Remarks at the Conflicts of Interest Final Rule Announcement, Center for American Progress, Washington, DC, April 6, 2016

[as prepared for delivery]

Good morning and thank you, Jeff, for the kind introduction. Without your tireless efforts – and the relentless support of our boss, President Obama – we simply would not be here today. Thank you for your friendship and partnership.

I also want to thank:

• Neera and our hosts at the Center for American Progress, who do remarkable work on behalf of the middle class. On a day that’s all about what it means to be middle class in America, I can’t think of a better place to make this announcement.
• The outstanding Members of Congress who are here today – Senator Murray, Congressman Becerra, Senator Schatz, Senator Warren, Senator Booker, Congressman Sarbanes, and Congressman Delaney.
• A number of other Members of Congress wanted to be here today – I’d like to say a special thank you to Leader Pelosi, Leader Reid, Congressman Scott, and Congresswoman DeLauro, among many others for their support. And thank you to the Congressional staff here today. Your hard work and that of your bosses means so much. You are all true champions for retirement security.
• The industry representatives here today, who prove that it’s a false choice to say we can have a thriving financial services industry or look out for consumers’ best interests. You demonstrate every day that we can and must have both. I am grateful for your constructive input throughout this process, and the rule we finalize today is stronger because of your engagement.
• My colleagues here from the Department of Labor who have tirelessly worked on this issue – especially the career staff of the Employee Benefits Security Administration, the backbone of our team.

Working together, today we finalized the Conflict of Interest rule. It puts into place a fundamental principle of consumer protection in the American retirement marketplace: a consumer’s best interest must now come before an adviser’s financial interest.

This is a huge win for the middle class, and an affirmation of the basic bargain of America: that if you work hard and play by the rules, you can expect to be able to provide your family with a roof over your head; a good job, with steady income; and a secure, stable retirement.

But that basic bargain has frayed. In far too many places and on far too many issues: the rules no longer work for working people. The system is out of balance.

For decades, a perfect storm has eroded the retirement security that is a central tenet of middle class life.

First, the retirement landscape has fundamentally changed. It used to be that you would work 30 years at one company and retire with a pen, a party, and a pension. We’ve moved from defined benefit plans to defined contribution plans. The Ozzie and Harriet world gave way to a Modern Family era of IRAs and 401ks, so the responsibility for retirement savings is now squarely in the hands of ordinary Americans.

Second, the Great Recession devastated retirement savings. For many working people, their 401ks shrank to 201ks.

And third, the regulatory structure that protects people’s investments has not kept up with this shifting landscape. In a world where people are more on their own than ever in making financial decisions, financial advisers are not required to give advice that was in their clients’ best interest.    

For families like the Toffels, this perfect storm spelled disaster.

Merlin and Elaine Toffel did everything right. After a lifetime of working hard, raising four kids, and saving wisely, they built up an impressive portfolio with Vanguard.

When Merlin was diagnosed with Alzheimer’s and could no longer manage their finances, Elaine made an appointment at the bank they used and trusted for years. The bank’s investment broker told her to liquidate that impressive Vanguard portfolio, selling them variable annuities to the tune of $650,000. Elaine trusted that advice; it was in her best interest, she thought.

But those variable annuities charged nearly 4% of the investment per year – more than $26,000 annually. If the Toffels needed to access the money right away, as all too many families do when their loved ones are in decline, a 7% surrender charge would cost them more than $45,000. In the end, the broker’s conflicted advice cost a hard-working, middle-class family more than $50,000.

The Toffels’ story is tragic. But it is not unique, and it is not fair. The advice the Toffels were given may have been “suitable,” but it sure wasn’t right. American families like the Toffels are losing billions of dollars because of an out-of-balance system that allows for conflicted advice. Responsibility should be rewarded, not exploited.

For families like the Toffels – families who’ve done everything we ask of the American middle class – the stakes couldn’t be higher.

Both your doctor and your lawyer are obligated to look out for what's best for you. Despite what most working people assume, that’s not necessarily the case for financial advisers, who to this point have merely been required to give advice that was “suitable.” If you had an illness, you wouldn’t accept your doctor’s recommendation of a “suitable” treatment plan. You’d expect and deserve the plan that was best for you.

Financial advisers, however, are under no legal obligation to provide advice that’s in your best interest. They can steer you towards more complicated investment products with higher, often times hidden, fees.

Scott Puritz is the Managing Director of a firm called Rebalance IRA that adheres to the fiduciary standard. More than 30 percent of his client base is what he calls “brokerage refugees” – clients who were shocked to find out that their trusted retirement adviser doesn’t have a fiduciary obligation to recommend products in their best interests. The corrosive power of fine print turned their American dream of a secure and dignified retirement into a nightmare.  

