Fiduciary law expert Ron Rhoades has a question about the core of the Department of Labor’s fiduciary standard rule as it relates to individual retirement accounts: “Is it an angry lion with teeth, or an angry lion without teeth?”
In an interview with ThinkAdvisor, Rhoades, a leading proponent of the rule, bluntly addresses his own question about this “gray area” and the rule as a whole. Rhoades’ expectation: The rule will emerge diluted and, overall, light on enforcement. [This interview with Rhoades took place Nov. 17, before the DOL officially announced on Nov. 27 the 18-month delay in the enforcement provisions of its fiducairy rule.]
Assistant finance professor at Alfred State, Rhoades is a longtime lobbyist on Capitol Hill concerning financial planner and investment advisor issues. Fresh from meetings in Washington with the DOL and Securities and Exchange Commission about fiduciary issues, he anticipates the OMB to publish the rule in about a week.
Rhoades, however, doubts that the full rule will go into effect during President Donald Trump’s administration. Rather, he predicts the battle over the fiduciary standard for FAs advising retirement accounts will be resolved at the state level rather than by the federal government.
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Long-term, CFP Rhoades, who every year visits a wide range of BDs, RIAs and bank trust officers to share information (theirs and his), foresees shake-outs in both the insurance and asset management industries as a consequence of their fight against fiduciary standards.
The first phase of the rule went into effect June 9, 2017; nevertheless, when it comes IRAs, advisors and insurance agents are mostly ignoring it, Rhoades maintains.
In the interview, Rhoades, the director of financial planning at Alfred, opines too on the Certified Financial Planner Board of Standards’ proposal to adopt a fiduciary standard for all certificants at all times. That move would cover everyone who currently holds the designation. He therefore foresees mixed, disruptive reaction, not the least of which would be CFPs exiting firms that forbid them to continue to hold the mark.
An estate planning attorney for three decades before co-founding an investment advisory, Rhoades six years ago turned college professor and started a small fee-only practice. A popular speaker, he’ll be a co-presenter at a financial planning conference concerning fiduciary and IRA rollovers at Alfred on February 7.
ThinkAdvisor recently conducted a phone interview with Rhoades from his Bowling Green, Kentucky, office. He discussed parts of the DOL rule now in effect and why he thinks Merrill Lynch may become the nation’s largest investment advisor. Here are highlights from our interview:
THINK ADVISOR: What are your expectations for the revised DOL rule? Originally it allowed consumers to bring class lawsuits.
RON RHOADES: Nobody has seen the actual rule yet outside of the DOL and the OMB. My guess is that it will likely contain very similar provisions to what the current extension has, which is that the DOL will take a light-handed approach to enforcement.
To what extent do you think the rule will be watered down?
Come mid-2019, it’s likely that we’ll have a rule that’s substantially weakened by new exemptions or changed exemptions. We might see the BICE [best-interest contract exemption] substantially weakened in terms of its requirements. We could see a brand-new exemption that might create a loophole to the rule that swallows up the [original] rule.
What are some parts of the rule that have been in effect as of June 9, 2017?
If you’re giving advice on an ERISA-covered plan, such as a 401(k), you’re a fiduciary almost all the time and subject to the Impartial Conduct Standards. ERISA has a private right of action that allows clients to bring [both] lawsuits and arbitration. You’ll see a lot of class-action lawsuits against ERISA plan sponsors. The plan sponsors will now be able to [also] hold accountable those who have recommended specific investments because they’ll be considered a fiduciary, which was not the case before June 9.
What about FAs as fiduciaries when advising about IRAs?
We definitely have a gray area as it applies to IRA accounts. There’s a spectrum of different views. Is the DOL rule an angry lion with teeth or an angry lion without teeth? At this point, we don’t know from a legal perspective.
How are advisors reacting post-June 9?
I haven’t observed that a lot of brokerage firms, individual brokers and insurance agents are worried about the rules and trying to adhere to them, at least on IRA accounts. My observation is that the majority of brokers and insurance agents who provide investments to IRA accounts haven’t changed their business practices.
What elements of the rule pertaining to IRAs aren’t in effect now?
Key parts relating to having a contract with the client, where advisors acknowledge fiduciary status and that such contracts create an enforceable breach of contract for violating the Impartial Conduct Standards. So BICE isn’t in effect, though firms can use it as an option, at least for IRA accounts.
Have many firms taken steps to comply with the rule as it was originally defined and published?
Yes, and at least one of them, a big wirehouse. With regard to IRA accounts, they’ve changed their systems and processes to comply.
Merrill Lynch was ahead of the game in terms of moving to a fiduciary platform for IRA accounts. It’s basically an assets-under-management platform using very low-cost exchange-traded funds. They have since provided some exceptions on a case-by-case basis. However, the atmosphere I’ve observed within Merrill is very positive in terms of their embracing the fiduciary standard. They might be the biggest investment advisor in the future.
What do you think of President Trump’s choice for Secretary of Labor: Alexander Acosta?
He’s a Labor Secretary working with an administration that’s anti-business regulation. To his credit, he’s saying that, if we’re going to change regulations, we’ll do it the right way: We’re going to follow the process.
Right now, with part 1 of the DOL rule in effect, are consumers better off?
There’s been [positive] impact on 401(k) accounts, but most consumers haven’t yet benefited from the rule on their IRA accounts and won’t unless the DOL reverses course and says they’re going to be stricter in how the rules are enforced and allow private actions [lawsuits] to exist. Consumers are still very much in a let-the-buyer-beware stance with regard to being provided products for their IRAs, which are often very expensive — and some of them are just poor products.
Do you think there will be lawsuits that challenge this next delay?
It’s likely that after it comes out, one or more consumer groups might sue the DOL. They’re going to argue that the Administrative Procedures Act wasn’t followed, that the economic analysis was inadequate and that the delay doesn’t meet ERISA requirements regarding being in the best interest of investors or, for that matter, requirements of the Internal Revenue Code.
What are chances that those suits will succeed?