Political assaults in and around Congress on the Department of Labor’s rule to amend the definition of fiduciary on retirement accounts look all but certain to fail to stop the rule in its tracks. That’s prompted the industry — on both the broker-dealer and RIA side — to gear up to help advisors and registered reps navigate how to put the rule into practice.
“For advisors who are helping their clients with retirement, there’s no way around it: This rule will have broad implications for their business and their careers,” said Dale Brown, president and CEO of the Financial Services Institute, the independent broker-dealer advisory group.
Brown and other industry observers concede that it’s “way too early” to say with certainty what DOL’s rule will look like once it’s released, likely in the first half of this year. But the version released last year that underwent a lengthy comment period gives them some idea.
Advisors and brokers will have to assess what percentage of their business “is in retirement planning and therefore directly impacted by the rule, and how many of their clients are smaller account clients,” Brown noted. Ultimately, it’s the smaller investors “that are going to be harmed by this rule,” Brown argued, since a best interest standard “doesn’t do a small investor any good if they can’t find an advisor they can afford to work with.”
Without having seen the final rule, “it’s extremely difficult to make business decisions in that vacuum,” Brown continued. “But we are starting to have more conversations with our members” about the rule’s potential outcome, and FSI is working “to be a resource for compliance” and to help brokers and advisors “do business in a post-DOL world.”
FSI, he added, “will be a forum for our members to share ideas and best practices to figure that out.”
‘Tough to be a broker’
Indeed, once the DOL’s rule is released, it will be “decision time” for commission-based brokers who are providing recommendations to clients in the retail space, added Amy Lynch, president and founder of FrontLine Compliance, and a former SEC staff accountant.
Career-wise, it will be “tough to be a broker” once this DOL rule is put into place, Lynch said. After the DOL rule is implemented, “it’s going to be easier to operate as an investment advisor rep going forward than a broker rep. So there will be a shifting, but I think there’s a shift going on anyway — a move to a fee-based model — because of the ongoing revenue stream.”
FSI’s Brown added that while independent broker-dealers will adapt to the “new reality” brought about by DOL’s rule, he sees BDs and their reps moving to embrace a more holistic financial planning approach.
For Series 7 or Series 24 brokers, Lynch said, “I’d be thinking it’s getting too complicated. It’s simply becoming too hard to know which hat I’m wearing at what time, in each sale with a client. Am I under a fiduciary standard because of this conversation? Or wait, ‘I just referred this person to another firm that provides investment advice!’ Does that put me under a fiduciary umbrella just making the recommendation?”
That question becomes even more relevant if the rep has “a quid pro quo with the other firm, and he’s receiving indirect compensation for that,” Lynch added. If the rep gets “a referral fee for making that referral to another money manager, then he would fall under the DOL rule, because he receives compensation for that recommendation.”
Lynch sees brokers shifting to the fee-based RIA structure. If DOL’s rule “goes through the way it looks today, brokers would want to get away from this gray [area]. No one wants to be in the gray world, they want to be in the black-and-white world.”
(But RIAs shouldn’t ignore the possible impacts to their business model. See sidebar on page 10.)