options and will 

prevent advisors from recommending products that very well may be in the best interest of an 

investor. Ultimately, these decisions are best made by investors working in collaboration with a 

financial advisor, not by officials at the DOL who don’t understand the individual investor’s needs.

Problems with the Mandated Point of Sale and Annual Disclosures:

Yet another concern with BICE comes in the form of its mandated disclosures. BICE requires 

that, prior to the execution of an asset purchase, an investor be provided an individualized chart 

that projects the total costs (in dollars) of the investment for one-, five-, and ten-year periods. In 

addition to this initial disclosure, BICE also requires that an annual disclosure be provided to the 

investor. The annual disclosure must list: (1) each asset purchased or sold during the previous year 

with the corresponding transaction price; (2) the total amount of fees and expenses with respect 

to each asset; and (3) the total amount of all direct and indirect compensation received by the 

advisor and the firm as a result of each asset.

The annual disclosure will increase compliance burdens on financial advisors. Financial 

advisors will have to ensure that their systems and reports are reprogrammed so that they 

capture the information being requested by the DOL. It will take a healthy amount of time and 

resources to ensure full compliance with such a disclosure. The same is true for the proposed initial 

disclosure, but the initial disclosure comes with an extra concern. In order to be able to provide 

an investor with the estimated costs (in dollars) of the investment for the one-, five-, and ten-year 

periods mandated by BICE, an advisor would have to make performance projections for the 

investment in order to make a projection of the costs. This very well could put advisors in direct 

conflict with SEC and FINRA rules that prohibit performance projections. Furthermore, such 

projections may create expectations by investors that their investments will achieve such 

performances, which could lead to hazardous and unreasonable investor expectations. Both the 

initial and annual disclosure requirements need to be reconsidered so that they provide investors 

with useful information in a concise manner that does not conflict with regulations already on the 

books.
Testimony of Dean Harman

June 17, 2015

Page 18 of 26

Problems with Internet Disclosures:

Another problematic section of BICE revolves around the massive and overly-burdensome 

Internet disclosures. BICE requires that firms maintain a publically-accessible website that is

updated on at least a quarterly basis. This website must be in machine-readable format, and 

include: (1) the direct and indirect compensation payable to the firm, each individual advisor, and 

each individual affiliate of the firm for each asset available within the last year; and (2) the 

source of any and all compensation and its variations among assets. It is clear to me that the DOL 

underestimates the complex nature of these disclosures. In the independent model, financial 

advisors have access to a wide variety of investment products which they offer to their clients. 

Each of these investment products has unique pricing structures and compensation models. For 

example, when factoring in the various share classes available, a single mutual fund family may 

offer 500 or more versions of their funds. As a result, compiling, presenting and maintaining the 

required Internet disclosure for each financial advisor affiliated with a financial institution will be 

a massive undertaking with significant costs to my clients. In addition, the scope, breadth and 

complexity of the project will lead to inadvertent errors which may confuse investors or expose

financial advisors and financial institutions to unreasonable litigation.

Problems with Data Retention and Production Requirements:

Firms must also retain all records relating to BICE for six years and provide unconditional 

access to such records during normal business hours to DOL, the IRS, plan participants, and IRA 

owners (or their representatives). Furthermore, on request from DOL, a firm must produce massive 

amounts of information for each asset, by quarter, within six months of any data request. The 

data that may be requested includes the aggregate shares/units bought, the aggregate purchase 

price and investor costs of those purchases, the revenue received by the firm and its affiliates

along with the identity of each revenue source, and comparable information for all sales and all 

holdings. Firms would also have to produce the following information with regards to their 

advisors: (1) the identity of each advisor; (2) quarterly return information for each advisor’s 

clients’ portfolios; and (3) external cash flows in and out of each portfolio by date. The proposal 

gives the DOL the right to publicly disclose any and all of the information obtained during the 

data requests without any identifiable financial information.

As can be seen from the above summary of the data retention and production request

requirements, this will not be an easy task for the industry to undertake. I am no expert 
Testimony of Dean Harman

June 17, 2015

Page 19 of 26

regarding the logistical, technical, and financial resources that would be required in order to put 

the proper systems in place to manage these requirements, so I will leave that to others to 

expound upon. That being said, I have no doubt that this will be a huge undertaking that will 

come at great costs to the industry. These new compliance burdens will come with astronomical 

costs that will inevitably be passed down to financial advisors and impact the consumer. For BICE 

to be a workable exemption, these requirements must be greatly scaled back so that the costs of 

compliance are reasonable.

Problems with “Levelizing” Compensation:

BICE requires the advisor to avoid recommending an asset if the total compensation would 

exceed “reasonable” compensation for the total services provided. The DOL provides very little 

information regarding what would be considered “reasonable” compensation and what types of 

variable compensation models would meet the requirements of BICE.

The DOL does discuss the need for firms to go through a rigorous process of proving that a 

variable compensation model meets the requirements set forth in BICE and also states that 

compensation models based on flat fees would meet the requirements. The combination of these 

two factors serves as a quasi-endorsement of level compensation models, and will likely push 

firms in the direction of “levelizing” compensation models. As the compensation models become 

“levelized,” I believe they will no longer be reflective of the services that I and other financial 

advisors provide. This will likely have the effect of financial advisors instituting, or raising, 

account minimums on retirement accounts, thus making it more difficult for investors of moderate 

means to gain access to valuable retirement advice and products. I do not want to be in a 

position where I have to turn away a potential client who needs my advice because his or her 

account would cause my business to incur losses, but the DOL proposal’s push towards “levelized” 

compensation would have that consequence for my practice and the individuals I serve.

Problems with a New Private Right of Action:

The last concern with BICE that I will cover is its creation of a new private right of action 

that was never authorized by ERISA or any other related statute. This new private right of action 

would stem from the contract that a financial advisor and a firm have to enter into with a client. 

