Most financial professionals don’t need to be told that we are in a nearly-unprecedented period of regulatory uncertainty in the United States. President Trump’s administration has initiated a forceful, regulatory rollback environment that will have extensive impact on the financial service industry.
One of the most significant sources of uncertainty – in addition to new leadership for FINRA and the CFTC and new staff at the SEC – is the future of the Department of Labor (DOL) fiduciary rule created under the Obama administration.
Current state of the DOL fiduciary rule
Currently, the fiduciary rule became effective in June of 2016, but will not become applicable until April 10, 2017. Many anticipate that it will be further delayed by the DOL. A recent DOL enforcement memorandum does not commit to a delay, but instead offers seemingly broad protections to financial services firms and advisers in the near term.
Because it is already effective, the law prohibits the DOL from delaying the fiduciary rule indefinitely. However, the rule could be withdrawn and replaced. Even if the rule is withdrawn, other regulations might impact the industry in a similar way. The New York Times reports that the Securities and Exchange Commission, possibly in conjunction with FINRA, may be contemplating its own proposal of new regulations that reconcile standards for retirement and nonretirement accounts.
In these uncertain times, many financial pros wonder what the future holds and what actions their competitors are taking. What should financial services firms and advisors make of all this? What should they know about the direction of the industry?
Building on the extensive resources already invested
The uncertain future of the DOL fiduciary rule is having a significant impact on the businesses in our industry. But the truth is that it comes late in the game. Most financial industry leaders have already taken steps toward compliance, devoting millions to restructuring best practices before the last election. With the bulk of the work done, they are continuing forward.
Many firms report that they intend to train and supervise to a fiduciary standard of care, irrespective of when or in what form the fiduciary rule is finally implemented. They continue to make decisions as if more activities and advisors will be subjected to a fiduciary standard of care, including:
Putting in place procedural safeguards – Financial services firms and advisors are planning to comply with increased disclosure and reporting requirements, as well as take steps to limit potential class action exposure.
A shift away from some, potentially problematic products – The commission-based nature of some products creates potential conflict-of-interest headaches under the new regulations, so some are moving away from them altogether. Most notably, Merrill Lynch and several other large financial services firms announced that they will attempt to avoid a provision of the rule known as the best-interest contract exemption (BICE) by no longer offering new, adviser commission-based IRAs starting in April.
A shift to more fiduciary-friendly products – Some thought leaders point to products such as exchange-traded funds (EFTs), which operate in a space that does not have product commissions, as a logical offering for new fiduciary advisors.
A move to platforms that are revenue-neutral and transparent – Many industry leaders are continuing to provide greater transparency and eliminate potential conflicts of interest in a broad spectrum of investments, not just retirement accounts.
Leveraging compliance as a competitive advantage – Many believe that service providers who disclose all compensation and fees, both direct and indirect, will have a marketplace advantage. The service expectations placed on the financial advice profession have increased to meet market demands, and those advisors who provide not just product information but indispensable financial counsel personalized to each investor’s needs will likely succeed.
All in all, financial professionals face uncertain times. Steps have been taken to comply with the DOL’s fiduciary rule, and most leaders will build on existing work even if the future of the rule is unknown. Those who do may be able to take advantage of new opportunities as the industry continues to transform.
