Since the Labor Department issued its revised proposal to expand the definition of “fiduciary” under ERISA to include any financial adviser who provides guidance to investors in retirement accounts, the Financial Services Institute has been hard at work combing through the proposed rule in order to understand and analyze its impact on independent financial advisers and their clients.

After several months of careful review, thoughtful discussions with our members, and dialogue with the DOL, the White House and other regulators, we have come to a distressing conclusion: The DOL’s revised proposal, as currently written, is unworkable for financial advisers and stands to do serious damage to American retirement savers and retirees.

The proposed rule represents a fundamentally flawed rethinking of the way that retirement advice, products and services are delivered to investors, and would have profound negative consequences for both registered representatives affiliated with broker-dealers and registered investment advisers.

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Before examining the disruptive and harmful potential impacts of the DOL’s proposal, allow me to emphasize a few points on FSI’s perspective. First, we strongly support a uniform fiduciary standard that would harmonize regulatory requirements for registered representatives affiliated with broker-dealers and registered investment advisers, and we have since 2009 – even before the passage of Dodd-Frank. A principles-based, properly structured fiduciary standard will help alleviate consumer confusion, enhance investor protection and enable investors to continue to receive the advice they have come to depend on.

Next, we understand and share the DOL’s goal of protecting investors, and we are eager to work with the department to help achieve this objective. We believe that investors are best protected when their access to quality, affordable financial advice, products and services is not limited, and we are eager to work with the DOL to ensure that this crucial aspect of investor protection is not neglected.

IMPLICATIONS

For legislators, investors and members of our industry, the first key element to understand about the DOL’s proposed rule is its sheer scope. Under the proposal, the vast majority of interactions between advisers — whether they are affiliated with a broker-dealer or working under an RIA — and clients regarding assets in qualified plans or IRAs would fall under the broadened definition of “fiduciary.”

This is an important determination since, under the Employee Retirement Income Security Act of 1974, a fiduciary is prohibited from receiving commissions for his services without relying upon an available exemption. Currently, 98% of smaller IRA accounts — defined as having $25,000 or less in assets $mdash; are advised on a commission basis.

The DOL’s proposal includes an exemption that, despite its stated aim of permitting commission-based advisory relationships to continue (as well as preserving other forms of compensation such as revenue sharing and 12(b)-1 fees), would impose such costly and complex requirements on advisers and financial services firms that commission-based IRA accounts would simply cease to be economically viable. This is the much-discussed best-interests contract exemption.

The BICE would require potential investors to sign a contract with advisers prior to any conversations about their accounts, investments or goals. In the contract, advisers and institutions would be required to acknowledge their fiduciary status, provide extensive warranties regarding their services and compensation, and avoid exculpatory language that would limit their liability.

(More: Perez says DOL fiduciary debate shifts from whether to how)

These basic requirements are only the start. From there, the BICE would steer members of our industry into uncharted territory: It would require that firms establish machine-readable presentations of all direct or indirect compensation that is or could be earned for every investment, for every financial adviser, as well as for the institution or its affiliates. Disclosure to this effect would be required on firms’ websites. Firms do not currently provide this information in any format, and implementing the systems and processes to make this information available would be tremendously expensive and complex.

CONFLICTS WITH FINRA, SEC

The BICE would also require disclosure of total compensation at the point of sale and annually, listing total costs on a one-, five- and 10-year basis. This would require firms to project the growth of investments in clients’ portfolios, in direct conflict with Finra and SEC rules. Further, the BICE would prohibit a wide swath of investment options for clients and impose onerous new monitoring and record-keeping requirements, among other stringent new mandates.

At a high level, our analysis of the DOL’s new proposal makes it clear that the rule would:

1. Raise costs significantly for advisers and firms through its complex and difficult disclosure and record-keeping requirements.

2. Create enormous liability exposure for advisers and firms by effectively incentivizing plaintiff’s attorneys nationwide to serve as the enforcement mechanism for this new regulatory regime.

3. Put pressure on broker-dealers, investment advisers and the financial adviser business model by pushing for rigidly standardized compensation.

4. Most importantly, the rule would result in reduced investor access to retirement advice, products and services, especially for small and midsize clients.

As I said, these drastic and damaging impacts would apply for registered investment advisers, as well as for advisers affiliated with broker-dealers. While RIAs seek to adhere to the SEC’s fiduciary standard today, the DOL’s proposal would establish a new and unfamiliar regulatory framework that differs from the SEC standard in significant ways, and which would result in new monitoring, reporting and compliance requirements and costs.

THE BOTTOM LINE

To put it simply, Labor Department’s new rule proposal is unworkable for broker-dealers, financial advisers, investment advisers and their clients.

We are further troubled by the DOL’s pace in seeking to implement this proposal. Comparably complex rule-making processes by the DOL typically take approximately 725 days to move through the Office of Management and Budget review process to publication and comment, and finally to release as a final rule. In this case, however, the DOL is seeking to complete the rule-making process in half that time.

Fortunately, through the hard work and dedication of our members, we are working to make our industry’s and investors’ voices heard on this vital issue. Our comprehensive advocacy effort on the DOL proposal incorporates:

1. Our detailed comment letter, including extensive recommendations for making the rule workable, filed on July 21.

2. An in-depth analysis of the DOL’s regulatory impact study, which forms the basis of the department’s rule-making effort, which we have commissioned from Oxford Economics.

3. Vigorous outreach efforts to engage members of Congress to ensure they understand the proposal and its potential impact on access to retirement advice fully.

4. A grass-roots campaign asking FSI members to write letters to members of Congress, and encouraging investors to do the same through our new dedicated microsite, www.MySavingsMyChoice.org.

5. Engaging the DOL in a constructive dialogue to understand officials’ views and goals and to help them understand ours.

Dale Brown is president and chief executive of the Financial Services Institute Inc.