The Department of Labor’s fiduciary rule on retirement advice is taking effect today.
After much delay and uncertainty, particularly in the last six months under the new administration, retirement advisors now must put investor interests first when choosing products and determining fees for their services.
Full implementation of the rule isn’t expected until January 2018, when all-out enforcement of the rule will kick in. What that means is that between now and then, advisors and firms must show “good faith” and be able to demonstrate they are acting as true fiduciaries if the DOL comes knocking on their door. In other words, enforcement is months away, but the heart of the fiduciary rule is in effect starting today.
Showing The LegWork
The industry has been getting ready for this for a long time, and most advisors already act as fiduciaries under the Securities and Exchange Commission. The big difference is that until now, no one had to really worry about showing the legwork that goes into product selection and compensation to demonstrate they are in fact putting investor interests ahead of their own.
It’s that compliance demand—or homework, if you will—that’s really a big change for most advisories—the question of how to prove they are doing the right thing by investors.
“There’s a high degree of uncertainty as to what ‘good faith attempt’ means for a firm,” Envestnet’s Steve Boms, VP of government affairs, said. “And even though RIAs serve as fiduciaries under the SEC, they’re now looped into DOL compliance, too. There’s a whole new apparatus that RIAs under the SEC will have to make sure they are compliant with.”
ETFs To Gain?
Many in this industry have projected the big beneficiary of this rule to be ETFs—the low-cost, passive, easy-to-understand, cheap-to-own products. MarketWatch said the ETF market could grow to $10 trillion by 2020—that’s more than three times the size it is today.
There’s no question that fee compression in the ETF space, transparency, ease of trade and tax advantages all suggest ETFs are well-placed to gain assets in a world where investor interests trump all else.
But some say it may be too soon to be making that prediction. For starters, cheap isn’t always best when it comes to meeting investor needs. There are cases where a low-cost, passive ETF might not fit a client’s goals.
The DOL is certainly not calling advisors to dive into ETFs. The rule does not specify what products best meet the fiduciary standard.
“There are criteria when it comes to product and fees, but they are not prescriptive from DOL,” Boms said. “The DOL is not saying, ‘Here’s the maximum fee you can assess,’ and it’s not telling advisors what steps to take. This is where the uncertainty over what ‘good faith’ means comes into play.”
Rule In The Making
It’s also unclear whether the fiduciary rule will last in perpetuity. The DOL is still welcoming feedback from advisors, firms and investors as it shapes the rule going forward.
“There could be other iterations of this rule,” noted Boms. “There are a lot of moving pieces still at play that compound the uncertainty of what the fiduciary rule looks like one, five, 10 years from now. We just don’t know. “
Contact Cinthia Murphy at [email protected]