If not for President Donald Trump’s 60-day delay, the Labor Department’s fiduciary rule for retirement accounts would have taken effect on Monday, April 10, in the first of a two-step adoption process. Betterment, the largest independent robo-advisor and a supporter of the fiduciary rule, marked the day with a roundtable of fiduciary rule advocates, who discussed not only the arguments in favor of the rule and against any watered-down version but what could happen next.
Why the Fiduciary Rule Should be Adopted as Is
Advocates of the fiduciary rule focus on the primary goal for financial advisors to act in the best interest of their clients when advising on retirement accounts and disclose any conflicts of interest that the advisors may have. But there are other reasons the rule in its current form could benefit financial advisors as well investors, according to Monday’s roundtable.
It’s inevitable. Betterment CEO Jon Stein said no matter what happens after the delay ends on June 9, the fiduciary standard will eventually be adopted in the “very long term … Passage is inevitable.”
The sky won’t fall and fiduciaries will benefit. Maureen Thompson, head of policy at the Certified Financial Planner Board of Standards, said the criticisms against the fiduciary rule now are the same ones she heard when the CFB Board, in 2008, required all CFP-certified advisors to operate under a fiduciary standard. Despite industry fears, CFP certifications actually grew by 40% and broker-dealers, insurance brokers and RIAs operating under the CFP fiduciary rule “found that they can not only work under it but also thrive under a rule similar to the DOL rule,” said Thompson.
Fiduciary advisors could lose access to new, innovative products if the rule isn’t adopted. Thompson said she’s heard from fiduciary advisors concerns about losing access to new products that are being developed if there is no fiduciary requirement.
Micah Hauptman, financial services counsel at the Consumer Federation of America, noted that many fund families who developed T shares charging less than half the load of a typical front end-loaded fund (a 2.5% maximum vs. 5.75%) have now stalled those rollouts.
“Industry opponents to the DOL rule have constantly raised the question of lack of access to products and services,” said Hauptman. “There’s a lack of access to that product today and that has a direct repercussion on retirement investors.”
Stein noted that there’s a “misconception that people are getting great advice today” when the reality is that many are being sold “bad products.”
Retirement accounts are where the action is. Industry opponents have also argued that a unified best interest standard that affects both taxable accounts regulated by the Securities and Exchange Commission and retirement accounts regulated by the Labor Department would serve investors better than a rule solely from Labor. But Hauptman noted that “retirement accounts are where the action is for middle-income savers” because savers try to max out their contributions to retirement accounts before contributing to taxable accounts (and many don’t even max out).
“We really need protection in retirement accounts first,” said Hauptman, adding that the SEC hasn’t made any progress on a fiduciary rule in about 25 years and its authority is limited to securities and doesn’t include fixed indexed or equity indexed annuities, which are regulated as insurance.
What Happens Next
As it stands, certain components of the fiduciary rule kick in on June 9 even though they could eventually be revised or repealed following a Labor Department review of public comments on the questions listed in Trump’s memorandum asking whether the rule has harmed or is likely to harm investors; has resulted in dislocations or disruptions that may adversely affect investors and retirees; and/or is likely to cause an increase in litigation and an increase in prices for retirement services. Comments are due April 17.
On June 9 the definition of fiduciary investment advice as well as impartial conduct standards kick in, said Hauptman.
For example, advisors who make recommendations to retirement savers about rolling out of 401(k) plan into an IRA are considered fiduciaries and should follow the impartial conduct standard to act in the best interest of their retirement clients. Advisors are also required to charge “reasonable compensation and can’t make misleading statements” pending re-examination of the rule, said Hauptman.
In addition to Labor, Congress has the power to nix the rule. It could add a rider to spending bills prohibiting the department from moving forward on the rule, which is more likely if the financial “industry feels it’s not getting what it wants from the DOL,” said Thompson.
The department, after reviewing the comments due next Monday, could choose to water down the rule or nix it but the latter won’t necessarily be easy to do.
“They can’t just wave their wand and kill the rule,” said Hauptman. The agency has to follow a process required by the Administrative Procedures Act and review and base its decision on evidence. “If they just come to a different conclusion based on the same evidence that propelled the DOL under President Obama to develop the fiduciary rule after a six-year process they “will set themselves up for a legal challenge,” said Hauptman. “They have to find new compelling evidence that would change their view. … It will be really difficult to override all of that.”
Thompson says the odds are “not better than 50/50” that the fiduciary rule will be adopted as is. “It’s a tough fight to preserve what’s good about the rule.” But a fight that Betterment, the Consumer Federation and the CFP Board will continue to wage.
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