BICE prohibits the inclusion of a provision disclaiming liability from a violation of any contractual 

term or any waiver or qualification of the investor’s ability to enter into a class action suit against 
Testimony of Dean Harman

June 17, 2015

Page 20 of 26

the advisor or the firm for any violation of the contract’s terms. That being said, the contract may 

allow for arbitration of individual investor claims.

In creating this new private right of action, the DOL has failed to recognize that ours is an 

industry that is already heavily regulated and has an extremely low incidence of unethical 

behavior. Out of the over 637,000 individuals regulated by FINRA in 2014, approximately 

0.2% had disciplinary actions filed against them.

19 This is largely attributable to the fact that, as 

I stated earlier, a financial advisor’s business is built on trust and reputation. If we break that 

trust with our clients, then we are out of business. It’s that simple.

Beyond the basic principles of trust and ethical conduct to which I and virtually every other 

advisor adhere, there are already effective federal and state remedies that are available to 

consumers who feel that they have been harmed by a broker-dealer and other advisors, including 

the FINRA arbitration and mediation processes. Because of the effective set of remedies already 

in place to help potentially aggrieved investors, the new private right of action created by BICE is 

wholly unnecessary. Perhaps the biggest impact of this private right of action will be an increase 

in error and omission insurance premiums. These increased costs will be borne by financial 

advisors and ultimately impact the consumer. This may further establish retirement advice as cost 

prohibitive for investors of modest means. Furthermore, because of the complexities of the 

proposal, it is conceivable that firms and advisors will make inadvertent errors that do not 

materially harm consumers, but give rise to suits against firms and advisors. All of this will be a 

boon to lawyers, while harming investors and small businesses across the country. Therefore, any 

final rule should do away with the proposed private right of action, thus allowing the current 

effective network of federal and state remedies to handle alleged instances of misconduct.

Even though each of the above requirements of BICE presents problems, the biggest 

concern is the cumulative effect of all of these issues. If the DOL moves forward with a largely 

unchanged rule, financial advisors will be faced with a mountain of regulatory burdens to 

overcome. This will place serious financial, compliance, liability and administrative strains on the 

many small businesses across this country run by financial advisors. Unfortunately, the costs 

associated with implementation will also be felt by the clients that we serve and it may lead many 

to not seek or be able to afford critical retirement advice. Because of this, it is absolutely vital 

 

19 http://www.finra.org/newsroom/statistics.
Testimony of Dean Harman

June 17, 2015

Page 21 of 26

that the DOL make substantial changes to its proposal to ensure that there is a workable path 

forward for all parties.

There are Better and Less Disruptive Alternatives to the DOL’s Proposal

While FSI is committed to working constructively with the DOL to improve the current 

proposal, we believe there are better ways to achieve the goals of investor protection that guide 

the DOL in this effort, and guide our industry and the various federal and state regulatory entities 

that supervise our industry.

As I stated earlier in this testimony, FSI strongly supports a carefully-crafted, uniform 

fiduciary standard of care applicable to all professionals providing personalized investment 

advice to retail clients. The idea of a uniform fiduciary standard of care is not an idea that is 

solely championed by FSI. Section 913 of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act (Section 913) instructed the SEC to evaluate the effectiveness of existing standards 

of care for financial advisors. The SEC is specifically charged with evaluating how the current 

standards of care affect the ability of advisors to provide personalized investment advice to 

retail customers, and identify any places for improvement in these standards. In order to 

accomplish this mission, Section 913 gave the SEC the authority to adopt a uniform fiduciary 

standard of conduct for financial advisors. Earlier this year, SEC Chair Mary Jo White announced 

her support for SEC rulemaking adopting a uniform fiduciary duty of care.20 FSI has a strong 

preference for the SEC to take the lead or, in the alternative, conduct a joint rulemaking with the 

DOL so as to reduce inconsistent standards that would likely create compliance burdens for 

advisors and increase costs for investors.

Beyond the uniform fiduciary standard of care, improved disclosures would address many 

of DOL’s concerns that have led to the proposal. Investors can make better choices when they are 

properly informed of the differences between the advice and services being offered. In order to 

provide investors with the information that they need, investors should receive concise, 

consolidated disclosure documents written in plain English. This course of action is beneficial on 

three fronts. First, it helps to increase the knowledge base of investors because they are able to 

 

20 See, Lynch, Sarah, White says SEC should act on fiduciary rule for brokers, advisers, Reuters, available at

http://www.reuters.com/article/2015/03/17/sec-fiduciary-white-idUSL2N0WJ1E920150317.
Testimony of Dean Harman

June 17, 2015

Page 22 of 26

better understand information related to their retirement savings. Investors would have access to 

important information in language that is easy to understand and not full of “legalese.” Second, 

improved disclosures would not upend the retirement savings landscape. It would require that 

disclosures be rewritten, but, unlike DOL’s current proposal, it would not entail the financial 

services industry completely overhauling business models in order to achieve compliance. Third,

and most importantly, this course of action would preserve access to retirement advice, products,

and services for small- and mid-sized investors.

As a way to illustrate how reworked disclosures could work and start a conversation 

regarding this approach, FSI suggests the following two-tiered approach that would be beneficial 

to investors:

1) A short-form document focused on the issues that are of greatest importance to 

investors provided at the point of engagement.21 The document would include:

 The standard of care owed by the financial institution and financial advisor to 

each client;

 The nature and scope of the business relationship between the parties, the 

services to be provided, and the duration of the engagement;

 A general description of any material conflicts of interest that may exist 

between the financial institution, the financial advisor and the investor;

 An explanation of the investor’s obligation to provide the financial institution 

and financial advisor with information regarding the investor’s age, other 

investments, financial situation and needs, tax status, investment objectives, 

investment experience, investment time horizon, liquidity needs, risk tolerance, 

and any other information the customer may disclose;

 An explanation of the investor’s obligation to inform the financial institution or 

financial advisor of any changes in the above information;

 A phone number and/or e-mail address the investor can use to contact the 

financial institution regarding any concerns about the advice or service they 

have received; and

 

21 The disclosure could be provided in paper or electronic format.
Testimony of Dean Harman

June 17, 2015

Page 23 of 26

 A description of the means by which a customer can obtain more detailed 

information regarding these issues free of charge.

