The Department of Labor’s new fiduciary rule will go into effect next April, and it promises to bring sweeping changes to the way that financial advisory firms do business and the manner in which retirement planners can dispense advice and effect transactions. At this point, financial advisors and broker-dealers would be wise to assume that the rule will go into place as it stands now, despite the opposition that it faces, and continue their preparations to comply with it.
Staying the Course
Under the rule, many advisors who were previously only held to a suitability standard in their businesses will now be held to a much higher level of accountability, one that requires them to disclose their compensation as well as any possible conflicts of interest and act unconditionally in the best interests of their clients. Advisors who fail to do this under the new rules could be subject to class-action litigation by clients. The rule is intended to provide a greater level of accountability and transparency to clients who may otherwise be sold high-commission products that provide them with a lower rate of return. (For more, see: DOL Releases First Round of Fiduciary Rule FAQs.)
But there are a number of groups in the financial industry who are strongly opposed to the rule, and one of their chief arguments is that the Department of Labor overstepped the bounds of authority when the created the rule. There are also many questions outstanding regarding the specifics of the rule and how it is to be implemented.
Several of Donald Trump’s advisors have stated that he intends to repeal or substantially revise this rule, which has left many firms uncertain as to what direction they should take on this matter at this point. However, Trump has not publicly stated that he intends to take action regarding this matter during the first hundred days that he is in office and the rule will go into effect before anything more will be done about it. And once the rule is in effect, it will be much more difficult to repeal than it would be at this point. Congressional action may then be necessary, which may be difficult to pass, as many Democrats such as Elizabeth Warren (D-Mass.) are supporters of the rule, and will likely fight any motion to repeal it. And they may have enough allies to successfully block any attempt to overturn it. (For more, see: The Fiduciary Rule: What Will Implementation Cost?)
Another possibility is that the rule may become disallowed in court, depending upon the outcome of the litigation that is currently pending against the rule by several industry groups. It is also possible, although rather unlikely, that current Secretary of Labor Thomas Perez will freeze the rule until Trump finds a replacement for him. This possibility is probably the fairest possible outcome, as it would save financial advisors and firms the expense of preparing for a rule that will not go into effect. Or a new Labor Secretary could be appointed before the rule goes into effect who could halt the rule. But it’s highly questionable whether a new Labor Secretary will be appointed in time to do this, as Trump has a large number of cabinet positions to fill in a very short time.
The Bottom Line
It is highly unlikely that Trump will be able to take meaningful action against the rule before it goes into effect and once that happens, it will be considerably more difficult to overturn. It is possible that some parts of the rule could be disallowed by the courts, but it is uncertain at this point how that is going to turn out. One court has already upheld the rule, and other judgments will be rendered in the coming months. (For more, see: Fiduciary Rule: Preparing Advisors for Compliance.)