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June 23, 2017 at 09:00 AM
What would you do if you knew exactly when an earthquake would change life the way you know it? What if you had the opportunity to prepare for it? Would you shore up your home to limit damage? Would you buy insurance? Would you sell insurance? Would you move to safe ground? Would you doubt the forecast and do nothing?
Jan. 1 is the date when the effects will be felt by financial advisors who work with retirement investors. The earthquake has already occurred. It occurred on June 9 when the Labor Department’s fiduciary rule became applicable. The shock of this earthquake has been delayed by regulators through a no-enforcement policy that remains in effect until Jan. 1.
Several things could change before the start of the enforcement period. If none of these changes occur, the transition period will end and enforcement will be in effect. Among the most likely changes are relaxed disclosure and contract requirements or a further delay in enforcement. The definition of who is a fiduciary, the best interest standard and compensation limits are very unlikely to change. The complete repeal of the rule is a remote possibility because such an action would require the courts to reverse themselves on a unanimous finding or even more remotely, for Congress to reach a consensus.
The no-enforcement policy creates an opportunity to pause and prepare for what lies ahead.
Those who choose to limit the damage must find ways of retaining as much of current compensation as possible. This requires adopting a method of compensation compliance that yields the minimum loss. Choices range from limits that are based on benchmarks (the worst) to profit-based compensation (the best).
Those who prefer to buy insurance protection will find that “earthquake” insurance is no longer available. There is simply no insurance protection for regulatory violations.
Those who decide sell insurance rather than investments may escape the earthquake by switching to products that are outside the reach of the new regulations. This severely limits business opportunities and is a distinct competitive disadvantage. The disadvantage becomes more acute as the public demand for fiduciaries continues to increase.
Moving to safer ground entails getting ahead of the regulations and avoiding all potential conflicts of interest. In practical terms this means selling advice as a service and charging a flat or hourly fee, so such a change would require considerable time to complete.
