The Department of Labor’s announcement of its long-awaited, long-debated fiduciary rule for retirement plan advice will be remembered as a milestone in the history of the industry. To put it simply, professional financial planners and advisors have achieved a victory, and the Wall Street and independent broker-dealer service models have been dealt a blow.
This fits perfectly with the political tone of the times, and in the announcement, Labor Secretary Tom Perez made the most of it. Standing in front of a backdrop that read “Protect Your Retirement, and Stop Conflicts of Interest,” he talked about the fact that so many Americans believe the system is rigged against consumers, and addressed the idea that brokerage firms and independent broker-dealers cannot serve less-wealthy plans and individuals without commissions. “I don’t believe that the only way to provide financial advice to small savers is to provide conflicted advice,” he said.
He noted that many independent advisors are already operating under similar rules. When he talked to them, he added smartly: “They asked if they could get the business cards of all those people who won’t be served by Wall Street firms that say they’re getting out of the business.”
The fiduciary rule is a principles-based, rather than rules-based, standard – the kind of requirement that seems to drive sales organizations crazy, perhaps because it’s so much harder to find loopholes in a broad general principle than in a list of very specific rules. Many independent fee-only and dually registered advisors already operate under these principles as a matter of business routine, but they seem to represent alien territory to the brokerage and insurance worlds.
Among the most important takeaways:
- In establishing best interest contract exemptions, the rule drafters clearly looked to address industry objections about small investors – that larger firms and insurance companies simply can’t work with smaller accounts unless they can charge fat commissions. But even when an advisor is recommending assets that fit into this window, he or she would still have to enter into a contract stating that the advisor and firm are fiduciaries in making these recommendations.
- Perhaps the most interesting aspect of the new rule is the fact that it expands the ERISA and new fiduciary requirements to IRAs when the money is rolled into a client’s IRA from a qualified plan.
- One big win for advisors was the elimination of a proposed requirement that would have required prospects who were in the office discussing a rollover sign a fiduciary contract at the first meeting. As it turns out, a contract can be included in the package of other documents when a prospect becomes a client.
- Yet another concession: if an advisor makes overtures to plan participants to become clients, that, in itself, is not automatically considered to be a fiduciary recommendation. However, the recommendation to roll money out of the plan will fall under the regulations.
- Dually registered advisors and insurance agents had objected that if they were working with a plan, they would have had to charge less for managing IRAs than the costs of the plan they recommend that clients roll out of, and avoid products that were more expensive than the plan options. In the final rule, they will simply have to manage assets in a customer’s best interest, which might mean they can sell commissionable products rather than move an IRA to an RIA management arrangement.
- In perhaps the biggest win for the sales industry, the contract exemption was modified. The list of investments advisors are permitted to offer was expanded from the prior proposal to include variable annuities and nontraded REITs – although one wonders how those products are going to fit into a fiduciary clients’ best interests standard if challenged in court.
- Proprietary products are specifically not prohibited, which means internal salespeople (DoL’s explanatory materials specifically mention insurance product salespeople, but Fidelity was a strong lobbyist against this provision, as well) can still recommend their company’s products even if they are inferior to alternative potential recommendations. In what may simply be a dead giveaway to the industry, the DoL backed off of requiring advisors to recommend low-expense investment options if “another product is better for the client.”
- The brokerage and independent broker-dealer lobbyists also won a provision that significantly waters down disclosure requirements. The disclosure that a rep has to act as a fiduciary can now be put on the firm’s website, and clients will not be entitled to receive projected performance estimates over 1-, 5- and 10-year periods, or annual cost disclosures.
- Financial firms will have until Jan. 1, 2018, to fully comply with the rule, rather than the originally proposed eight months.
The final rule came in at a svelte 1,023 pages, and will almost certainly be challenged in Congress and perhaps also in the courts. An estimated $17 billion a year is a lot of money for the industry to give up without a bitter, protracted fight.
One can see a certain craftiness in the concessions the DoL made, which might make it harder for the brokerage and IBD community to argue unfairness and a deaf ear to their interests before a panel of judges.
Either way, professional advisors win.
The publicity surrounding the rule has alerted millions of savers and investors to the conflicts of interest in sales models. A protracted fight in Congress and/or the courts will require the wirehouse and insurance organizations to argue, publicly, that it is not in the best interests of consumers to work with advisors who are required to treat them under the same standard of care as they would their grandmother, once again exposing their conflicts to the public.
A fiduciary stake has been put in the ground, creating a principles-based standard for financial advice. One wonders how the SEC can plausibly argue that a person’s non-ERISA savings can come under a lesser advice standard than what has now been made the law of the land.
Advisors who want to get into the 401(k) advice business and displace expensive, broker-sold plans should probably act sooner rather than later, while the publicity over conflicts and billions of dollars in sales charges is at its height. As brokerage and insurance firms start to comply with fiduciary requirements, they’ll become increasingly familiar with operating in the leaner, more consumer-focused model that advisors have worked under for decades, and learn to compete with independent advisors in ways they never have before.