Advisors Brace for DOL Rule Assault
Less than three months into his presidency, Donald Trump will face a multi-billion-dollar question -- whether or not to strike down the Department of Labor’s new fiduciary rule for retirement accounts.
“From a strictly practical point of view — no matter what side of the fence you’re on, either pro-DOL rule or against it — the incoming administration needs to make a decision sooner rather than later,” says Steve Foldes, vice-chairman of Evensky & Katz/Foldes Financial Wealth Management in Coral Gables, Fla., which manages about $1.5 billion. “The clock is ticking for the advice industry.”
The DOL rule, set to take effect in April, calls for heightened fiduciary standards in IRAs and similar tax-advantaged accounts. It has already led several major brokerages to bar commission-based products in such retirement holdings.
Arguably, the new Trump administration faces bigger financial regulation issues than the fiduciary rule, such as trimming or eliminating overarching Dodd-Frank regulations – to say nothing of filling cabinet posts and thousands of federal government positions in the next few months.
“Even with the Republicans controlling Congress, the governing reality for Trump is that dismantling any fiduciary standards already in place could turn into a relatively messy political undertaking,” says Mike House, a securities lawyer at Hogan Lovells.
As head of the firm’s legislative practice group in Washington, D.C., he’s telling RIA clients to “not jump to any conclusions at this point” but to stay on top of a “very fluid situation” that could take time to fully play out.
A lot is at stake for advisors and their clients. The outgoing Obama administration estimates that a fully implemented DOL rule could save investors around $17 billion a year, according to the Financial Times.
As a practical matter, advisors need to keep operating as if the DOL rule will take place, says Ed Gjertsen, vice president of Mack Investment Securities in Northfield, Ill.
Major players like Merrill Lynch and JPMorgan Chase have already ditched commission-based compensation in retirement accounts, observes Gjertsen, president of the Financial Planning Association. The industry group represents about 24,000 advisors, fee-only and commission-based alike.
“We don’t see the DOL rule as a black-and-white situation,” says Gjertsen, an advisor in his own right whose firm has decided to not ban commissions in retirement accounts.
Indemnity provisions within the rule letting advisors sign so-called best interest contract exemptions with clients, he adds, will prove an effective way to safely offer commission-based products in certain circumstances.
“Any rollback in the DOL rule is likely to create more confusion for investors, not less,” Gjertsen says. “So even though the FPA is compensation-neutral, we plan to keep supporting efforts to create a more unified fiduciary standard.”
But some say a rollback wouldn’t necessarily hurt independent RIAs, whose advisors are fiduciaries by definition. In fact, it might make distinctions even greater between brokers and holistic FAs, says Skip Schweiss, head of advisor advocacy and industry affairs at TD Ameritrade, which supports more than 5,000 RIAs.
“Since the advent of the independent RIA business in the early 1990s, advisors have distinguished themselves from brokers as acting as true fiduciaries for their clients,” he says. “So in that sense, any rollback in regulations could make those differences in the minds of many investors even more distinct.”
The vast majority of RIAs served by TD Ameritrade are fee-only firms, notes Schweiss. “By and large, we’re finding that most of the advisors we work with don’t have to make a lot of major changes to comply with the DOL rule,” he says.
Commonwealth Financial Network, an RIA and broker-dealer to about 800 independent practices, is gearing up to bar commissions in retirement accounts. But a reversal of the DOL rule could trigger a return to letting its 1,650-odd advisor network charge commissions if they so choose, says Wayne Bloom, the firm’s chief executive.
Although he views the DOL rule in generally favorable terms, Bloom says the “unintended consequences” of full implementation will prove “very costly and complicated.”
At the same time, he observes that commissions in retirement accounts only account for about 8% of Commonwealth’s overall business. “So to us, regardless of what changes are made by a new administration, the ship has sailed — the trend in this industry is clearly towards serving clients with a fee-based model,” Bloom says.
Some political observers are cautioning, however, that past regulatory momentum might not be enough to stem a populist wave of reform-minded Republicans.
House Financial Services Committee Chairman Jeb Hensarling (R., Texas), who is also thought to be a contender to become the next Treasury secretary, said last week that talks are already underway with Trump about scuttling the DOL rule. Meanwhile, House Speaker Paul Ryan (R., Wisc.) is reportedly confirming much the same.
Democrats, of course, might try to filibuster any new proposal brought before Congress. But an incoming DOL head, even acting on an interim basis, could simply order a delay in the rule’s implementation.
That was a strategy the Obama administration used in 2009 to thwart Bush administration DOL initiatives, notes the Wall Street Journal.
“It’s very easy for government agencies to say that because the industry needs more time to react, we’ll push this out and in the meantime come up with a new rule that replaces the old rule,” a financial-planning expert tells the paper.
In fact, he’s putting chances of the DOL rule being “delayed and eventually replaced” at "90% or better.”