The head of the Senate Homeland Security and Governmental Affairs Committee recently told Labor Secretary Thomas Perez to halt implementing the Department of Labor’s “burdensome” fiduciary rule because it will likely be “undone” by the incoming Trump administration.
In a Nov. 22 letter to Perez, Sen. Ron Johnson, R.-Wis., chairman of the committee, told Perez that like DOL’s overtime rule, which was halted recently by a Texas federal judge, there is also “substantial likelihood” that DOL’s fiduciary rule will be dismantled.
Johnson’s letter comes as a new study was released Wednesday, finding that advisors in the U.S. are likely to abandon mass-market clients because of Labor’s fiduciary rule.
“I urge the Labor Department to cease implementation of the regulation immediately to spare low- and middle-income Americans, financial advisors and small businesses from the unnecessary and avoidable burdens that will drive up the costs of services and decrease access,” Johnson told Perez in his letter. “I hope the Labor Department will acknowledge the reality of the situation and avoid imposing unnecessary costs and burdens in further implementation of regulation that will very likely be rescinded.”
In late February, Johnsnon released a study that charged DOL with “ignoring and rejecting” concerns raised by the Securities and Exchange Commission on how to craft its rule to change the definition of fiduciary on retirement advice, resulting in a “flawed process” in devising a plan that “could ultimately hurt American retirement savers.” Johnson’s committee also held a hearing in April on DOL’s rule.
According to CoreData Research, which polled 552 U.S.-based advisors and was conducted by the firm’s UK arm, 71% of the advisors plan to “disengage from some mass-market investors” because of the DOL rule. On average, these advisors estimate they will no longer service a quarter (25%) of their mass-market clients — creating a potential advice gap for low-balance investors, the research states.
“The election of Donald Trump introduces a degree of uncertainty over the fiduciary rule,” said Craig Phillips, head of CoreData Research International. “However, our research suggests the rule could result in mass-market clients being left out in the cold, creating the prospect of an advice gap in an echo of what happened in the U.K. when the [Retail Distribution Review rule] came into effect.”
A previous CoreData study revealed UK advisors believed the RDR had created an “advice gap,” with more than half (52%) claiming its introduction negatively impacted mass-market investors.
The CoreData research of U.S.-based advisors, which was not commissioned, also found that 58% of advisors currently receiving commissions will move away from the practice by 2020 in order to get ahead of potential future regulation, and that 94% of advisors believe smaller clients “orphaned” by advisors are likely to turn to automated advice.
The CoreData research of U.S.-based advisors also found that:
- Two-thirds (64%) of advisors view the impact of the fiduciary rule on mass-market investors as largely negative. And 60% believe the fiduciary rule will have a negative impact on at-retirement clients.
- A third (35%) of advisors will likely add an automated advice service to their business because of the fiduciary rule.
- Six in 10 advisors (62%) say they will increase ETF recommendations in their retirement accounts due to the rule.
- 60% of advisors say they will decrease allocations to non-traded REITs and 57% say they will limit offering variable annuities in retirement accounts due to the fiduciary rule.
- Three in four advisors (74%) think the fiduciary rule will be expanded to nonretirement accounts.
- In the long term, 55% of advisors believe, commission on retirement accounts will eventually be banned. Twenty-four percent of this group believe commission on all accounts will be banned.
- Almost half (45%) of advisors believe investors would rather have cheaper, non-fiduciary advice than more expensive fiduciary advice.
- Over a third (36%) of advisors plan to hire additional staffers as a result of the rule, and 86% plan on working more hours per week.
- Nearly all advisors (95%) see the financial advice industry moving toward a model based on transparency and full disclosure.