2) An expanded disclosure that would provide investors with access to full details via the 

financial institution’s website or brochures to be provided free of cost. The short-form 

disclosure form above would have information on how to access this expanded 

disclosure. Utilizing hyperlinks and other internet functionality, investors would be able 

to access the following information in areas where they desire additional detail:

 A detailed schedule of typical fees and service charges;

 The specific details of all arrangements in which the firm receives an economic 

benefit for providing a particular product, investment strategy, or service to a 

customer; and

 Other information necessary to disclose material conflicts of interest.

This is just one alternative to the current DOL proposal that could achieve the DOL’s goals. 

There may be other, better alternatives out there that should be discussed and analyzed. Both 

FSI and I are ready and willing to engage in the development of disclosures, standards of care, 

or other mechanisms that would effectively protect investors and preserve access to retirement 

advice and products for all investors.

Conclusion

I thank Chairman Roe, Ranking Member Polis, and the rest of the Subcommittee for 

allowing me to share my thoughts on this very important issue. Should the Subcommittee need 

anything further from FSI or from me, we would be glad to provide the requested information.

FSI and I want to ensure that Americans are well-prepared to make decisions regarding 

their retirement savings. This will require that our retirement savings landscape continue to evolve 

so that it is easier for investors to receive high-quality, individualized investment advice from a 

trusted advisor. As a result, we support the adoption of a carefully-crafted, uniform fiduciary 

standard of care applicable to all professionals providing personalized investment advice to 

retail clients. Unfortunately, while well-intentioned, the current DOL proposal will make it harder 

for all Americans to receive such retirement advice. This is because it is based on flawed

assumptions that lead it to be too complex, too cumbersome, and too costly, thus resulting in a 
Testimony of Dean Harman

June 17, 2015

Page 24 of 26

proposal that will leave small- and mid-sized investors without affordable access to much-needed 

retirement advice and products. FSI believes that there are alternatives to the current DOL 

proposal, including a uniform fiduciary standard and better, more concise disclosures. We stand 

ready to continue our engagement with the DOL and any other interested parties to try and 

develop a final rule or other proposal that will protect investors and ensure that all Americans 

have access to the retirement advice, products, and services that will help them achieve the 

dignified retirement that they deserve.
Testimony of Dean Harman

June 17, 2015

Page 25 of 26

About Dean Harman, CFP ®

Dean Harman, CFP ® has been practicing in the financial services industry since 1994. He 

operates Harman Wealth Management, LLC in The Woodlands, Texas. Harman Wealth 

Management, LLC specializes in working with clients who are business owners, executives and 

sports coaches.

In 2006 Dean purchased Estate Resources, a financial planning, RIA and asset 

management firm in Houston, Texas, which he merged into Harman Wealth Management, LLC In 

2010 he purchased ETF Plan, Inc., and asset management, RIA firm which also merged into 

Harman Wealth Management, LLC He serves on the Advisory Boards of Genworth Financial, 

Sagepoint Financial, The Financial Services Institute, and The College of Business and Behavioral

Sciences at Clemson University.

Dean is regularly quoted in the media and has been featured in: The Wall Street Journal, 

the New York Times, Newsweek, Kiplinger’s, Smart Money, CBS Market Watch, Men’s Health, 

Yahoo Finance, Google Financial News, Retire Smart, The Players Club, The Journal of Financial 

Planning, Investment News, Investment Advisor, H-Texas and local media. He also had an 

appearance in the movie Tin Cup.

He is a graduate of Clemson University where he played football from 1987-1991. 

Following college he had a brief stint with the Tampa Bay Buccaneers in 1992 and 1993 before 

starting his career in financial planning.

Background on Independent Broker-Dealers, Independent Financial Advisors and FSI

For more than 40 years, independent broker-dealers and independent financial advisors 

have brought Wall Street to Main Street, offering comprehensive financial planning services and 

unbiased, affordable investment advice to millions of individuals, families and businesses large 

and small. The approximately 167,000 independent financial advisors make up nearly 60% of 

all practicing financial advisors nationwide, offering services that include financial education, 

planning, implementation and investment monitoring. While we serve a broad cross-section of 

clients, our members’ typical clients are middle class, Main Street investors – those investing tens 

or hundreds of thousands of dollars, not millions.
Testimony of Dean Harman

June 17, 2015

Page 26 of 26

Independent broker-dealers and independent financial advisors also share a number of

other business characteristics. They generally clear their securities business on a fully disclosed 

basis; primarily engage in the sale of packaged products, such as mutual funds and variable 

insurance products; take a comprehensive approach to their clients’ financial goals and objectives; 

and provide investment advisory services through either affiliated registered investment adviser 

firms or such firms owned by their registered representatives. The independent business model 

allows our members to tailor their products and services to support both the small investors 

opening their first IRAs and the more affluent clients who need more complex wealth management 

services.

These financial advisors operate as self-employed independent contractors, not as 

employees of their affiliated broker-dealer firms. They are small business owners with strong ties 

to their communities. In fact, their standing in their communities is critical to their success, as wordof-mouth and reputation are their primary sources of new clients. Independent financial advisors 

generally meet their clients in person and provide their services face-to-face or over the 

telephone, forming personal, trust-based relationships. Thus, independent financial advisors have 

a powerful incentive to pursue their clients’ investment goals with integrity and transparency, and 

every reason to want to make sure their clients receive personalized investment advice that is in 

their best interest.

Since 2004, the Financial Services Institute (FSI) has represented the interests of 

independent financial service firms and independent financial advisors. Through FSI, these 

financial professionals work together to promote the independent business model and a 

regulatory environment that serves all its constituents effectively.

