Ed Slott: About That New IRA Conflicts of Interest Report …

What You Need to Know

The takeaway for advisors: More regulation is likely on the way, according to Slott.
Slott sees the report as yet another futile effort by regulators to protect consumers from bad actors, who will still be unethical.
The remedy cited in the report could wipe out a client’s IRA, Slott maintained.

The takeaway for advisors from the just-released Government Accoutability Report on IRA conflicts is that “unfortunately, more regulation is on the way and that means more burdensome compliance paperwork,” according to IRA and tax expert Ed Slott of Ed Slott & Co.

“Yes, the report shows that there are concerns about conflicts of interest and they want to do something about it,” Slott told ThinkAdvisor Thursday in an email exchange. “But everything they have tried … hasn’t really worked.”

He cited the Labor Department’s fiduciary rule, the best-interest contract exemption that was part of the 2016 fiduciary rule, and consumer protection efforts by the Securities and Exchange Commission and others.

The GAO report released Wednesday, Agencies Can Better Oversee Conflicts of Interest between Fiduciaries and Investors, “is yet another futile effort by the regulatory agencies to ostensibly protect consumers from bad actors, who will still be unethical, and put their own interests first,” Slott relayed.

The report was commissioned by members of Congress and released Wednesday by Rep. Bobby Scott, D-Va., ranking member on the House Education and Workforce Committee, as well as Senate Health, Education, Labor and Pensions (HELP) Committee Chairman Bernie Sanders, I-Vt., and Sen. Patty Murray, D-Wash.

Lawmakers asked GAO to assess where issues around conflicts of interest and investment advice stand today, after the Labor Department’s 2016 fiduciary rule, which was vacated by a Texas court in 2018.

‘Useless Paperwork’

While “there are inherent conflicts of interest in selling financial products,” Slott said, “there are the same conflicts in almost every consumer transaction. Advisors get paid like other business people.”

The report says “the government (IRS) needs to step up holding advisors accountable, and that sounds good for consumers, but everything any agency has attempted has only buried good advisors in needless piles of useless paperwork that clients don’t understand anyway,” Slott said.

“Clients spend more time signing forms than speaking with advisors about their financial affairs.”

Is the Cure Worse Than the Disease?

The report focused on identifying prohibited transactions “to protect clients from supposedly unscrupulous advisors pushing these investments,” Slott said. “Yes, that’s wrong and better educated advisors (especially on the IRA tax rules) should know better.”

On the surface, Slott continued, “these protections sound good. But the very protections the report advises (to identify and assess the prohibited transaction excise taxes against the advisors — and some of those penalties could be 100% tax on the prohibited transaction), could inadvertently wipe out a client’s IRA,” Slott maintained.