Delaney Defends Fiduciary Rule in Financial Services Hearing, Argues That Rule’s Detractors Are Wrong to Doubt Entrepreneurs and Innovators
WASHINGTON – Congressman John K. Delaney (MD-6) spoke out in defense of the Department of Labor’s Fiduciary Rule and challenged arguments made by opponents of the Rule that presume that the private sector cannot innovate and adapt. Congressman Delaney spoke during the Financial Services Committee’s Subcommittee on Capital Markets, Securities, and Investment Enterprises hearing.
During the hearing, Congressman Delaney stated that the arguments made by opponents of the rule are, “so contrary to how we think about our capital markets and our entrepreneurial economy.” In Delaney’s view, the private sector will be able to innovate and provide high-quality service, at a fiduciary standard, to their clients.
For Delaney’s full remarks, see below. Congressman Delaney is the only former CEO of a publicly-traded company in the House of Representatives and worked with the Obama Administration to finalize the Fiduciary Rule.
Congressman Delaney: Thank You Mr. Chairman for permitting me to participate in this hearing and thanks for calling it. The reason I asked to participate is because I have been a strong supporter of the Fiduciary Rule and I found this conversation very interesting because, if you didn’t know better, you’d think the Fiduciary Rule prevents people from owning annuities. It in fact doesn’t prevent people from owning annuities. For example, it discourages people from selling annuity products if, when you include all the fees, it is deemed to be not in the best interest of the client and I think there is somewhat of a broad agreement here that investment products that are in a client’s best interest is a more important standard than the current standard, the suitability standard. I think that in a perfect world everyone here would agree that we would love for every client to receive investment advice that is in their best interests as opposed to just suitable. So the issue seems to be that because of this rule which, trust me, I agree would be terrific if the SEC put would have put forth this rule; they do probably have more expertise in the area, but they didn’t do it. And I think a future where the SEC comes up with a rule for all the investment advice and we synchronize Fiduciary Rule from the DOL with that could be a great outcome, but I wouldn’t want to delay the DOL Fiduciary Rule because it seems to be the forcing function to get the SEC to finally try to do something on this. I think that’s a false choice. I think we can have the SEC try do something on this and then we can see what they come up with and we can look at the Fiduciary Rule and we can synchronize them in one standard. But what I find amazing about this discussion is the notion that the current business model of, say your firm, Mr. Lombard, and I am sure the overwhelming majority of your advisors do a terrific job for their clients. Your firm has a great reputation, it’s got a good brand, the names on the door, and people wake up every day and do the best thing for their clients. But the issue with the Fiduciary Rule in the eyes of three of the four guests here seems to be that for some reason because of this rule, we will be left with a world that – it’s all robo-advisors and there is no innovation and no adaptation to this new standard. And that just seems so contrary to how we think about our capital markets and our entrepreneurial economy because, as someone who started two financial services companies from scratch and took them public on the New York Stock Exchange prior to being here, and specifically started companies that focused on opportunities that was created by larger financial institutions who weren’t adapting to the market’s needs either because they had legacy systems, or legacy compensation structures or some legacy practices that made them hard to respond to the model. I guess my question for Mr. Lombard and Dr. Holtz-Eakin, and I’m a huge admirer of your work by the way, so thank you for being here, why do you think for some reason that suddenly the private economy, the entrepreneurial economy of the United States won’t take this new standard, and if your firm can’t respond with a high quality product where human combined with technology allows people to get advice at a best interest standard – why don’t you think all kinds of entrepreneurs raising all types of private capital won’t start all kinds of new businesses to exactly meet that need and out compete you if you’re stuck throwing your clients out of your firm or putting them on some automated, Siri like, system. I just don’t understand why you’d bet against the entrepreneurial economy of the United States.
Mr. Lombard: So, we’ve already made innovation. We’ve brought down our minimums on advisory fees fivefold, from $25,000 to $5,000. We still have upwards of 10,000 accounts with balances less than $5,000. We have certain fixed costs that those clients, if we charged those fixed costs to them, would pay an unreasonable fee.
Congressman Delaney: So hearing that, I would say “Ok, I’m going to start a new company without those fixed costs and outcompete you and provide great service to these people.” Why don’t you think that’ll happen? Because that’s how it happens everywhere in this economy.
Dr. Holtz-Eakin: So, I have two responses. It’s fantastic questions. Right on the mark. And there’s a broad concern, which is also going on in Financial Services, about the birth rate of firms in the U.S. economy which has been declining steadily and which, a few years ago, fell below the death rate of firms and that’s a troubling trend.
Congressman Delaney: There’s other reasons for that.
Dr. Holtz-Eakin: So I worry that the regulatory burden contributes to the inability to enter and to provide the competition you are describing.
Congressman Delaney: I agree with you.
Dr. Holtz-Eakin: I say this lovingly, I hope you are afraid of going out of business every day. You want that kind of competition. The second thing I’m worried about is exactly the mirror image of the concern that’s been expressed earlier, which is how long does that take? And in the interim, what happens to everybody who had advice and is now gone.
Congressman Delaney: Transitions are tough, I acknowledge that and we ought to be smart about that but I just think that people will innovate out of this issue.