Independent broker-dealers and independent financial advisors formed the Financial 

Services Institute not only to serve as an advocacy organization, but also to be a forum for 

improving compliance efforts and promoting our business model. FSI is committed to preserving 

the crucial role of independent broker-dealers and independent financial advisors in helping 

Main Street Americans plan for their futures and meet their long-term financial goals. As part of 

this mission, FSI conducts industry surveys and research, and provides a forum for members to 

share their best practices in compliance, operations, and marketing. FSI also serves as an 

advocate in Washington, using the information it collects to help shape a regulatory environment 

that is fair and balanced and serves all its constituents.
Statement of the Investment Company Institute 

Brian Reid, Chief Economist 

Hearing on “Restricting Access to Financial Advice: Evaluating the Costs and 

Consequences for Working Families and Retirees” 

Subcommittee on Health, Employment, Labor, and Pensions 

Committee on Education and the Workforce 

United States House of Representatives 

June 17, 2015

The Investment Company Institute1

 is pleased to provide this statement regarding the U.S. 

Department of Labor’s fiduciary proposal for the hearing in the Subcommittee on Health, 

Employment, Labor, and Pensions of the U.S. House of Representative’s Education and the 

Workforce Committee. We thank Subcommittee Chairman Roe and Ranking Member Polis for 

the opportunity to testify, and Chairman Kline for the committee’s continued bipartisan attention 

to an issue so critical to American retirement savers. 

The mutual fund industry is especially attuned to the needs of retirement savers because 

mutual funds hold half of retirement assets in defined contribution (DC) plans and individual 

retirement accounts (IRAs).2 The DOL’s proposal would have a dramatic impact on the ability of 

those retirement savers to obtain the guidance, products, and services they need to meet their 

retirement goals. 

ICI supports the principle at the heart of the DOL’s proposal—that financial advisors 

should act in the best interests of their clients when they offer personalized investment advice. 

Unfortunately, the DOL did not stay true to the meaning of that principle. As a result, its proposed 

rule is hopelessly complex, confused, and, in its current form, unworkable. The DOL also chose 

to break away from a coordinated approach with the Securities and Exchange Commission (SEC), 

which itself is considering whether to impose harmonized fiduciary standards that would provide 

a single standard of care for all investors. If the DOL adopts its proposed rule, the result will be a 

                                                            

1

 The Investment Company Institute (ICI) is a leading, global association of regulated funds, including mutual funds, 

exchange-traded funds (ETFs), closed-end funds, and unit investment trusts (UITs) in the United States, and similar 

funds offered to investors in jurisdictions worldwide. ICI seeks to encourage adherence to high ethical standards, 

promote public understanding, and otherwise advance the interests of funds, their shareholders, directors, and 

advisers. ICI’s U.S. fund members manage total assets of $18.1 trillion and serve more than 90 million U.S. 

shareholders. 

2

 At the end of 2014, U.S. retirement assets totaled $24.7 trillion, DC plan assets were $6.8 trillion, and IRA assets 

were $7.4 trillion. Investors held $3.5 trillion of IRA assets and $3.7 trillion of DC plan assets in mutual funds. See

Investment Company Institute, The U.S. Retirement Market, Fourth Quarter 2014 (March 2015), available at 

www.ici.org/info/ret_14_q4_data.xls. 
2

regulatory hodgepodge that does not promote the best interests of retirement savers. In fact, it 

may well harm their interests. 

ICI will submit a detailed comment letter to the DOL addressing our concerns about the 

proposed rule. In this statement, I will focus first on the DOL’s failure to provide a sound 

economic rationale for its proposal. I will then describe some of the key ways in which the 

proposal is flawed. 

The DOL’s Regulatory Impact Analysis Is Fundamentally Flawed 

The DOL relies on its Regulatory Impact Analysis to justify its proposed rule. But the 

Regulatory Impact Analysis fails to demonstrate the DOL’s assertion that there is a “substantial 

failure of the market for retirement advice.”3

 It also does not properly consider how the proposal 

actually could limit retirement savers’ access to guidance, products, and services, or how such 

limits could affect savers—particularly lower- and middle-income savers with smaller account 

balances. 

The DOL argues in its Regulatory Impact Analysis that broker-sold funds 

“underperform,” “possibly due to loads that are taken off the top and/or poor timing of broker 

sold investments.”4

 The DOL’s analysis does not provide a benchmark for returns against which it 

measures this claim of “underperformance.” It contends that such underperformance could cost 

IRA mutual fund investors “$430 billion over 10 years and nearly $1 trillion across the next 20 

years.”5 The DOL has arrived at these numbers by misinterpreting and incorrectly applying the 

findings of the academic research that it cites as the foundation of its conclusions. In fact, these 

assertions do not stand up when tested against actual experience and data. 

The DOL also has on its website a white paper prepared by the White House Council of 

Economic Advisers (CEA). That white paper claims that “conflicted advice costs Americans 

about $17 billion in foregone retirement earnings each year.”6 This assertion is also not supported 

by sound analysis or data, as I explain below. 

Adjusting for the errors in the DOL’s analysis, we find that the claims touted by the DOL 

simply have no basis. Indeed, the DOL’s proposal, if adopted, could actually have a significant 

net societal harm. The proposal’s costs and burdens, including those on retirement savers, do not 

support adoption of the proposed rule. I have five points to explain why. 

                                                            

3

 DOL, Fiduciary Investment Advice Regulatory Impact Analysis (Apr. 14, 2015), available at: 

www.dol.gov/ebsa/pdf/conflictsofinterestria.pdf, at p. 7. 

4 Id., at p. 98. 

5 Id. 

6 CEA, The Effects of Conflicted Investment Advice on Retirement Savings, (Feb. 2015), p. 21. The CEA white paper 

is available at: www.whitehouse.gov/sites/default/files/docs/cea_coi_report_final.pdf.
3

1. Contrary to the DOL’s claims, investors who own funds that are sold with front-end 

loads actually have concentrated their assets in funds that outperform—not 

underperform—the average return for their fund category. 

The DOL claims that if its proposal is not implemented, retirement investors will lose 

nearly $1 trillion over the next 20 years due to excess fees and underperformance losses. The 

analysis that the DOL uses to back this claim is deeply flawed.

