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Regulation and Compliance > Federal Regulation > SEC

Top 3 Issues Advisors Will Face in 2014, Part 2: The Fiduciary Issue

By Michael E. Kitces

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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).

At the same time, opponents of the fiduciary rule have expressed concern that the DOL’s likely action may be more stringent than the SEC’s, and consequently have even lobbied in the past year for legislation that might require the SEC to act first (though at this point there has been no momentum on the bill). In the meantime, a recent SEC Advisory Panel on fiduciary concluded that the SEC should act to implement some form of fiduciary duty on brokers who provide personalized investment advice, providing another nudge for the SEC to act.

Beyond Fiduciary, RIA Oversight and the CFP Board

Aside from the prospective fiduciary action—which realistically looks more likely to be the DOL taking the lead in 2014, with the SEC to perhaps follow thereafter—the other regulatory issue likely to see some activity in 2014 are enhancements to the oversight of registered investment advisors. In other words, that means increasing the frequency of exams for RIAs. The starting point will simply be a more aggressive schedule for auditors, as Commissioner White at the SEC has already warned, but the SEC arguably still lacks the resources to visit RIAs as frequently as they’d like, which means potential proposals for RIA user fees may surface again in 2014, especially after the SEC’s Advisory Panel recommended it as a way to finally move forward on Section 914 of Dodd-Frank.

In the meantime, the CFP Board may face its own challenges in its ability to “regulate” and oversee financial planners. Beyond just an ongoing imbroglio over its compensation disclosure rules, 2014 could see a resolution to the ongoing Camarda case. At this point, that case is about more than “just” the actual compensation disclosures that the Camardas used, but about the CFP Board’s capability of overseeing and enforcing its own rules. A setback in the Camarda case could be an even more significant long-term setback to the legitimacy of the organization as a potential future overseer for financial planning and keeper of the professional standards.

The Bottom Line While there may be no big new final rules implemented in 2014, this may be the year where we finally see the fiduciary template the DOL is going to set forward, which could become the precedent for the SEC as well. Regardless of the fiduciary rule(s), the SEC is finally increasing its focus on more exams for investment advisers, even if it takes user fees to fund the effort. In the meantime, don’t expect FINRA to be silent. The self-regulator is still trying to position itself—a la its recent “Report on Conflicts of Interest”—to be the regulator for all advisors, both brokers and RIAs, under a “harmonization” of the regulatory standards. Stay tuned for ongoing developments with the CFP Board’s case against the Camardas.

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.

View all the blogs in this series of posts on the top three issues that will affect advisors in 2014.

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