5 Advisor Views On New Fiduciary Rule

The rule, unveiled this week, and now headed for Congressional approval, would not be fully effective until January 2018. But assuming it is approved and implemented, it could shake up some long-standing commission-based business models often used in retirement investing. Perhaps most impacted by this regulation will be brokerage firms. Registered investment advisors (RIAs) are already required by the Securities and Exchange Commission to act as fiduciaries.

We caught up with a few experts for their view on the rule.

Joe Goldberg, Director of Retirement Plan Services; BAM Advisor Services

It’s progress from where we were. But there’s a lot of ability to maintain the same practices with just a little more disclosure and more transparency. It seems they loosened up the utilization of the best-interest contract—with pre-existing clients—so I think the rule is going to impact more new business for different service providers.

The financial impact is going to be greatest on smaller IRA rollover people who are poached to be sold loaded mutual funds with their rollover dollars. It’s going to be harder for producers to do. The industry as a whole for retirement plan advisors working qualified plans has moved more towards a fiduciary practice, but the real impact here is on the IRA business model, and the amount of annuities and products that are sold to people when they’re incentivized to roll their money out of retirement plans.

It will be interesting to see what a firm like Edward Jones does. The entire business model is built upon IRAs that sell loaded mutual funds and have massive contracts with companies like American Funds. The truth is that it’s hard to operate and help serve the small IRA client in a fee-based environment.

I wonder how much these best-interest contracts will influence where those dollars go. Today a lot of them go into annuities that are commission-driven. Anyone who’s under the age of 50 who’s been sold annuities for their IRA is 100% driven by commission versus what’s in their best interest. The variable annuity market is going to be impacted.

I did think the best-interest contract, which will require more disclosure, is maybe a little more lenient than I would have thought. There’s certainly a benefit to the investors. The majority of their liquid net worth is in IRAs and 401(k)s. To put in place a rule where most service providers have a legal obligation to act in the best interest of clients, and those who want to operate in a commission-based structure have to face more hurdles and disclosures—that’s a good thing for investors.

But we went into this knowing that this is a large enough industry with enough lobbyists where the rule wasn’t going to be perfect. For example, the best-interest contract doesn’t have to be presented upfront in the sales process, just at the time of any service agreement. If we want people to be educated consumers, there should be a clear statement from the beginning that says, “I’m not working under a fiduciary standard.” But as far as this iteration, I don’t think I could have expected any more.

What’s telling to me is that the rule would not be implemented until 2018. To say that a company not acting as fiduciary has a year and a half to find a way to disclose what it needs to disclose, makes you scratch your head. How difficult can it be for a company to explain what kind of revenue it derives from its clients? The majority of the financial services industry has never had any requirement to serve in the best interest of clients.

Michael Kitces, Partner & Director, Wealth Management for Pinnacle Advisory Group; publisher of the financial planning industry blog Nerd’s Eye View

Overall, this looks like a well-made rule. The DOL clearly listened closely to comments from both sides, and found numerous ways to improve and simplify the implementation of the final rule, in a manner that didn’t undermine the key consumer protections.

The introduction of the “Level Fee Fiduciary” eligible for a streamlined exemption is significant. It recognizes that RIAs already operating as fiduciaries with clients don’t necessarily need significant additional layers of fiduciary oversight.

As a result, those most impacted by the new rule are truly “just” the brokers who were acting as “financial advisors” and holding out to the public as such, but weren’t actually held to a fiduciary advice standard. In fact, the new Level Fee Fiduciary exemption may well serve as an encouragement and nudge for many brokers to finally make the transition to being fiduciary RIAs.

Ultimately, the rules still only cover retirement accounts—employer retirement plans and IRAs. It still doesn’t cover a typical taxable brokerage investment account. As a result, we now have two different standards for investment accounts, depending on whether they’re taxable (bank or brokerage) or tax-deferred (IRA or employer retirement plan).

This isn’t the DOL’s “fault,” per se—its jurisdiction is limited to retirement accounts in the first place. But the implementation of the new fiduciary rule will place a new level of pressure on the SEC to finally act, and make fiduciary advice protections uniform for all types of investor accounts, not just the ones that happened to be tax-deferred for retirement.

Jon Stein, CEO & Founder; Betterment

Many investors are unaware that their retirement account managers and advisors—including brokerage firms and mutual fund companies—are currently under no obligation to act in their best interest.

Investors are also often unaware of the fees they’re charged, because those fees may be hidden in the fine print. Once the new rule is implemented, investors will receive additional disclosures regarding fees, compensation, and potential conflicts of interest when they receive investment recommendations concerning their retirement accounts.

The fiduciary rule should also help prevent instances of product steering, which occurs when brokers and advisors direct clients to invest in more expensive investment products—including their own branded products—over others.

Opponents of the rule cited implementation costs—such as the costs to retrain advisors or update legal procedures and technologies—as a reason to not support it. They also argued that, if forced to abide by the fiduciary rule, they would no longer find it economically feasible to provide services to lower-balance accounts.

But we believe the rule’s opponents actually pushed back because they wanted to preserve an outdated status quo—one that did not always put customers first, or prioritize transparency, innovation and unconflicted advice.

In plain speak, opponents were focused on the potential impact the fiduciary rule would have on their bottom lines.

We’re optimistic about the DOL’s rule-making and what it represents.

Joshua Brown, CEO, Ritholtz Wealth Management; author of the blog “The Reformed Broker”

My initial read on the DOL's final fiduciary rule: Literally nothing changes. I don't hate [the rule]. I’m glad they preserved the choice for advisors in terms of fund cost, so that not everyone has to buy an index fund. But these provisions mean nothing much will really change, on the ground. Same products, same conflicts, just a touch more disclaimers on the paperwork that no one will read.

Allan Roth, founder, Wealth Logic LLC, an hourly based financial planning firm

I’m of the belief that consumers are actually harmed if they are told by their advisor that they must put the client’s interests ahead of their own and then don’t. It builds a trust that might not be there if a lower standard is communicated.

The question remains as to whether any regulator or credential licensor (such as the CFP Board) will actually begin to enforce the fiduciary standard.

In my view, if past is prologue, then there is little reason for optimism that this will ultimately be good for consumers. But perhaps the Department of Labor's approach will be different. After all, they at least think something going on right now is wrong, and I couldn’t agree more.

Contact Cinthia Murphy at [email protected].