Front-end loads are a form of commission used to compensate brokers who sell mutual 

funds. The DOL bases its claim of investor harm on the idea that front-end loads create incentives 

for broker-dealers to recommend particular funds, and that those funds tend to “underperform” by 

100 to 200 basis points per year.7 The DOL assumes that, after adoption of its proposed rule, the

amount invested in underperforming funds that pay front-end loads will substantially decrease 

and that retirement savers will invest in higher-performing funds. 

The DOL’s calculation of $1 trillion in harm rests heavily on an academic paper that uses 

a set of computations to try to explain the range of loads that funds pay to brokers.8

 This paper 

finds evidence that a subset of funds—those whose front-end loads result in higher broker 

compensation than can be explained by the average of similar funds—underperformed the 

average return of their fund category during the next year. The DOL then assumes that all IRA 

assets that are invested in front-end load funds suffer the same underperformance—mistakenly 

applying a result from a subset of load funds to all load funds. 

A simple test with hard data exposes the DOL’s leap in logic and breaks down the central 

claim of its Regulatory Impact Analysis. In fact, investors who own funds that are sold with frontend loads have concentrated their assets in funds that outperform—not underperform—the 

average return for their fund category. 

We examined front-load fund shares sold in each year from 2007 to 2013. Using 

Morningstar performance data, we measured fund returns net of expenses in the year after the sale 

(for example, we measured 2008 performance for fund shares sold in 2007, and 2014 performance 

for shares sold in 2013). For shares sold during the 2007 to 2013 period, the sales-weighted 

average returns for shares sold with front-end loads actually outperformed the Morningstar 

average return for all funds with similar investment objectives by 27 basis points per year. This 

demonstrates that investors who purchased front-end load funds concentrated their purchases in 

funds that outperformed their Morningstar average. This fact directly contradicts the DOL’s 

assertions and raises serious questions about the DOL’s contention that the market for retirement 

advice suffers from a substantial market failure. 

                                                            

7

 As noted above, the DOL does not provide a benchmark for returns against which it measures underperformance. 

8

 DOL, Regulatory Impact Analysis, at p. 98, citing Christoffersen, Evans, and Musto (2013). Attached to this written 

statement is a brief analysis of this and other key papers that the DOL relies on in its Regulatory Impact Analysis. 
4

We have no explanation for why the DOL would choose not to test assertions and 

suppositions that are so critical to its conclusions against real and widely available data—a basic 

step in any economic analysis. By contrast, our test looks directly at the performance of actual 

fund shares sold with a load. The fact that investors concentrated their purchases of fund shares 

sold with a front-end load in those funds that outperformed the average return for their category 

undermines the DOL’s analysis and eliminates almost all of the rationale the DOL uses to justify 

its proposal. 

2. The DOL ignores market realities and assumes brokers will continue to offer advice 

and services despite substantial reductions in their compensation. It ignores the 

costs that investors will face if in fact they cannot use brokerage accounts for 

retirement savings. 

The DOL’s analysis is flawed in another fundamental way: it ignores the cost of advice 

and services outside of broker-sold funds, resulting in an inappropriate overstatement of the 

benefits of the proposal. The DOL focuses solely on the costs of advice and assistance paid 

through a fund—through an up-front sales charge, for example. But the DOL fails to consider 

how these costs compare to the costs that investors incur when they pay a financial advisor 

directly for advice (for example, using an asset-based fee that an investor pays directly to a 

financial advisor) rather than paying through a fund. Ignoring the market realities of the cost of 

advice and assistance, the DOL exaggerates the benefits from lower loads resulting from their 

proposal and ignores possible costs that investors could incur if they move to fee-based advice. 

How significant is this omission? The DOL argues that IRA investors currently pay 

between 26 and 28 basis points per year in front-end loads, in addition to fund expenses. A recent 

study by Cerulli Associates finds that fee-based accounts—the most likely alternative to 

brokerage accounts—cost investors 111 basis points per year on average, in addition to fund 

expenses.9

 

In the Regulatory Impact Analysis, the DOL asserts that retirement savers will continue to 

use brokers if its proposed rule is adopted, under its proposed “Best Interest Contract Exemption.” 

It predicts that the Exemption will induce brokers to reduce loads. The DOL claims that annual 

front-end load costs will fall by 65 percent over the next 20 years.10

In fact, as I discuss below, the Best Interest Contract Exemption is prohibitively costly, in 

addition to being convoluted and unworkable. Brokers subject to the Exemption’s many new 

limitations, burdens, and costs, as well as increased exposure to liability, are not likely to work for 

less compensation, as the DOL presumes. 

                                                            

9

 Cerulli Associates, Inc., Cerulli Report RIA Marketplace 2014, p. 20. The average asset-based fee includes high-net 

worth accounts, which typically are charged lower asset-based fees. Accounts of average or smaller size may pay 

higher fees. 

10 DOL, Regulatory Impact Analysis, at p. 113.
5

The DOL itself notes elsewhere in its Regulatory Impact Analysis that front-end loads 

already have fallen significantly. It states that these charges probably cannot fall much further 

without reducing the level of service and advice that brokers provide to fund investors.11 It is 

difficult to reconcile that statement with the idea that adoption of the proposed rule—with its 

substantial new costs and liabilities—would induce brokers to accept commissions that are twothirds below current levels. 

In fact, many investors will still want to receive advice and will need to continue to pay 

for it. If brokers are largely foreclosed from providing that advice, investors will need to turn to 

fee-based accounts, if those accounts are available to them. In that event, many could end up 

paying even more, as evidenced by the current Cerulli data. For many investors—particularly 

those with small or even average balances—the total costs of fee-based accounts typically are 

higher than the cost of purchasing funds with front-end loads. 

The DOL’s failure to consider asset-based charges ignores the fact that a move to feebased advice could raise costs for many IRA investors with small or even average balances. 

3. The DOL fails to demonstrate that investment performance is different when an 

investor is advised by a fiduciary compared to when the investor is advised by a 

provider that is not a fiduciary. 

