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.

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.

(Related: UBS Exits Protocol, Creating ‘New World’ for Advisors, Clients)

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.

Enforcement of the fiduciary rule will lack bite, Rhoades says.

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.

Which wirehouse?

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.

(Related: UBS Exits Protocol, Creating ‘New World’ for Advisors, Clients)

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?

Limited. My fear is that it may be very difficult to get an injunction that would prevent the delay from going forward and that by the time any lawsuits [are brought], it may be a year-and-a-half or more. By that time, the DOL will have come out with some new proposal. Also, the courts, to a certain degree, defer to agencies, especially when they delay things.

Does the DOL rule greatly increase costs to advisors?

Firms that are moving to fee-based accounts and completely away from third-party compensation – such as payment for shelf space, 12b-1 fees or other back-channel payments – will have substantially lower liability and lower compliance costs, at least for IRA accounts.

What about those who don’t give up commissions and third-party comp?

Firms that continue to stick with commission –based [products] and revenue-sharing arrangements will have increased liability for IRA accounts and increased compliance costs as they try to put in place systems to mitigate the many risks clients face when these conflicts of interest are present.  It’s a lot easier and cheaper to eliminate them, as opposed to managing them under BICE.

The CFP Board has announced that it will issue a second draft of its proposed revisions to its Code of Ethics and Standards of Conduct that would make all Certified Financial Planners fiduciaries for all investments. The comment period will be from January 2, 2018, through February 2, 2018. Would that revision be retroactive for all CFP certificants?

Yes, it would apply to all Certified Financial Planners – nearly 80,000 in the U.S.

Guess that might cause some disruption.

If the CFP Board adopts a fiduciary standard for all CFP holders at all times, the CFP mark will become more valuable, and those who continue to hold it have a much greater marketing advantage. I think most CFPs will make the change and retain their certification.  But those advisors that are used to selling most of their lives won’t want to change [over] and represent the client, which is a completely different mind shift.

But would the decision to retain their CFPs be solely up to the advisors?

Some firms may not allow their employees to continue to hold the CFP designation. I think those firms are at risk because advisors treasure their CFP certification. They spend a lot of time and effort to get it. If firms say, “You can’t be a CFP,” those advisors might very well walk to some place where they can be a CFP.

Does Rep. Ann Wagner’s bill to kill the DOL rule, passed by a House committee, stand a chance?

There will be other [similar] bills that the House of Representatives passes. The problem is that because they don’t have an impact on revenue or the budget, they require 60 votes in the Senate. It’s therefore very unlikely that they’ll be given a vote on the floor. So it’s highly unlikely that Congress will pass a bill that stops the DOL in its tracks or changes the law.

Will the Securities and Exchange Commission issue its own fiduciary standard rule for advisors?

The SEC is just beginning to look at fiduciary regulation. I’m not optimistic that they’ll propose anything.

What’s your outlook, then, for the imposition of a fiduciary standard on financial advisors?

Under the Obama administration, a great deal of work was done at the DOL and, to some degree, at the SEC by those who wanted to impose a fiduciary standard on everyone who gave financial advice. If the political winds shift in Washington and there’s a Democratic administration three, or seven, years from now, it’s going to be really easy to get a fiduciary principles-based rule passed fairly quickly.

What’s happening in individual states with the issue of FAs becoming fiduciaries?

Nevada passed a law that makes financial planners fiduciaries with the exception of insurance agents. Other states are considering similar legislation. So if the Federal government continues not to move forward with the imposition of fiduciary duties on financial advisors, many of the states will. I think it’s much more likely that advisors will be held to be a fiduciary under state common law and that the standard applied will be the high standard, including the Impartial Conduct Standards. I expect that over the next few years a dozen or more states will adopt fiduciary obligations for personal financial advisors.

But will insurance agents not be held to a fiduciary standard, as in Nevada?

We hope they will. Certainly, in the case of fixed annuities and fixed-indexed annuities, where people are basically selling investments that aren’t regulated as securities, there’s a need for that. However, the insurance lobby is among the most powerful lobbies not only in Washington but also in the state legislative houses. So never underestimate the power of political donations.

The insurance industry surely has been objecting strongly to the DOL rule.

The rule says you can’t sell expensive variable annuities and expensive fixed-indexed annuities. They object to that. Before President Trump got elected, sales of these [types of] annuities had begun to fall dramatically. But with the DOL delay in effect, you’re seeing sales of these expensive products rise again.

What might be the upshot of a fiduciary requirement?

You’re going to have the insurance industry fighting against fiduciary standards and the asset management industry fighting against the standards because it’s really going to affect them over the next few decades. The end result is that you’ll end up with a lot fewer players and a lot less expensive product out there. When you create an army of fiduciary advisors doing due diligence on investment products, the expensive ones will go by the wayside.

Why will there be fewer players?

You’re going to see a shakeout among assets managers and insurance companies providing annuity products and a huge decline in the sale of life insurance as a retirement savings vehicle, which is also extremely costly. Fiduciary advisors are rarely going to recommend that.

Broadly, what’s the future of fiduciary in the financial advisory world?

The move toward fiduciary for all financial planners has been occurring in the courts, at the DOL, at the CFP Board and other bodies. And it’s also been occurring as a big shift in the marketplace. So it’s not just the regulators that are driving it. Advisors would prefer to be on the same side of the table as the client. They want to be advisors, not sellers.

So how will all that manifest in the future?

We’ll continue to see the marketplace shift. The DOL has accelerated that a little bit. If the fiduciary rule goes fully into effect — which I think is doubtful under the current administration — it would accelerate it greatly.

And long-term?

We’re likely to see broad-based fiduciary standards apply within the next decade or two or three. The fiduciary standard will permeate throughout. It’s been advancing in this direction and will continue to. Firms will recognize where the future lies and adopt a fiduciary culture from the top down, eliminate a lot of conflicts of interest and along the way, attract more advisors and clients. 

What about right now? What do you see for firms that adopt a fiduciary standard and those which don’t?

Firms that make the shift now regardless of what the regulations do or don’t require are going to be the survivors. Two or three years from now, firms that have been late making the change to fiduciary will likely find that it’s very difficult to do so and may not be in a position to make the shift. Those firms that still want to be product sellers and hire people to sell products, may see higher profits temporarily. Their market share, however, will continue to shrink.

— Related: UBS Exits Protocol, Creating ‘New World’ for Advisors, Clients