It looks like the best the White House can do is keep kicking the regulatory ball down the road, leaving the fiduciary standard in limbo. The DOL won’t enforce the new rules, but they aren’t going away any time soon either.
The DOL fiduciary rule, which requires financial advisors to make sure that all decisions regarding client retirement accounts are made in the investor’s best interest, has taken a long and winding path towards implementation, surviving seven years of comment period, three lawsuits and continued opposition from some sectors of the financial services industry.
It was nearing the finish line — with roughly two months to go before its April 10 start — when the new presidential administration threw a new obstacle in its path. Now progress in either direction has completely stalled.
On February 3, President Donald J. Trump issued an executive memorandum, asking the DOL to re-examine the Fiduciary Duty Rule’s impact on consumers, the financial services industry or increased litigation — and to rescind the rule if further analysis found that the rule caused harm.
With no labor secretary installed yet, the acting Secretary of Labor Edward Hugler issued a statement that “The Department of Labor will now consider its legal options to delay the applicability date as we comply with the President’s memorandum.” He is expected to ask for a 180-day delay in the rule’s implementation, as well as a new notice and comment period.
Rescinding the rule requires some bureaucratic maneuvering. Jamie Hopkins, the co-director of the New York Life Center for Retirement Income and associate professor of taxation at The American College of Financial Services, explains that it will likely take right up until the April 10 start date to stop the rule.
“The first step is to file a notice and comment period about delaying the rule, probably between 15 and 30 days,” he says. “My guess is they’ll probably try to go with 15 because they don’t have a lot of time to get all this done by April 10. They’ll probably go with a 15 day comment period, close that, then suspend the rule within another 15 to 30 days after that.”
“They kind of have to get all that done by April 10 if they want to suspend it, because really if this rule goes into effect even for a day, you could start working on a new rule, but in a lot of ways you’re kind of stuck, because all the companies will have to have complied by day one,” he adds.
The impact of court decisions
Meanwhile, the DOL has won a series of high profile court cases challenging the law. Most recently a Dallas federal judge upheld the fiduciary rule. “Ruling against arguments made by several industry trade associations, she held that the DOL did not exceed its authority, did not create a private right of action for clients, did not violate rulemaking parameters and conducted a reasonable cost-benefit analysis,” explains Jon Vogler, a senior analyst in retirement research at Invesco. “In addition, a Kansas federal judge issued a summary judgment in favor of the DOL on Friday, Feb. 17 in a case brought by a fixed-index annuity provider.”
These court decisions may have further impact as the rule is reconsidered, Vogler maintains. “In performing the ‘economic and legal’ analysis of the rule required by President Trump’s Feb. 3 directive, the DOL will likely have to take into account the Texas court’s ruling, according to some experts,” he says.
Other observers are less optimistic. Harold Evensky, CFP, AIF and president of the wealth management firm Evensky, Katz, Foldes, comments, “I believe there is an excellent chance that the bureaucratic process may well extend the implementation date. If that is successful it is likely the additional time will enable Congress to eliminate or eviscerate the rule.”
The way forward
These events leaves countless industry players in a quandary. Should they continue to move towards a fiduciary standard, even though it’s not required? Should continue to prepare, but hold off on implementation, until the end of the new comment period for further clarification from the DOL? Or should they erupt in a chorus of “Ding dong, the witch is dead,” and blithely go on with business as usual, as if the rule was never proposed?
Aaron Schumm, the founder and CEO of Vestwell, a technology platform for financial advisors who serve the retirement market, believes that the industry will continue to move towards a fiduciary standard, with or without the rule.
“Awareness has been raised and people are talking about what it means to be a fiduciary,” he says. “Seth Myers did a segment on Late Night about the DOL rule. I think it’s very interesting that the general public in that regard is talking about this.”
He adds, “For the firms that put a lot of money and time and effort in place to try to work with this rule, they’re going to stick with it. You’re not going to see anyone pull back and say, I’m no longer going to do what’s in the best interests of my clients, because I’m not required to. Firms like Merrill Lynch, they’ve said that they’re moving forward with this regardless.”
Evensky, on the other hand, sees “a mixed bag.” The large firms that have sunk money into complying will continue to move forward, he says, but, “Even then they are likely to fudge the lines.” And sectors of the industry who had the most to lose from new regulations—variable annuity and indexed annuity firms? “Those that are very insurance based probably not,” he adds.
Investors will be on their own to figure out which firms adhere to a fiduciary standard and which don’t if the DOL rule is eliminated, exactly as they are today. Evensky recommends that individuals ask their advisors to take a fiduciary oath drafted by Committee for the Fiduciary Standard in 2009. The oath certifies that advisors work in their clients’ best interests, act with prudence, refrain from misleading clients, avoid conflicts of interest and be transparent in disclosing information to clients. “We are actively encouraging the media, particularly the public media to print the oath and encourage investors to use it to protect themselves as they clearly cannot count on Congress or regulators,” says Evensky.
Hopkins believes that reversing the rule will mostly confirm the path that financial services firms have already taken. “Most of the big firms who spent a lot of money getting ready, they’ve changed some of their business practices, their fees, their structures.
They’re not going to change that,” he says. “Other firms have made changes and are waiting and they have all the systems and processes in place, and they’re going to flip the switch come April 10. If the rule’s not there, they don’t flip the switch and they keep operating as they have.
But I don’t think most companies are too upset one way or the other. Companies that wanted to make a change will make a change.”
A marketing opportunity
But companies that continue to operate under the much looser “suitability” standard may face some headwinds. “Over time, as people become more and more aware of the fiduciary standard, there will be firms like LPL that will use it as a marketing tactic against their competition,” says Schumm. “They’ll be saying, look, those guys aren’t going to do what’s in your best interest and we are.”
Already a new TD Ameritrade survey of 5000 RIAs finds that these independent, fee-based advisors, who have always adhered to a fiduciary standard, are winning more new business from commission-based brokers (31%) than any other source.
“I think the advisors in our community, they’re still trying to do what’s right for their clients. Even if they don’t have to. Even if it’s not mandated by the DOL,” says Schumm. “There may be some advisors with this old school mentality of let’s go back to the way it was. No one looking over my shoulder. But it’s short sighted. It all blows up and we deal with the mess.”