The DOL relies on a string of academic studies to buttress its claims that investors are 

harmed by their use of brokers.12 These studies do not support the conclusions that DOL draws. 

The problem is that none of these academic studies actually compares the outcomes of investing 

with a financial advisor that is a fiduciary to the outcomes of investing with a broker-dealer or 

other financial advisor that is not a fiduciary. Thus, the DOL does not actually measure—and 

cannot measure, based on these studies—whether an investor using a fee-based ERISA fiduciary 

advisor will experience a different investment outcome than an investor using another financial 

advisor that is not an ERISA fiduciary. 

Attached to this statement is a brief summary of the primary studies relied on by the DOL. 

The attachment also provides our analysis of why the papers offer little, if any, support for the 

DOL’s hypothesis that investors purchasing funds through broker-dealers receive significantly 

lower returns than investors using fiduciary advisors. After careful review, it is our conclusion 

that the studies do not support the Regulatory Impact Analysis used to justify DOL’s proposal. 

4. The DOL fails to identify and analyze societal harms resulting from its proposal. 

In its estimates of the cost of its proposed rule, the DOL focuses only on administrative or 

compliance costs. It makes no attempt to acknowledge, much less measure, a significant harm that 

                                                            

11 DOL, Regulatory Impact Analysis, at p. 123.

12 The CEA cites many of the same studies and draws the same conclusions as the DOL analysis. The CEA’s 

misreading of the studies is also similar to the DOL’s. 
6

can occur if it adopts the proposed rule—the inevitable risk that at least some retirement savers 

would lose access to advice and information they currently rely on to meet their savings goals. 

Research shows that investors with access to advice have more diversified portfolios and 

take on more appropriate levels of risk than those who do not receive advice or information. 

Indeed, in its justification of an earlier rule change, the DOL said that retirement investors who do 

not receive investment advice are twice as likely to make poor investment choices as those who 

do receive that advice.13 The benefits of advice—and, conversely, the harm of losing access to 

advice—are significant. 

The DOL’s apparent belief that investors are ill-served by brokers ignores the fact that its 

rule could eliminate the guidance, products, and services that investors receive from brokerdealers that are compensated with front-end loads. Financial advisors, regardless of their standard 

of care, are unlikely to work in an environment of greater costs, limitations, and exposures to 

liability for less compensation. Indeed, many broker-dealers are likely to exit the market for 

retirement advice under the proposed rule. The DOL thus ignores the impact of its proposed rule 

on the quality and appropriateness of investment choices that retirement savers must make. 

As a result, retirement investors may be left with no choice but to seek asset-based fee 

accounts to obtain the investment assistance that they need. But as we have already established, 

the total costs of investing through those accounts can be greater—not less—than the cost of 

investing with brokers. 

Asset-based fee accounts pose an even more significant barrier. These accounts often 

require investors to have substantial balances that are significantly larger than the typical IRA 

balance.14 As a result, fee-based accounts may not be available to lower- and middle-income IRA 

investors who cannot meet minimum balance requirements. Other market participants may seek to 

overcome the proposed rule’s barriers and find ways to serve retirement savers who now rely on 

broker-dealers. It is entirely foreseeable, however, that many IRA investors would no longer be 

able to obtain advice under the proposed rule. 

American workers will be worse off if they cannot get the assistance they need to 

determine how best to save for retirement. It is entirely inappropriate, and not credible economic 

analysis, for the DOL merely to ignore the harm that would come from retirement savers losing 

access to advice. 

                                                            

13 See Investment Advice—Final Rule. 76 Fed. Reg. 66136, 66152 (October 25, 2011).

14 The median IRA balance in 2012 was $25,170. See Holden, Sarah, and Steven Bass. 2014. “The IRA Investor 

Profile: Traditional IRA Investors’ Activity, 2007–2012.” ICI Research Report (March). Available at 

www.ici.org/pdf/rpt_14_ira_traditional.pdf. 
7

5. IRA investors are concentrated in funds that have lower costs on average—not in 

higher-cost funds, as the CEA white paper asserts. 

The DOL has posted on its website a link to a CEA white paper that claims that variable 

compensation paid to broker-dealers and other financial advisors creates “conflicted investment 

advice,” which in turn “can lead to underperformance: excessive fees, excessive trading, market 

mis-timing, and so forth.”15 The CEA white paper cites academic literature to support its claim 

that IRA investors using brokers suffer an underperformance of 100 basis points per year. 

Unfortunately, the CEA, like the DOL, supports its claims by selectively choosing 

statistics and commentary from the academic studies it cites. The CEA also offers a hypothetical 

calculation of fees to illustrate the factors that it claims are harming IRA investors. The CEA first 

assumes that typical 401(k) plan investors pay fund expenses of only 20 basis points. It then 

assumes that investors pay 130 basis points in fund expenses after they roll their assets over to an 

IRA. The resulting assumed difference in fees—110 basis points—reduces returns for IRA 

investors by $17 billion annually, according to the CEA’s illustration. 

Actual data show that the CEA’s illustration is far off the mark. The average fee paid by 

IRA investors in stock funds in 2014 was only 71 basis points. The average fee paid by 401(k) 

investors for investing in stock funds was actually 54 basis points. So the real difference in fees, 

based on what investors are actually paying, was 17 basis points—far less (almost 85 percent less) 

than the 110 basis point difference claimed by the CEA. 

Further data show that actual IRA investors pay fees that are below the average fee for 

similar funds. As the chart below shows, IRA investors tend to concentrate assets in funds with 

expense ratios (the bars) that are far less than the simple-average expense ratio of all funds (the 

line). In 2014, for example, the average expense ratio paid by IRA investors on equity funds was 

71 basis points—or 62 basis points less than the average expense ratio for all equity funds.16 This 

pattern also holds true in hybrid and bond funds. 

                                                            

15 CEA study, p. 16. Accessed on June 7, 2015. 

16 Calculation: 133 basis point average expense ratio on all equity funds minus 71 basis point average paid by IRA 

investors on equity funds equals a 62 basis point difference.
8

IRA Investors Pay Below-Average Fees 

Note: Data exclude mutual funds available as investment choices in variable annuities. 

