This is the second in a three-part blog series that looks at the top issues advisors will face in 2014. In part one, we explored what may be next for ‘robo-advisors.’ In part three, we will look at the challenge of demographics.
At the beginning of the year, the predictions (including from yours truly) were that 2013 would be the year that we saw some kind of fiduciary regulation. The Department of Labor was promising to deliver its fiduciary proposals, updated and amended from the original offering DOL proposed in 2010 and withdrew in 2011, while at the same time pressure was growing on the SEC to act as well and it had put proposed fiduciary rulemaking on its priority list. While 2013 turned out to be far more hype than action regarding fiduciary regulation, the building pressures suggest that 2014 could still be “the big year” for the onset of regulatory change.
On the DOL front, the fiduciary rulemaking process continues to be a regulatory priority in 2014, and as of now the “Conflict of Interest Rule-Investment Advice” is scheduled for its next draft release in August of 2014. At its core is a provision that would expand the definition of fiduciary under ERISA to include not only those who provide investment advice to employee benefit plans, but also those who provide investment advice with respect to IRA rollovers.
Although it remains to be seen if it will be specifically enumerated under the rule, the fear from the brokerage industry is that a fiduciary rule extended to IRAs could eliminate commissions on investments held inside IRAs, and the brokerage industry claims that without the availability of commissions that the majority of Americans with smaller IRAs would be priced out of the market for advice. On the other hand, fiduciary advocates point out that consumers may end up paying a lesser price under a fiduciary rule with fewer commission-laden products, and that in theory brokers were only supposed to be providing limited investment advice “incidental” to the sale of securities anyway.
Accordingly, a fiduciary rule can lift the quality of advice the middle class receives, and reduce the conflicts of interest impacting the advice, while also reducing their costs. Ultimately, it remains to be seen what the final details of the DOL’s revised fiduciary rule will contain, and whether/how it will try to accommodate all the different business models seeking to serve consumers while still applying a fiduciary standard to the delivery of advice.
At the same time, the SEC has also put a fiduciary rule on its 2014 regulatory agenda, and SEC chairwoman Mary Jo White has indicated that fiduciary rulemaking remains a priority for the SEC; nonetheless, the rule is currently flagged as a “long-term action” under the SEC with no specific timetable, suggesting that the SEC may be waiting to let the DOL propose a rule first.
Which organization takes the first step matters, as there is a strong potential that the definition of fiduciary under one will likely set precedents for the other (either as an industry compromise, or simply because regulators acknowledge that there could be some overlap between SEC and DOL rules and having conflicting rules could be even more problematic for advisors to follow).