A recent presidential memorandum from Donald Trump to the Department of Labor (DOL) is expected to delay the April 10 implementation of the new Fiduciary Duty Rule. This rule requires broker-dealers to act in the best interests of their clients when working with retirement accounts. The memorandum could even lead to the rule’s demise.
Despite the delay and potential for cancelation, some companies have decided to move away from commission-based products anyway. Many are planning to adopt a fee-based fiduciary standard for retirement-based products no matter what happens at the DOL. (For more see: DOL Fiduciary Rule Explained as of Feb 3, 2017.)
Incentives to Stick with the Rule
Financial firms have spent months and millions of dollars getting ready to adhere to the new rule. Some feel it may be too late or too confusing to cancel announced and planned changes and to restructure operations yet again.
Even for those companies that may want to reverse course and return to previous practices, investor pressure (and competition) may force wealth managers to stick to at least some version of a fiduciary standard even if the rule is eliminated entirely. With or without the rule, there has been a lot of publicity about the fiduciary standard. Investors are likely to seek that level of service and reject advisors who do not offer it.
Companies Staying the Course
Some firms have formally announced plans to continue moving away from commission-based products and a suitability standard toward a fee-based fiduciary standard – regardless of the Trump administration’s actions. Merrill Lynch, for one, stopped offering new commission-based IRAs at the beginning of this year. Wells Fargo Advisors told advisors it expected some form of fiduciary standard to eventually be implemented, and Morgan Stanley said it would “continue to move forward with many of the initiatives” the company already had underway.
Others planning to stay the course include Commonwealth Financial Network and LPL Financial, along with insurance companies American International Group, Inc., and Principal Financial Group, Inc.
While large wealth management firms like those mentioned above can afford to make sweeping changes to comply with the Fiduciary Duty Rule, smaller companies and most independent retirement planning professionals fear the cost of compliance and loss of commissions would drive them out of business. With the cost of implementing the fiduciary rule estimated at $2.4 billion per year, that fear is very real.
A number of anti-fiduciary rule lawsuits have been filed by various parties in and out of the financial services industry. Until recently, the DOL and its fiduciary rule have emerged victorious from those challenges.
However, on Feb. 23, Judge Susan Richard Nelson of the U.S. District Court for the District of Minnesota denied the DOL’s request for a stay in one such lawsuit, saying, “considerations of fairness to the opposing party mandate a presumption in favor of denying a motion to stay.” This marks the first time a court has ruled against the DOL. (For more, see: Lawsuits That Aim to Stop the Fiduciary Rule.)
Changes Are Coming
No matter what happens with the Fiduciary Duty Rule, there are those who say the existence of the rule has already provided impetus for changes in wealth management practices.
“We think that the wealth management industry is already in the middle of a massive shift from a product-centric to a client-centric approach, and the DOL Fiduciary Rule has already accelerated that trend,” said Anton Honikman, CEO of MyVest.
In a recent New York Times op-ed, Vanguard Group founder and former CEO John Bogle said simply, “The fiduciary rule may fade away, but the fiduciary principle is eternal. The arc of investing is long, but it bends toward fiduciary duty.”
The Bottom Line
Whether the Fiduciary Duty Rule ultimately lives or dies, the writing may already be on the wall. Market share for fee-based assets increased from 30.3% in 2010 to 38% in 2015, according to market research firm Aite Group. This was even before the Obama administration issued the new rule on April 6, 2016.
This more optimistic view suggests that, moving forward, advice available to you as an investor is going to become more focused on your best interests. You may have to shop around and ask questions, but chances are that a more widespread application of the fiduciary standard is here to stay. Note, by the way, that the current Fiduciary Duty Rule applies only to retirement assets – you can insist on that standard for regular investment accounts, as well, but need to ask.