DOL Fiduciary Rule Winners and Losers

First Up, the Courts

Opponents who have challenged the rule in the courts continued their war, though they continue to lose legal battles. The most recent blow to opponents came March 21 when the judge overseeing the case in Texas brought by nine plaintiffs — including the U.S. Chamber of Commerce, SIFMA and FSI — denied their emergency request to block the rule’s original April 10 effective date.

The plaintiffs asked Judge Barbara M.G. Lynn to stop the rule from taking effect while they take their case to the U.S. Court of Appeals for the Fifth Circuit. But Lynn, who already denied their original bid to block the rule, argued in her mid-March ruling that the court “has already found plaintiffs’ position on the merits unpersuasive, two other district courts have reached the same conclusion in similar cases, and neither court has enjoined enforcement of the rules.”

Duane Thompson, senior policy advisor at fi360, noted that if Labor does decide to kill the rule, “I think the seven-year debate [over the rule] has moved out of industry circles into the mainstream to a certain extent. Fiduciary is not yet a household term, but is certainly growing in awareness.”

Arjun Saxena, financial services partner at PwC’s consulting business, sees the “secular trend” of independent broker-dealer consolidation continuing whether the fiduciary rule remains intact or not. “We see a bunch of players in the independent broker-dealer space and retail broker-dealers feeling the squeeze and being forced into consolidation, like insurance brokerages — it’s a secular trend,” Saxena said.

Ultimate losers on the product front include higher-cost share classes and 12b-1 fees as well as equity indexed and variable annuities, Thompson opined, with Saxena adding that while the number of mutual funds will continue to dwindle, new share classes will be available.

Even if the fiduciary rule is repealed, wealth managers continue to “prune their fund list,” Saxena said.

The Share Class Issue

The new “T” mutual fund share class “has a uniform front-end load and 12b-1 structure across fund families,” Saxena said, noting that the share class was created by asset managers “specifically to make it easier for [brokerage firms] to offer mutual funds within commission-based transactional retirement accounts, within the constraints” of the BIC exemption.

However, he said, “introducing these onto their mutual fund platforms requires some proactive effort by the [brokerage firms] to onboard new CUSIPs to their fund platforms, changes to their billing systems, advisor training, etc.” Also, “some manufacturers have not added this share class to their offerings.”

Adopting the “T” share class would, he said, “cause some negative revenue impact to [brokerage firms] and to advisors, though the figure is less than what the headline differences in front-end loads would suggest.”

Furthermore, voiding the DOL rule and the BICE requirements would mean advisors “handling retirement accounts under a brokerage construct would not be deemed ERISA fiduciaries, and their conduct would continue to be governed by suitability requirements.” Thus, he said, it is unlikely that “we would see much uptake for the new ‘T’ share class by [brokerage firms] or by advisors.”

If the rule moves ahead, “advisors will be deemed ERISA fiduciaries for any and all retirement accounts where they are ‘providing advice,’ and specific rule requirements (for example, right of private action) increase the risk for potential lawsuits,” he said.

So registered reps “will look for tools that allow them to continue serving those clients at acceptable economics, while containing the compliance risk.”

A Robo-Advice Solution?

Digital advice capabilities, Saxena suggested, would offer a way for brokerage firms to serve low AUM retirement clients by allowing them to deliver individualized advice in a scalable and economically viable way.

Jon Stein, founder and CEO of Betterment, told Labor in a comment letter that the “positive changes” in the investment industry since the rule’s passage, “such as reductions in fund fees and changes to conflicted service models,” could disappear if the rule is “watered down” or delayed. “For the benefit of the millions of Americans saving for retirement,” Stein said Labor should allow the fiduciary rule to go into effect in April.

In his comment letter, Financial Engines CIO Christopher Jones told Labor that investors would be the losers if it failed to maintain “strong protections to ensure that all Americans have access to unconflicted investment advice.”

With more than 92 million individual investors now responsible for managing their own retirement assets, Jones wrote, “there has never been greater demand for high-quality investment advice.”

In a statement released by the Financial Services Institute, CEO Dale Brown argued that Labor’s March 1 decision to delay the rule was a “critical step in protecting retirement savers’ access to advice, products and services. […] We will continue to work with the administration, and through the legal process, to repeal and replace this rule.”