From the April 2017 issue of Investment Advisor • Subscribe!

DOL Fiduciary Rule Winners and Losers

Industry observers argue over the effects of the rule whether it stays intact, is modified or killed as Labor secretary nominee Acosta weighs in

Labor Secretary nominee R. Alexander Acosta at his confirmation hearing on March 22 (Photo: Diego Radzinschi) Labor Secretary nominee R. Alexander Acosta at his confirmation hearing on March 22 (Photo: Diego Radzinschi)

As the Department of Labor at press time continued to grapple with whether to delay the effective date of its fiduciary rule (the consensus: a delay from the original April 10 date to June 9), industry players and lawmakers were busy telling Labor in comment letters why such a delay was warranted — or not.

Editor's note: On March 29, DOL sent to the Office of Management and Budget its final rule requesting a 60-day delay to the implementation date of its fiduciary rule. 

While the jury is still out on the fiduciary rule's ultimate form, industry observers agree that there will be definite winners and losers — be they products, industry players or consumers — post Labor's decision to either modify the fiduciary rule or eventually kill it.

R. Alexander Acosta, President Donald Trump's Labor Secretary nominee, appeared before the Senate Health, Education, Labor and Pensions Committee, which oversees Labor, for his confirmation hearing on March 22.

Acosta said during the hearing that, if confirmed, he would follow Trump's Feb. 3 directive to review the rule. “There is an executive action that directs how DOL will approach this [fiduciary] rule,” Acosta said in response to a question by Sen. Elizabeth Warren, D-Mass. Warren queried Acosta on whether, if confirmed before the 60-day request to delay the rule is finalized, he would “promise to stop” the delay.

Said Acosta: “I [...] support following executive actions from the president, who will be my boss.”

Warren probed further, asking Acosta, “Generally, do you support this [fidcuary] rule? Do you think this rule is a good idea?”

Acosta replied: “With respect, the rule goes far beyond simply addressing the standard of conduct [of] an investment advisor.”

Sen. Lamar Alexander, chairman of the HELP Committee, said in his opening remarks at Acosta's hearing that the Obama administration issued “130% more final rules” than the previous administration's Labor Department, citing the fiduciary rule, which he said “makes it more expensive for the average worker to access investment advice.”

Acosta noted during his testimony the executive order issued by Trump that “each Cabinet officer must review all rules and make determinations if they should be revised.” DOL “has been ordered to review all rules.”

During that review, “high on the list will be to protect workers with appropriate rules,” he said.

Acosta added: “We would enforce all rules that are in affect pending that review” of rules ordered by Trump.

When queried on his overall “big picture” view of regulation, Acosta replied that Trump “has ordered that we eliminate regulations that are not serving a meaningful purpose,” adding that “we need to free up small business” in order to create jobs.

Acosta was introduced during the hearing by fellow Cuban-Americans, Sens. Marco Rubio, R-Fla., and Ted Cruz, R-Texas. Rubio called Acosta a “brilliant, brilliant legal mind with a deep knowledge of labor issues.”

Cruz, who attended law school with Acosta and has known him for 25 years, cited Acosta's academic accomplishments but noted that he's also “a man of character, who takes very serious fidelity to the law and to the Constitution and has a passion for justice.”

A speedy confirmation process was anticipated, as an executive session was to be scheduled for committee members to vote on Acosta's nomination a week after his confirmation hearing.

Editor's Note: The Senate Health, Education, Labor and Pensions Committee voted 12-11 on Thursday to support Acosta's nomination to be the next secretary of Labor.

So which products and players will be the fiduciary winners and losers?

First Up, the Courts

Opponents who have challenged the rule in the courts continued their war, though they continue to lose legal battles. The most recent blow to opponents came March 21 when the judge overseeing the case in Texas brought by nine plaintiffs — including the U.S. Chamber of Commerce, SIFMA and FSI — denied their emergency request to block the rule's original April 10 effective date.