Sources: Investment Company Institute and Lipper

Our data do show that 401(k) investors pay lower fees in mutual funds than IRA holders 

pay. This in part reflects economies of scale, as employer plans aggregate the savings of hundreds 

or thousands of workers. In addition, average fees are somewhat higher for mutual funds in IRA 

accounts because some IRA investors pay through fund fees for services, such as professional 

investment advice and assistance that are not available through their 401(k) plans.

The DOL’s Proposed Rule, Like Its Regulatory Impact Analysis, Is Flawed 

The DOL’s rule proposal is confusing and convoluted. 

Confusing. The DOL’s rule proposal leaves quite unclear the circumstances under which 

a provider of investment information will be an ERISA fiduciary. Based on our initial analysis, 

providing even the most basic information—such as that offered in many common call-center and 

web-based interactions—will trigger ERISA fiduciary status. The result will be the restriction of 

even basic information provided to retirement savers, for fear that the information later will be 

viewed as advice triggering ERISA fiduciary status. 

To provide a workable framework for its proposed rule, the DOL must provide clear and 

unambiguous thresholds for determining when a service provider is offering fiduciary advice. It 

must allow service providers to continue to offer meaningful investment education to retirement 

savers without inadvertently triggering fiduciary status. 

The proposal breeds more confusion by asking a series of questions about a blanket 

exemption from ERISA prohibitions for so-called “high-quality low-fee” investment products. 

0.99 0.89 0.84 0.79 0.71

1.66

1.54 1.46 1.42 1.33

2002 2005 2008 2011 2014

IRA asset-weighted average fund expense ratio

Industry simple-average fund expense ratio

Equity funds
9

The DOL does not actually propose such an exemption, nor does it specify how such an 

exemption would work and what investments might qualify. Indeed, the DOL’s questions are 

hopelessly vague. DOL simply has not provided the public with enough information about this 

aspect of its proposal to comment in any meaningful way. 

The DOL and other financial regulators must promote investor choice and remain productneutral. Cost is not, and cannot be, the sole factor in making an investment decision. Nor does 

trust law, in articulating the nature of fiduciary duty, sanction low cost as a consideration 

exclusive of others. And regulators cannot and should not set themselves the task of determining 

what constitutes a “high-quality” investment product. We know of no useful criteria for this 

purpose that take into account the diverse portfolio needs of the millions of American retirement 

savers. 

Convoluted. The proposal takes a straightforward concept—that investors should receive 

advice that is in their best interest—and turns that principle into an overcomplicated, unworkable 

rule. 

The proposed “Best Interest Contract Exemption” is a primary example of this problem. 

The DOL purportedly designed that proposed exemption to permit broker-dealers and others to 

continue to receive variable compensation, such as commissions and front-end loads, 

notwithstanding their status as an ERISA fiduciary. Under the Best Interest Contract Exemption, 

however, a financial services provider must comply with a series of unworkable conditions that 

are not based on fiduciary principles. Among them are the following: 

 Before giving any advice, the service provider must enter into a written contract 

containing a panoply of waivers and commitments that create significant litigation 

exposure and liability. Broker-dealers and others receiving variable compensation 

are likely to struggle, in operational and customer-service terms, to have a written 

contract in advance of every interaction that could be portrayed as advice-giving. 

 The service provider’s individual representative must be party to that contract. 

Taken together, these first two conditions imply a set of procedures that borders on 

the absurd. Before asking a question or receiving any information, an investor 

seeking information from a call center would be required to enter into a contract 

not merely with the corporate service provider, but with the employee operator at 

the call center. If that operator needs to refer the call to a more-knowledgeable 

colleague, the investor presumably would then be required to enter into yet another 

contract with that colleague. It is difficult to imagine the system that would 

accommodate three-way contracts for all of a financial services firm’s thousands 

(perhaps tens of thousands) of representatives and many thousands of customers. 
10

 The service provider must provide point-of-sale disclosure of impossible-tocalculate projected costs of investment, extensive website disclosure, and annual 

disclosure to investors. These disclosures must include, among other things, the 

total dollar amount of all compensation received by the service provider as a result 

of the investor’s holdings and purchases. Some of these disclosures essentially 

would be impossible to provide because they assume perfect knowledge of future 

performance of an investment. 

In seeking to impose these requirements, DOL has converted the fiduciary principle into a 

series of compliance traps and barriers for financial advice professionals and their firms, in 

particular smaller firms. This emphatically is not how fiduciary duty—a relationship of 

confidence and trust—should be defined and crafted. ICI supports efforts to promote the best 

interests of investors, but any regulatory initiative to do so must be workable and not restrict the 

information, advice, and services that investors require to meet their goals. We fear that the 

DOL’s confusing and convoluted rule proposal will create real harm—a loss of access to 

information and advice—to America’s retirement savers. 

Conclusion 

The economic analysis used to justify the DOL proposal is fatally flawed. It appears to be 

crafted solely to support the agenda of adopting the DOL’s proposed rule—not to measure 

accurately the costs and benefits of the proposal. The Regulatory Impact Analysis does not 

properly analyze the impacts of the proposal. The DOL does not establish that the benefits of its 

rule justify its significant costs. In fact, the economic analysis raises the question of whether the 

DOL fully understands the market for investment advice. 

We agree that retirement savers, and other investors, should be served by financial 

advisors who act in their clients’ best interest. But the added layers of complexity and confusion 

that the DOL proposes to pile on top of that simple best-interest principle creates the risk that 

many savers will receive no advice or service, or none that they can afford. Sadly, we expect that 

the proposed rule, if adopted, will make retirement saving more challenging and costly for many 

retirement savers, particularly those with modest balances. 