Now make no mistake: the challenge that consumers confront in getting access to sound advice is not about bad people doing bad things. I honestly believe that the vast majority of those who provide advice are trying to do the right thing. The heart of the challenge for consumers seeking advice and advisers giving advice is that they are operating in a structurally flawed system. The interests of the consumer are all too frequently misaligned with the financial interests of the firm and the adviser.

Many companies already advertise that they put their client’s needs ahead of their own. The marketing materials contain a familiar promise: “we put clients first.” Today’s rule ensures that putting clients first is no longer simply a marketing slogan. It’s the law.

This rule came up a great deal in my confirmation hearings. I committed to slowing down the rulemaking process in order to build a big and inclusive table that allowed us to both hear and address the concerns of stakeholders. In any rulemaking, it is important to bring an open mind, a keen ear, and a healthy dose of humility. We did just that.

We held over 100 meetings, four days of public hearings, and received close to 400,000 comments. And that’s just since our re-proposal – there were many more meetings, comments, and input that we got on the original proposal in 2010.

Throughout our extensive public outreach effort, we found that the vast majority of the industry looked to the same North Star – an enforceable, best interest standard – and had valuable ideas about how to reach it. With every meeting that we took, every comment letter that we read, every witness we spoke to at the hearings… we got smarter. We listened, we learned, and we adjusted.

You’ll see that reflected in the final rule.

We were asked to address the mechanics of the contract – companies said they would have to put a contract in front of a potential customer’s nose the second they walked in the door. 

We addressed that. Now the contract can be completed at the same time as the other paperwork you fill out when you open an account.

We were told the disclosure provisions were too burdensome – people said they were too complex, too difficult to implement, and too costly. 

We addressed that. We eliminated the 1, 5, and 10 year projections of the point of sale disclosure, eliminated the annual disclosure, and streamlined the other disclosures.

We were told that people read our proposal to mean that firms that sold proprietary products were put in a “penalty box” by our rule.  Folks said that it would be like having to recommend Chevy cars when you worked at a Ford dealership. 

We addressed it. We clarified that there is no bias against proprietary products, and created special rules to ensure that those advisers could meet the Best Interest standard.

We were told firms needed more time to build systems, so we extended the initial timeline from 8 months to one year, and phased in implementation so that firms have until January 1, 2018 to come into full compliance.

These are just a few of a lengthy list of issues where we streamlined, simplified, and clarified our rule while remaining true to our North Star. It would not have been possible without the productive engagement from consumer groups, industry, Members of Congress and all stakeholders alike.

There are many advisers who are already operating their businesses using this model. They constantly tell me two things: first, putting your customers’ interests firsts is great for the customer and great for businesses. Second, in response to claims by some in the industry that the new rule will force them to stop serving small and moderate savers, these folks who are already serving small savers ask me to give out their business card and their email, because they would love to pick up some new clients.

I am confident that industry will be able to comply with the streamlined rule and look forward to continuing our constructive engagement.

I would also not be surprised if there remain a small but boisterous minority in the industry who will continue to insist, “There is no problem,” or claim the imminent collapse of the market for “small savers.”

I refuse to believe that just because your savings are small means they’re not worthy of big protections. I refuse to believe that just because you may not be rich means your retirement savings deserve poor advice.

The argument that retirement advisers can only provide advice to small savers if we allow that advice to be conflicted is akin to saying that doctors who practice in underserved areas ought to be allowed to commit “a little malpractice.” I categorically reject that.

I’d also tell the critics to ask the Toffels if yesterday’s status quo was what they deserved for their lifetime of hard work and sacrifice. I’d tell them to ask a mom who is balancing her son’s college tuition payments with saving for her own retirement if she thinks her adviser’s interests should supersede her own. I’d tell them to ask a young person deciding what to do with a couple thousand dollars in a retirement plan if he can afford conflicted advice.

These folks do everything right. They work hard and save what they can. They are responsibly preparing for retirement, but because of skewed incentives that fuel bad advice that’s not in their best interest, that hard-earned nest egg ends up a shell of what it could have been. That’s not the America I believe in, and it’s not the system the American people deserve.

In the year 2016, I have difficulty believing that the only way to provide financial advice is to put your financial self-interest ahead of the customer’s best interest.

Indeed, a vocal minority will tell you that we can’t innovate, can’t smartly regulate, can’t change an outdated status quo that costs billions of dollars of retirement savings for working people.

Today, with my friends and colleagues, I’m here to say we can and we did. With today’s decisive action, we’re one step closer to putting a secure and dignified retirement within reach of everyone willing to work for it.

Thank you.