Hoping for a Regulatory Miracle

The necessary bureaucratic process played out, some improvements were made (although not nearly enough), and the DOL rule became effective. As things stand today, the DOL’s fiduciary standard with respect to retirement assets will apply beginning April 10.

To the DOL’s credit, it has been very accommodating with its time during this process. However, the DOL doesn’t understand the securities business. That shouldn’t be surprising given the applicable regulatory scheme (it’s the SEC’s job after all), but that lack of knowledge has had some hugely significant impacts.

In a variety of contexts, the DOL has suggested that it doesn’t think this change to a fiduciary standard for retirement assets is all that big of a deal. And conceptually, it isn’t. It needn’t be a big deal to replace a suitability standard — whereby recommendations must be suitable but not necessarily in a client’s best interest — with a fiduciary standard.

The problem, Santa, is that the DOL, through 1,000-plus pages of regulatory requirements, set up a complex framework that must be followed whenever retirement asset investments are involved. This framework touches every aspect of the BD business and requires a complete overhaul of everything that happens therein: paperwork, systems, technology, operations, oversight and supervision, surveillance, training, compliance and more.

Every BD I’m familiar with has spent enormous amounts of time and money to try to comply with the new rule (which, again, isn’t altogether bad because advisors should be fiduciaries), but almost none of that spending relates directly to client care.

Most of the time and money expended has been used simply trying to put systems in place to meet the DOL’s bureaucratic requirements, not to serve clients. It wasn’t intended, but smaller firms will be at risk in this new environment, because the capital requirements for all the new systems are large indeed.

As a result, clients without much money are going to find it even harder to find competent investment advice. The large firms already have minimum asset requirements that make it really hard for ordinary folks to get competent investment advice from a real person who looks carefully and realistically at their situations, expectations, needs and goals.

Interestingly, the RIA world largely thinks the new rule doesn’t really apply there, because a fiduciary standard is already in place. However, an ERISA fiduciary pursuant to the DOL rule is substantially different than a fiduciary under the current securities law. Moreover, every RIA that manages retirement assets will need to put in place the framework that DOL requires. But I digress.

Finally, the presidential election has thrown another monkey wrench into the mix. Some supporters of the incoming Trump administration have said that the DOL rule will be undone after the president-elect’s inauguration. A delay of some sort is possible too. But nobody in authority has said that. Besides, undoing an already effective regulation isn’t possible with just a signature and a press release.

While it’s unclear what will happen, Santa, I’d simply like common sense to prevail. I’d like the SEC to do its job. I’d like a fiduciary standard of care in place for all retail securities clients.

I’d like the extraordinary efforts being expended to try to comply with the new rule spent on improving the advice clients get and the service they receive rather than on jumping through bureaucratic hoops. I’d like a simple and straight-forward regulatory scheme around this new standard, one that makes practical sense and doesn’t cost a fortune.

Pretty much, I’m asking for a belated Christmas miracle. Will you help me out, Santa, please?