Financial Planning

Fiduciary Rule in Limbo, But Investors Are Still Winning

No matter what happens to the DOL conflict-of-interest rule, several changes have already kicked in, and that’s good news for retirement savers.

Among the flurry of directives flying out from the Trump administration in the first few weeks of his presidency was an order to delay the implementation of the Department of Labor’s fiduciary rule. The rule, which took nearly six years to materialize, was once again cast into uncertainty by the stroke of a pen. President Trump made it clear throughout his campaign and in the early days of his administration that he was no fan of what he considered to be burdensome regulations.

The DOL rule made the list of targeted regulations by virtue of some heavy lobbying by Wall Street friends as well as its close proximity to its April 10 implementation date. Instead of clarity on how they will be treated by financial advisers, retirement investors now face at least six months of confusion as the rule languishes in limbo.

Proponents: Investors Should Get the Standard of Care They Deserve

The fiduciary rule was considered to be a huge win for retirement investors as it finally lifted the veil on commission-based brokerage firms and advisers, forcing them to deal in the open regarding their inherent conflicts-of-interest and opaque system of compensation, fees and commissions. The rule requires any financial adviser to use a fiduciary standard of care when offering advice or recommending an investment product to retirement clients. That pretty much rules out selling commission-based products unless they were willing to seek a waiver from their clients allowing them to do so, but with complete transparency of all charges, fees and compensation.

Opponents: Too Costly, and it Hurts Small Investors

According to opponents, the DOL rule, combined with layers of ERISA requirements, would create a bureaucratic quagmire making it too costly to serve smaller investors, limiting their options for investment products and receiving advice. That is what caught the attention of the Trump administration, which believes the DOL, like other rule-making agencies in the federal government, has exceeded its authority. The directive has asked the DOL to review the rule and provide an updated economic and legal analysis, which is likely to tie everything up for months.

The Industry is Already Moving Forward

The impact of the rule on brokerage firms and commission-based advisers was significant, forcing them to choose between “operating in their clients’ best interests” and exiting the trillion-dollar retirement plan marketplace. Although brokerage firms vigorously fought the rule, many spent millions of dollars over the last year retrofitting their products and compensation structures to bring them in compliance.

Many of the big firms, such as Merrill Lynch, JPMorgan Chase and Capital One, have announced they would ban commissions on retirement accounts. In the other camp, firms like Morgan Stanley, Wells Fargo, Edward Jones and Raymond James have said they would instead be using the rule’s “best interest contract exemption,” or BICE. The exemption, which must be signed by both the adviser and the client, is an acknowledgement of the adviser’s role as a fiduciary while allowing for the charging of commissions. Proponents of the rule argue that BICE weakens the rule and allows commission-based advisers to operate under a veneer of a fiduciary standard.

Even Without the Rule, There’s No Going Back

The ultimate fate of the rule is unclear. The administration can’t simply rip it up, but they can put pressure on the DOL to revise or rescind it. It may also be trying to drag it out long enough for Congress to legislate it away. However, one thing is clear: The fiduciary rule and all of the attention it has been given over the past couple of years, has shaken up the advisory landscape. The real winners are financial advisers who already operate under a fiduciary standard of care. Regardless of what happens with the rule, investors are now much more aware of the differences between a fiduciary and a commission-based broker, and there will much more clarity in the marketplace.

Investors are winners as well. The genie has been let out of the bottle, and it will be hard for the firms to turn back. Some firms will continue to move forward to implement the spirit of the rule. Those firms choosing not to do so have been exposed and will need to take clear measures to implement a heightened standard of care or risk significant competitive disadvantages. The momentum gained over the last couple of years should continue to build toward greater transparency, more fee-based compensation and lower-cost products.

The financial services industry and the investors it serves might be better off with universal fiduciary standard of care handed down from Congress, the Securities and Exchange Commission or the DOL, but, ultimately, it will be the marketplace that brings about the change.

Woodring is founding partner of San Francisco Bay area Cypress Partners, a fee-only wealth consulting practice that provides personalized, comprehensive services that help retirees and busy professionals to enjoy life free of financial concern.

About the Author

Pete Woodring, RIA

Founding Partner, Cypress Partners

Woodring is founding partner of San Francisco Bay area Cypress Partners, a fee-only wealth consulting practice that provides personalized, comprehensive services that help retirees and busy professionals to enjoy life free of financial concern.

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