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DOL Rule Delay Highlights Industry Battle Lines

By Thomas Coyle August 31, 2017

Word that full implementation of the Department of Labor’s contentious fiduciary rule has been delayed for two years — until July 2019 — may not have shocked many observers but it’s still deeply significant, say industry experts on both sides of a debate that’s raged across two very different presidential administrations.

“It’s no surprise at all,” says Knut Rostad, who runs the Institute for the Fiduciary Standard in McLean, Va. “This administration has been very transparent, at least on that level.”

The DOL rule, initiated by the administration of U.S. President Barack Obama, expands the definition of “investment advice fiduciary” under the Employee Retirement Income Security Act of 1974 to bind all financial service workers who provide advice on retirement accounts to the ethical and legal status of fiduciaries — even stockbrokers and insurance agents, who have so far been held to a looser “suitability” standard around investment product sales.

In the days just before and after President Donald Trump’s inauguration last January, several new White House officials came out against the rule. Gary Cohn, the new administration’s National Economic Council director, called the DOL rule — which purports to require financial advisors to act in their clients’ best interests with regard to retirement accounts and rollovers — “bad” for consumers, and likened it to “putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” Anthony Scaramucci, at the time a small-business advisor to Trump compared the DOL rule to the infamous (and later overturned) 1857 Dred Scott decision by the U.S. Supreme Court, which ruled African-Americans weren’t and couldn’t become U.S. citizens.

Rostad views the new 18-month delay — OK'd by the White House’s Office of Management & Budget in response to a request by the DOL — as an inevitable outcome of Trump’s February directive that the DOL make sure the rule doesn’t “adversely” affect Americans from “gaining access to retirement information and financial advice.”

Since then, the DOL rule has gone into partial effect. As a result, retirement account FAs of all stripes are supposed to act in their clients’ best interests. But full implementation won’t happen for another two years — that is, 18 months after its last official start time in January 2018.

That’s if it ever even happens, grumbles Rostad, whose organization wants all financial advisors to be client-first fiduciaries as a matter of public service. He says the Trump administration and the brokerage industry despise two provisions of the DOL rule — the right for investors to sue advisors and firms for breaches of the rule, and the best interest contract exemption, which lets advisors continue receiving commissions if they agree in writing to continue acting in the client’s best interests and make a full disclosure of options other than commission-based business available. And the administration and brokerage industry will be working overtime between now and mid-2019 to get the provisions watered down or eliminated altogether, says Rostad.

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Meanwhile, the Financial Services Institute, a Washington D.C.-based advocacy group for “a healthier, more business-friendly regulatory environment for our members” — mainly broker-dealers and their advisors — sees the delay as an opportunity for needed refinements. And like Rostad, FSI head Dale Brown couches his views on the subject in terms of consumer protection. In short, he sees the DOL rule as it stands making retirement advice more expensive for consumers.

“President Trump ordered a full review of the rule and its impacts, and it’s critical the DOL completes that review,” says Brown. And as a big feature of this review, the DOL should use the extra time to work with other regulators to “simplify and streamline the rule,” he adds.

RIA-based FAs, who are fiduciaries by definition, take a mixed view of the new DOL rule delay.

Agreeing with Rostad, Theodore Haley of Advanced Wealth Management in Portland, Ore., says the hold off “is likely to give opponents time to either kill the rule or water it down significantly.”

Adds the RIA owner, whose compensation model includes by-the-hour planning: “For us as advisors the delay means more uncertainty.”

Allan Katz of the Comprehensive Wealth Management Group in New York is less concerned, calling the delay “a non-event.” As a holder of the Certified Financial Planner designation, Katz, who gets paid by the hour and on a project basis, says he would view himself as a fiduciary no matter what channel he operated in.

Like Haley, Katz has a broker-dealer affiliation in addition to his RIA role.

Rostad cautions against the view — common among RIA-based FAs, he says — that because talk of the DOL rule is increasing consumer awareness of different standards of conduct in the financial advice arena, the latest delay is likely to make RIAs more attractive to prospective clients than the reluctant fiduciaries they compete with.

“The larger impact of the delay will be that investors will hear louder and stronger claims to the fiduciary standard of trust” from channels that only selectively adhere to it, says Rostad. “Competitive pressures are going to be more intense” for old-line fiduciaries, which will force them be clearer in separating “what they do from what the other side claims to do.”