A better approach is one that balances the need for enhanced investor protections with the 

desire to minimize market disruptions and preserve investor choice. Such an approach would be 

more likely to result from a joint effort by the DOL and the SEC to work toward a harmonized 

fiduciary duty for all investors. Even more important, such an approach would stay true to 

fiduciary principles. 
A-1

Attachment A—Review of Studies Relied upon by DOL and CEA 

Set forth below is a brief summary of the studies relied on by the DOL and the CEA, and why 

they offer little, if any, support for the DOL’s conclusion that investors purchasing funds sold 

through brokers receive significantly lower returns than do investors using fiduciary advisors. 

1. Bergstresser, Chalmers, and Tufano (2009) 

The 2009 paper by Bergstresser, Chalmers, and Tufano attempts to measure the returns to 

investors using funds sold through brokers before accounting for fees used to compensate the 

broker. Significantly, the paper compared broker-sold funds with direct-sold funds but does not 

measure whether a fiduciary relationship produces superior returns, net of fees, over a nonfiduciary intermediary (e.g., brokerage) relationship. 

The Bergstresser paper does not support the DOL’s characterization of the paper’s conclusion 

(i.e., that investors purchasing funds from a broker fare worse than those purchasing funds from a 

fiduciary). In fact, the evidence in the Bergstresser paper, even if taken at face value, is highly 

inconclusive: the paper suggests that, compared to investors that purchased “directly sold” mutual 

funds, investors who used broker-sold funds earned lower returns on broad domestic equity funds 

and higher returns on foreign equity funds and perhaps money market funds between 1996 and 

2004. (The evidence on bond funds is statistically inconclusive.) 

Simply put, if underperformance is due to the conflicted compensation structure of the 

intermediary—as the DOL suggests—one would expect that the underperformance would occur 

in all types of funds, not just one. 

2. Del Guercio and Reuter (2014) 

The 2014 paper by Del Guercio and Reuter cited in the DOL’s Regulatory Impact Analysis finds 

that actively managed funds sold directly to investors outperform index funds, and that brokersold index funds outperform broker-sold actively managed funds. The paper speculates that this 

result is driven by broker incentives, but does not provide any test of this theory. Consistent with 

the limitations of the Bergstresser paper, the Del Guercio paper does not measure the net returns 

to investors using a fiduciary advisor versus a broker. They also do not examine where investors 

in broker-sold funds are concentrating their assets. 

The CEA acknowledges that a limitation of both the Bergstresser and Del Guercio studies is that 

such comparisons cannot incorporate differences other than the involvement of an intermediary 

versus a “direct sale” of the mutual fund. It explains, for instance, that “investors purchasing 

funds through intermediaries may be more risk-averse and less experienced with investing than 
A-2

those buying direct-sold shares from a mutual fund sponsor” and that “[f]ailing to account for 

such differences may potentially overstate or understate losses due to conflicts of interest.”17

3. Chalmers and Reuter (2014) 

The Regulatory Impact Analysis cites a 2014 paper by Chalmers and Reuter that attempts to 

measure the impact of broker recommendations on client portfolios. The authors find that plan 

participants who use brokers are likely to need help with asset allocation and fund selection. They 

also find that participants who were defaulted into a target-date fund received asset allocation at a 

lower cost than if they had used a broker. The paper does not test whether the result would have 

been different if they had invested with the assistance of a fiduciary advisor. 

4. Christoffersen, Evans, and Musto (2013) 

The DOL cites a paper by Christoffersen, Evans, and Musto that purports to measure the cost to 

investors of investing in funds sold through brokers. The paper finds that investors who were 

invested in funds that compensated brokers with higher-than-average loads, adjusting for a set of 

fund features, earned lower returns. Again, the paper does not measure or test if these returns 

were lower than those that investors would have received had they used a fiduciary advisor. Also, 

the paper finds that paying brokers through an annual 12b-1 fee or through revenue sharing did 

not produce lower returns, which is inconsistent with the argument that investors using a broker 

are more likely to be placed in underperforming funds. More important, however, is that the DOL 

does not properly adapt the findings of the paper to its economic analysis. 

5. Foerster et al. (2014), Hackethal et al. (2012) 

The DOL also references papers examining retail investment advice in Canada and Germany. 

While acknowledging that those countries’ legal regimes differ from that in the United States, the 

DOL cites the studies as support for the conclusion that advised accounts underperformed by 

more than 150 basis points. This incorrectly represents what the authors claim to have found—

and the papers appear to be irrelevant to the discussion here. First, while the papers do purport to 

study the value of advice offered by financial advisors, the papers are about investment advisors 

in Canada and Germany respectively, not the United States. The Foerster et al. findings are based 

on the authors’ analysis of statistics from the Canadian Financial Monitor survey of Canadian 

households. The Hackethal paper relies on a review of investor accounts at “a large German 

bank.” Whether the papers’ results carry over to the U.S. regulatory regime, and thus to brokers or 

financial advisors in the United States, is unlikely or, at best, just not clear. 

Significantly, the Foerster paper concludes that Canadian advisors induce their clients to take 

more risk—i.e., invest a greater portion of their portfolios in equities—thereby raising expected 

returns. The paper also observes, however, that “the amount of risk an advisor takes in his or her 

own portfolio strongly predicts the risk taken by his or her clients.” This suggests that the clients’ 

                                                            

17 CEA Report, at p. 11.
A-3

assumption of additional risk is consistent with their advisors’ own beliefs—not an inherent 

conflict of interest resulting from the manner in which the advisor is compensated. 

The Hackethal paper, based on a review of account data from a “single German bank,” does find 

that accounts advised by an advisor had returns that were lower than the sample mean for selfmanaged accounts, reflecting lower holdings in equities by the accounts. Given that Germans tend 

to invest a lower percent of their portfolios in the stock market (23 percent of German portfolios 

are invested in stocks, compared to 50 percent for Americans), it is not clear that these findings 

reflect the outcome of broker conflicts. They might, for example, reflect investing norms in 

Germany, or the fact, as the study also observes, that “[o]lder clients (over 50) have significantly 

greater probability than investors between 18 and 30 of using an advisor,” and might be at a stage 

of their retirement planning where they begin to reduce their holdings in equities in favor of 

fixed-income securities.