Planners Fear Unintended Consequences as DOL Rule Compliance Date Nears

ERISA attorney Reish worries about small BD, RIA firms' compliance

As the industry braces for the Friday deadline for compliance with the Department of Labor's fiduciary rule, words of advice, caution and frustration are emerging from advisors as well as ERISA attorneys.

Meanwhile, the judge overseeing the appeal brought by the nine groups in their case against the fiduciary rule in a Texas court agreed to expedite the hearing, with the appeal to be heard either in late July or the first week of August. The groups appealing include the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and the Financial Services Institute.

Robert Schmansky, a fee-only planner with Clear Financial Advisors in Lovania, Michigan, told ThinkAdvisor on Tuesday that he believes Labor’s fiduciary rule “is going to harm the exact people it claims to help.”

One of the rule’s “unintended consequences” will be that advisors “are going to weigh the risk of working with clients.” Advisors will “look deeper into potential risks before taking on a client,” Schmansky said in a phone interview.

As advisors compete “for fewer ideal clients, we will see a restriction in the supply of advisors,” said Schmansky, whose client base is split between those approaching retirement and young families just getting started. “I see that already. Advisors are increasing their minimums and fees, which will lead to us competing for the same clients. More and more clients are going to be left with robo-advisors and doing things [planning] online. Just because we are all going to be fiduciaries doesn’t mean they [clients] will all receive the same fiduciary advice.”

The industry has already seen “many stories about clients being dumped into high-cost management services because of the fiduciary rule.”

As larger advisory firms and dually registered firms “try to change their offerings, a lot of them are removing funds from their platforms — some clients are being switched into higher-cost advisory accounts after being in a lower cost fund. Just because these advisors are now fiduciaries doesn’t mean they are providing more services for those fees,” he said.

Schmansky relayed the story of a recent client that came on board with him after another firm moved the client out of A shares, where they had paid an upfront commission, to a higher-cost managed account.

The client “didn't understand the change in strategy other than their advisor explained that in order to continue working together they had to become advisory clients,” Schmansky said. “Previously, their fund fees were under 1%. In total, the cost of the advisory service and fund costs were in excess of 2%.”

The client “was confused when their advisor said they had to change their plan to an advisory agreement. There was no additional advice or services that came with the new charges; it simply seemed like the firm decided to move them from a low-cost, low-profit investment plan to a higher-cost advisory service.”

Schmansky said his firm “prepared a plan and they did choose to move assets over to an advisory relationship with me; … but, they are just one of many stories I’ve heard of clients being switched into higher-cost services due to the rule.”

Edward Vargo, private wealth manager at Burning River Advisory Group in Westlake, Ohio, also voiced his concern that lower-income clients could be left without an advisor. “As with most things initiated by the government, the idea is well-intentioned but the execution will be sorely lacking,” he told ThinkAdvisor in a Tuesday email message. 

The amount “of paperwork that this [rule] has created will do exactly the opposite of the [rule] intends — it will push advisors away from working with low-income, low-asset clients because it’s just not ‘worth it.’”

His advisory firm, he said, is “just starting to see the impact on how we have to manage our workflow and it is not going to be pretty. The thing I’m least concerned about is the ‘advice’ side of the equation, which is backwards. We are going to have to re-engineer our practice and who we serve as a result of all the new regulations.”

As a certified financial planner, Vargo said that he manages assets "according to the fiduciary standard in almost all cases. Consequently, I am a proponent of our industry having to adopt a fiduciary standard. The problem is the government’s draconian view of advisors and the steps we are forced to take to comply with the law. When the pendulum swings, it never swings back to center. Don’t be surprised if the law of unintended consequences — no service for small/beginning investors — rears its ugly head.”

Ready to Comply?

As to firms’ compliance with the rule three days from its effective date, Fred Reish, partner in Drinker Biddle & Reath's employee benefits and executive compensation practice group in Los Angeles, said some “general patterns” are emerging.

The largest broker-dealers, for example, the wirehouses, “are prepared for the changes,” Reish said. “Everyone wishes they had more time, but generally speaking, they are prepared.”

What Reish calls “good-sized broker-dealers, and especially those who have favored the RIA-type advisory business” are also in good shape compliance wise; however, “without the infrastructure and substantial changes of the wirehouses.” That being said, they will be in compliance “in material regards” on June 9.

“I am worried about the smaller broker-dealers, particularly, in terms of their understanding of how to comply with the rules,” Reish added.

“Many have not developed programs and systems for compliantly recommending rollovers and transfers of IRAs. Many do not have industry data on reasonable compensation. Some have not trained their advisors on the essence of a fiduciary process and the need to document that process,” he explained.

Most firms of this size have also “not reviewed and perhaps improved their policies and procedures” to comply with the requirement in Q6 of the latest set of DOL FAQs.

Reish says he’s also “worried about” the smaller RIA firms, “particularly the ones that do little or no retirement plan work.” His firm is seeing “inadvertent prohibited transactions due to lack of knowledge about how these rules work. They need to quickly work with their compliance consultants or ERISA attorneys to get into compliance.”

While RIA firms that do a lot of work with retirement plans are familiar with the fiduciary requirements and the prohibited transaction issues, “even there, though, there is a need to develop procedures and systems for recommending distributions and rollovers, as well as transfers of IRAs,” Reish warns. “They need to look at their policies, procedures and systems in light of Q6 in the DOL’s FAQs.”

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