WASHINGTON – The newly announced fiduciary rule could remake the planning industry, ushering in the most successful, ambitious regulatory effort in more than 40 years.

"These new rules will level the playing field so that retirement advisors will compete based on the quality of advice they give," Jeff Zients, director of the National Economic Council, told reporters.

He warned that powerful forces remain arrayed against the rule. In one of many steps likely to be seen as a concession to the industry in the finalized rule, advisors will have until Jan. 1, 2018, to fully comply with its many provisions. This raises the prospect that a Republican president could "do away with" the Department of Labor rule, says Ron Rhoades, a former chairman-elect of NAPFA, who reacted with dismay to the extended deadline.

However, if it survives intact into the next administration, it will send ripples throughout almost every sector within the advisory industry. Some segments will be stronger than others.

The rule could be a “tipping point” for many advisors to transition all their accounts – not just their retirement ones – to fee-based accounts from commission-bearing ones, Rhoades says.

Although a change made to the finalized rule will allow the continued sale of many products that could have faced heavy restrictions – such as equity-indexed annuities and nontraded REITs – many could still vanish over time if they cannot be defended as serving a client's best interest, says Ric Edelman, founder of Edelman Financial, which manages $15 billion in client assets.

There may be other dramatic changes afoot, as well.

"This could be the biggest thing since May Day," Edelman says, referring to May 1, 1975, when the SEC deregulated the brokerage industry. That opened the door for the emergence of discount brokerages, notably Charles Schwab.

'SOME HYPERBOLE, BUT NOT MUCH'

Skip Schweiss, head of TD Ameritrade's Institutional Retirement Plan Services, says there's some hyperbole in Edelman's estimation of the rule's impact, but not much.

The May Day comparison "is not off base," Schweiss says. "There is a set of thinking in the industry that very, very slowly and gradually we are moving toward a better world for consumers. The DoL rule would push that along."

Many changes have already taken place in advance of the rule. Among them:

  • Financial services giant American International Group announced it would sell its independent broker-dealer, AIG Advisor Group. Under the rule, the B-D would be better run by "someone independent of us," AIG CEO Peter Hancock told reporters at the time.
  • Schwab took its ETF wrap portfolio platform, for which it had been charging 90 basis points, and offered it for free last month as part of its digital advice offering, Schwab Intelligent Portfolios. This was a "radical" step that indicated Schwab intends to play in an ultralow commission environment, says Alois Pirker, research director for consulting firm Aité Group. It's a calculated risk that, while marketing the robo platform to new investors, assets will drift there from more expensive options, he says.
  • LPL said in March it would slash prices up to 30% on some of its model investment portfolios. This move by the country's largest IBD could force smaller B-Ds that can afford to do so to follow suit – or perhaps force some out of business.
  • Ladenburg Thalmann, one of the country's biggest independent broker-dealer networks, launched a self-service portfolio account with a $500 investment minimum.
  • Two third-party broker-dealers, CUSO Financial Services and Infinex Financial Group, announced plans to not only lower minimums and adjust pricing on advisory accounts, but to partner with digital advice providers.

These changes – price cuts, the elimination of commissions and a separation between product manufacturers and brokers – are some of the very ones that investor advocates have been seeking for years.
LPL's price drops position the company for stronger growth and do not amount to any capitulation on the company's part, an LPL spokesman has said.

"LPL is waving the white flag," Edelman counters. "They are acknowledging that their business practices will not withstand the regulations. And LPL is one of the good ones. Look at these other firms that sell only limited liquidity, commission-based products. You are going to see every brokerage firm doing something similar to what LPL is doing."

Various industry groups, most of whose members charge commissions, have fought the increased regulation strenuously. Some may make good on their threats to sue to stop the rule's implementation, Jim Pasztor, vice president of academic affairs for the College for Financial Planning, writes in a recent report.

One of the rule's critics said it shouldn't be described as a fiduciary regulation at all. Don Trone, a longtime fiduciary advocate who runs consulting firm 3ethos, made the assertion during his testimony before the Labor Department over the summer. The regulation is composed of "punitive rules that are going to make it easier for bad advisers to hide behind the complexity of the rules, and make it harder for honest advisers to provide their services," Trone said.

The rule is a key move by the Obama administration as it enters its waning days. The president chose to push this fundamental shift through the Labor Department instead of waiting for the SEC, which is governed by commissioners from warring political parties, or from industry watchdog FINRA, which has been criticized for being run by many of the key players in the industry that it regulates.

"The Labor Department has one master," says Mark Hurley, CEO of advisory firm financier Fiduciary Network. “That's the administration."

TRIUMPH OF SMALL

Under current securities law, many brokers may omit or obscure the impact of commissions or fees that clients pay to purchase investment products, including mutual funds, REITs and annuities. In a steady stream of arbitration cases and lawsuits, aggrieved clients have claimed they have had no idea how much of their savings their brokers had pocketed from undisclosed commissions and fees.

Nationwide, Americans lose about $17 billion a year to conflicted financial advice in their retirement accounts, according to a White House Council of Economic Advisors report in 2015. Retirement savings, including 401(k)s and IRAs, make up about 50% of all publicly traded assets, according to Rhoades, who heads the financial planning department at Western Kentucky University.

The White House on Tuesday offered a generalized example of how conflicted advice can affect a middle class saver.

"If a worker has $100,000 in retirement savings at age 45, without conflicted advice it would grow to an estimated $216,000 by age 65, adjusted for inflation," the statement says, "but if she receives conflicted advice it would grow to $179,000 – a loss of $37,000, or 17%."

This new regulatory step is a triumph of small over large, many say, and traces its roots to a slow-building mutiny that began mostly in the 1980s.

Bit by bit, small advisors began breaking away from large financial firms. These RIAs popularized the concept of unconflicted financial advice and prompted many brokers to mimic them by advertising their services as if they, too, were fiduciaries, says Hurley of Fiduciary Network.

"These are guys who basically hung out a shingle and [clients] showed up on their doorstep," he says, without the help of corporate marketing or public relations budgets.

By the end of 2015, RIAs had captured about 14.6% of the $19.2 trillion in client assets managed by both RIAs and broker-dealers, according to Aité Group.

Now all advisors may have to live up to their hype.

"What [RIAs] offer is what clients truly want," Hurley says. "They want the broker to be 100% on their side."

Labor Secretary Tom Perez says he thinks that's where most advisors want to be, as well.

The rule "is not about bad people doing bad things. I honestly believe that the vast majority of those providing advice are trying to do the right thing," Perez said, but "they are operating in a structurally flawed system."

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