In early 2017, Trump Administration officials and GOP lawmakers agreed: the fiduciary rule, established by the Obama Administration, was another big-government overreach and needed to go. Five months into the Trump Administration, it’s likely that the rule, which seeks to improve transparency and discourage conflicts of interest in investment plans, will see changes. But is it too late to change an industry that is already moving in a new direction?
Pushing for more transparency
The fiduciary rule was originally designed as an update to ERISA law that would bring more accountability and transparency to investment advice for retirement accounts such as 401(k)s. It expands the ERISA law definition of a fiduciary to virtually all financial professionals who work with retirement plans or provide retirement planning advice. In some cases, it would replace an older standard, the “suitability standard,” which is a lower bar of responsibility for advisors. With the new standard, advisors must place the interests of their customers above their own.
There are provisions to allow advisors to opt out of the new standard, with the permission of their clients, but the Obama Department of Labor (DOL) sought to create a rule that would put in writing that advisors were working in the best interests of their clients. The intention was to prevent conflicts of interest and clearly inform clients what fees and commissions they were being charged.
The rule change was not without its critics—some thought that independent investors, who do not rely on matching funds from employers, could be put at a disadvantage by the new system. The theory was that with fewer commission arrangements, brokers would have to raise fees, making the market more expensive for investors with limited resources.
With the election of Donald Trump as president, there was immediate discussion of cancelling or revising the fiduciary rule. The Trump Administration has put a high priority on being seen as business-friendly and anti-regulation. The controversial fiduciary rule was immediately targeted as a high-profile issue that would help make that point—especially since, as a regulatory rule and not a piece of legislation, it didn’t require a vote in Congress to change it.
A top priority for the new DOL chief
The new secretary of the DOL, R. Alexander Acosta, has said that scrapping the Obama administration’s fiduciary rule is one of his top goals. Implementation of the rule was slated to begin April 10 of this year, but the Trump Administration issued an executive order that moved the date to June 9, to give the DOL more time to review the rule.
As part of that review, DOL officials say they are undertaking an economic and legal analysis, looking at whether the fiduciary rule will affect consumer access to retirement information and financial advice. If the agency finds that it does, it likely will rescind or revise the rule.
Many Republicans in Congress also support changing the rule. On May 2, more than 100 members of Congress sent Acosta a letter calling for a permanent delay of the rule. “We are very concerned about the impacts of this rule on access to retirement advice for small- and medium-sized investors, as well as small businesses who are interested in establishing a retirement plan,” the lawmakers wrote.
Another legislative development that may affect the issue is the introduction of the Financial Choice Act of 2017, which is seen as an effort to counter the Dodd-Frank regulations also put in place during the Obama Administration. This proposed law would repeal the existing fiduciary rule and allow the Securities and Exchange Commission to issue its own version of the rule.
Notably, the recent $1 trillion spending bill passed by Congress did not include language striking down the fiduciary rule. Some lawmakers had pushed for an amendment to do just that, but the bipartisan compromise that emerged did not include “poison pill” amendments that Democrats opposed.
The industry (some of it) strikes back
But for all the maneuvering in Congress and elsewhere, much of the industry seems to have accepted the rule and made the “fiduciary standard” the de-facto status quo already. Insiders note that financial companies have spent millions re-tooling their approaches to meet the new standard, and changing course now would not only be difficult, but could hurt their standing with consumers and the employers who sponsor plans, groups that have generally supported the rule’s emphasis on transparency.
Some in the investment industry are still calling for changes to the rule. But even back in December, a CNBC article noted that many big players had already decided the train has left the station. “’A lot of major firms have spent millions to comply with the rule and have incorporated their strategies into their marketing messages,’ said Karen Nystrom, director of advocacy for the Financial Planning Association, a major supporter of the DOL’s fiduciary rule. ‘They may want to take the high ground on this.’”
In short, the big investment companies may have decided the goal of the fiduciary rule is the future of the industry—more transparency and consumer engagement, less reliance on the commissions and broker-driven strategies of the past. Even if the fiduciary rule is completely revoked, DOL is not going to force companies to go back to the old way of doing things. And most likely, they won’t.
Companies with employer-sponsored plans should be aware of the changes in the industry, whether the fiduciary rule goes forward or not. Employers and HR departments should be working with their brokers and advisors to make sure that fees and contracts are in compliance—or discuss why they aren’t, if an advisor has not yet complied. Marsh advisors are among the many groups that have moved forward with fiduciary rule compliance and will be able to answer questions on the changes that the industry is seeing.
Cynthia Dash, a general manager for Matrix Financial Solutions, recently wrote in Investment News that investment firms have much to gain from making their offerings more consumer-friendly. “Regardless of the rule’s final outcome,” she writes, “firms are transforming their approach to the retirement side of their businesses to become more transparent on fees and suitability and are moving forward with changes anyway, because it makes sense for advisers and their clients.”