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Regulation and Compliance > Federal Regulation > DOL

DOL Will Rely on Consumers, Advisors to Help Enforce Fiduciary Rule: Borzi

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Less than two months after the Department of Labor issued its final fiduciary rule for financial advisors, the nonprofit Institute for the Fiduciary Standard launched its Campaign for Investors, to educate investors on their rights when working with advisors and to provide advisors with guidance on how best to act in their clients’ interests.

The launch event at the National Constitution Center in Philadelphia, which included Vanguard founder John Bogle and DOL fiduciary rule architect Phyllis Borzi, focused on the impact of the fiduciary rule on advisors and their clients but also on future regulation.

Borzi said it will be up to consumers to enforce the rule through “state contract actions.” Addressing the audience, Borzi said the Labor Department is going to rely “on all of you.… I’m  deputizing you all … to help us monitor what’s going on in the advice community.”

The indefatigable Bogle applauded the rule but noted the confusion that will ensue if advisors treat retirement assets of clients — now covered by the DOL rule — differently from clients’ other assets and treat clients with retirement accounts different from those without those accounts at their firm.

 “As a practical matter I can’t imagine brokers serving nonretirement clients with a lower standard of care,” said Bogle. He urged the Securities and Exchange Commisison to follow the Labor Department and finally adopt its own fiduciary standard for brokers but noted that the application of a fiduciary standard should not stop there.  

”A federal standard of fiduciary duty …  must be applied to every person and every entity that even touches other people’s money … and must also include institutional money managers,” said Bogle.

Republican members of Congress couldn’t disagree more. They voted in favor of a House and Senate resolution to block implementation of the DOL fiduciary rule, which passed, but at this point they lack the two-thirds majority to override an expected presidential veto.

Borzi, who is an assistant secretary of Labor and oversaw compliance with the Affordable Care Act, called the congressional votes and threats of lawsuits from opponents of the rule “the usual Washington Kabuki theater. We think we’ve done a really good job for investors. We know the journey is just beginning.”

All of the panelists at Tuesday’s meeting discussed the rule as a done deal that will affect advisors and investors and change the advisory and investment management industries.

Bogle, creator of the first retail index mutual fund, and others expect index funds will grow even more popular while commission products take a hit as a result of the rule.

“The development of the fiduciary standard puts index funds on a whole new level,” said Bogle. They account for about 36% of U.S. financial assets, including pension fund assets, according to Bogle, noting, “We have a long way to go. We would be well served if more competitors turn to indexing.”

Bill Harris, the CEO of Personal Capital, an RIA that combines electronic advice with a human advisor, said the DOL rule will accelerate important trends already taking place, including not just indexing but also more digital delivery of advice.

 “Everyone in the industry needs to harness technology more, which will ultimately reduce costs,” said Scott Puritz, found and partner of Rebalance IRA, an investment firm specializing in retirement accounts.

Fee disclosure and transparency and a move to more accounts with flat fees are also expected as a result of the DOL rule in large part because of the expected decline in commission product sales. This, too, will expand a current trend in the industry, said Harris, whose Personal Capital charges a flat percentage fee under 1% for every account, based on assets under management.

But with the reduced sale of commission products will also come a decline in the number of advisors, said Patrick Sullivan, the managing director of Private Advisor Group, the largest advisor, by revenues, on LPL’s hybrid RIA platform. Still he expects investors will ultimately be better served as technology allows advisors to serve more clients with fewer people.

In the meantime, he said, the financial advisor industry has lots of work to do to comply with the new rules including documenting why, for example, they recommend that an investor roll over a 401(k) plan to an IRA.

The firms of advisors making that recommendation will have to file a BICE – best interest contract exemption – with clients to document that the rollover is the best interest of the client involved.When in doubt, assume you are under BICE,” said Borzi. “Any exemption to rule we will construe extraordinary narrowly.”

She said the Labor Department came up with the BICE because the agency does not have direct statutory authority over retirement assets outside of pension funds. “We had to be creative to try to find a way to make the responsibility for acting in your client’s best interest, the fiduciary responsibility, enforceable in the IRA context,” said Borzi. “That’s how we came up with the best interest contract exemption.”

Borzi inoted that “If we do nothing else were are creating an alignment between the best interests of investors with best interest of advisors.”

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