Washington DC • San Francisco

2121 K Street, NW

Suite 1100

Washington, DC 20037-6082

______

Main (202) 223-4700

September 21, 2015

RE: RIN 1210-AB32; Conflicts of Interest Rule

ZRIN 1210-ZA25; Proposed Class Exemption

Office of Regulations and Interpretations

Employee Benefits Security Administration

Room N-5655

U.S. Department of Labor

200 Constitution Avenue N.W.

Washington, D.C. 20210

To Whom It May Concern:

We are writing this letter to respond to the questions raised by Mr. Piacentini from the 

Department at its recent hearings on the Department’s proposed fiduciary rule about our study of 

the Department’s proposal. 

First, he responded to our critique of the Department’s reliance on a single 

“experimental” study to back its rejection of a simplified though strengthened disclosure 

requirement by pointing to the Department’s citation of a study by the RAND Corporation for 

the SEC. That study, performed by Hung et al. (2008), purportedly found that people do not 

understand “what kind of financial adviser they have and what the obligations of those advisors 

are.”

It is odd to us, however, that Department’s Regulatory Impact Analysis (RIA) only 

briefly mentions this report with regard to the efficacy of disclosures in passing (one sentence on 

page 174), but gives substantial treatment in both the introductory summary and later in the body 

of the RIA to the “experimental” study by Loewenstein, Cain and Sah (2011). (The RAND study 

is cited other times for propositions unrelated to the efficacy of disclosures.) If the RAND study 

were so important on this point, why relegate it to a single line?

Hal J. Singer

Direct Dial: (202) 747-3520

singer.h@ei.com
Page 2

Perhaps the reason for this unusual treatment is that the RAND study says nothing about 

the value of the efficacy of simplified disclosure. The RAND study merely claims that 

representatives of brokerage firms believe that “investors rarely read these disclosures” as they 

are currently presented. This is not an argument against developing a newer, simplified, 

improved disclosure written in plain English in big bold letters at the front of offering documents 

that investors cannot miss.

Given the current vacuum of adequate disclosure from the Department’s perspective, it is 

understandable why the RIA instead focused on the Lowenstein, et al. study, which at least 

purports to examine the value of disclosure generally (but again, not the precise recommendation 

we offered). Nonetheless, as we highlighted in our own study, the Lowenstein, et al. study is 

based on no real world evidence, and so can provide no reliable empirical basis for the 

Department’s rejection of toughened, simplified disclosure – a step without the risks and the 

compliance costs of its own proposal. The disclosure alternative we recommend ought to be 

given a chance before more controversial, riskier and costlier ideas such as the Department’s 

fiduciary proposal are more seriously considered, taking into account all of its potential costs 

and benefits, which the Department failed to do, as we documented in our study.

Which brings us to the Department’s second critique of our study – that our translation of 

the purported benefits of the proposal was somehow defective because we calculated a ten year 

average, 25 basis points, rather than a “weighted average,” which the questioner claims “would 

have made more sense because the effects are actually different over those 10 years.”

We do not understand what to make of this suggestion, since the Department itself 

assumes that the benefits of its proposed rule are phased in linearly over a ten year period. Under 

these circumstances, what weights would the Department have recommended we use instead? 

Even if we had applied different, and presumably, higher weights to the benefits in some 

years rather than others, it is not clear – without having a clear basis for applying those weights –

whether our calculated ten-year average of 25 basis points would have been higher or lower than 

this figure. Regardless of the outcome, even adding a few basis points to our estimate of the 

benefits of the Department’s would have made no difference to our net results, which showed 

that at a minimum, the RIA’s analysis had left out a conservative 44 basis points of costs that its 

proposed rule would generate by depriving investors of the value of advice relating to staying in 

the market during its ups and downs (avoiding market timing) and portfolio rebalancing. No 

amount of reweighting of the Department’s benefit numbers would offset these omitted costs 

(which as we showed in our report understated the full cost of the proposed rule). 

Third, Mr. Piacentini criticizes our use of Vanguard’s study of the value of financial 

advice regarding market timing, which relies on the relative investment performance of target 

date funds, as a proxy for good financial advice, relative to the performance of index funds. Our 

response to this is two-fold. 

Most important, the question implicitly concedes what we reported in our study: that the 

RIA itself contains no estimate of the value of financial advisers encouraging their clients, 

especially those with limited investment portfolios, not to engage in market timing. The RIA’s 
Page 3

cost-benefit analysis ignores the value of this advice, which we argued was a critically important 

omission.

We attempted to correct that omission by using the only study that came close to 

estimating this value, and that was the 2014 Vanguard study, which found that the average 

investor who exchanged money between funds or into other funds fared 150 basis points worse 

than those who did not. Vanguard used the performance of target date funds as a proxy for the 

value of the kind of advice that would discourage such attempts at market timing, and we 

adopted this convention in our work. But then, as outlined in our report, we heavily discounted 

the Vanguard estimate to take account of self-directed investment accounts, and added an 

additional conservative discount to this adjusted figure to arrive at 27 basis points of value 

added. Even then, we found that the value of avoiding market timing afforded by advisers, by

itself, outweighed the average annual benefit of Labor’s proposed rule.

We wish we could have found and used additional studies of the market timing effect, 

and we would have made use of them had we done so. The key point for Labor’s proposal, 

however, is that the Department made no attempt to come up with its own estimate of this effect, 

which is clearly important in the sometimes turbulent investment world. That the Department 

failed to take any account of the costs investors, especially small investors, would suffer by no 

longer having access to someone to call and talk to in times of market stress, and thus being 

exposed to making the fundamental mistake of trying to time the market, is a critical omission in 

the RIA – and one that can easily reverse the results of the cost-benefit analysis of the 

Department’s proposed rule.

Mr. Piacentini’s fourth criticism is that Vanguard’s estimate of the value of portfolio 

rebalancing reflects some “double counting” because such rebalancing is already reflected in the 

performance of target date funds. In fact, Vanguard’s 2014 study makes very clear that its market 

timing and portfolio rebalancing estimates are different, and the methods used to derive those 

estimates are also very different. This fourth criticism is therefore misplaced. In any event, we 

discounted Vanguard’s estimated benefit (35 basis points) to allow for the possibility that not all 

brokers providers this kind of advice.

We appreciate the opportunity to clarify the record relating to our study. 

Sincerely, 

Robert Litan

Senior Consultant

Hal Singer

Principal