The plaintiffs asked Judge Barbara M.G. Lynn to stop the rule from taking effect while they take their case to the U.S. Court of Appeals for the Fifth Circuit. But Lynn, who already denied their original bid to block the rule, argued in her mid-March ruling that the court “has already found plaintiffs’ position on the merits unpersuasive, two other district courts have reached the same conclusion in similar cases, and neither court has enjoined enforcement of the rules.”

Duane Thompson, senior policy advisor at fi360, noted that if Labor does decide to kill the rule, “I think the seven-year debate [over the rule] has moved out of industry circles into the mainstream to a certain extent. Fiduciary is not yet a household term, but is certainly growing in awareness.”

Arjun Saxena, financial services partner at PwC's consulting business, sees the “secular trend” of independent broker-dealer consolidation continuing whether the fiduciary rule remains intact or not. “We see a bunch of players in the independent broker-dealer space and retail broker-dealers feeling the squeeze and being forced into consolidation, like insurance brokerages — it's a secular trend,” Saxena said.

Ultimate losers on the product front include higher-cost share classes and 12b-1 fees as well as equity indexed and variable annuities, Thompson opined, with Saxena adding that while the number of mutual funds will continue to dwindle, new share classes will be available.

Even if the fiduciary rule is repealed, wealth managers continue to “prune their fund list,” Saxena said.

The Share Class Issue

The new “T” mutual fund share class “has a uniform front-end load and 12b-1 structure across fund families,” Saxena said, noting that the share class was created by asset managers “specifically to make it easier for [brokerage firms] to offer mutual funds within commission-based transactional retirement accounts, within the constraints” of the BIC exemption.

However, he said, “introducing these onto their mutual fund platforms requires some proactive effort by the [brokerage firms] to onboard new CUSIPs to their fund platforms, changes to their billing systems, advisor training, etc.” Also, “some manufacturers have not added this share class to their offerings.”

Adopting the “T” share class would, he said, “cause some negative revenue impact to [brokerage firms] and to advisors, though the figure is less than what the headline differences in front-end loads would suggest.”

Furthermore, voiding the DOL rule and the BICE requirements would mean advisors “handling retirement accounts under a brokerage construct would not be deemed ERISA fiduciaries, and their conduct would continue to be governed by suitability requirements.” Thus, he said, it is unlikely that “we would see much uptake for the new ‘T’ share class by [brokerage firms] or by advisors.”

If the rule moves ahead, “advisors will be deemed ERISA fiduciaries for any and all retirement accounts where they are ‘providing advice,’ and specific rule requirements (for example, right of private action) increase the risk for potential lawsuits,” he said.

So registered reps “will look for tools that allow them to continue serving those clients at acceptable economics, while containing the compliance risk.”

A Robo-Advice Solution?

Digital advice capabilities, Saxena suggested, would offer a way for brokerage firms to serve low AUM retirement clients by allowing them to deliver individualized advice in a scalable and economically viable way.

Jon Stein, founder and CEO of Betterment, told Labor in a comment letter that the “positive changes” in the investment industry since the rule's passage, “such as reductions in fund fees and changes to conflicted service models,” could disappear if the rule is “watered down” or delayed. “For the benefit of the millions of Americans saving for retirement,” Stein said Labor should allow the fiduciary rule to go into effect in April.

In his comment letter, Financial Engines CIO Christopher Jones told Labor that investors would be the losers if it failed to maintain “strong protections to ensure that all Americans have access to unconflicted investment advice.”

With more than 92 million individual investors now responsible for managing their own retirement assets, Jones wrote, “there has never been greater demand for high-quality investment advice.”

In a statement released by the Financial Services Institute, CEO Dale Brown argued that Labor's March 1 decision to delay the rule was a “critical step in protecting retirement savers’ access to advice, products and services. […] We will continue to work with the administration, and through the legal process, to repeal and replace this rule.”

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