U.S. President Donald Trump has moved to effectively delay the Department of Labor rule meant to force financial advisors to act in their clients’ best interests.
The DOL fiduciary rule was scheduled to be phased in starting April 10 but might now be delayed indefinitely, pending further review. The rule expanded the definition of “investment advice fiduciary” under the Employee Retirement Income Security Act of 1974 to bind all financial service workers, including stockbrokers and insurance agents, who provide advice on retirement accounts to the ethical and legal status of fiduciaries.
Trump’s pushback against the DOL rule came in the form of a targeted memorandum signed Friday. The directive instructs the Department of Labor to examine the fiduciary rule to assess whether it “adversely” affects Americans from “gaining access to retirement information and financial advice.”
Labor must now update its economic and legal analysis of the likely impact of the rule, and consider if the rule:
- Harms access to certain retirement products, offerings, information or advice.
- Results in “dislocations or disruptions” in the retirement services industry that adversely affect retirees or investors.
- Will likely result in increased litigation in the industry.
While not explicitly delaying the rule outright, according to the memorandum if Labor finds that the fiduciary rule does any of these things, it should propose to rescind or revise the rule.
Congresswoman Ann Wagner (R-Mo.), a prominent backer of financial-regulatory reform, was at the Oval Office signing of the directive. “What we’re doing is we are returning to the American people, low- and middle-income investors, and retirees, their control of their own retirement savings,” she said. “This is about Main Street, and it’s been a labor of love for me for over four years.”
The DOL rule memorandum was one of two executive actions aimed at financial regulation reform. An executive order broadly directed at the Dodd-Frank Wall Street Reform and Consumer Protection Act asks the secretary of the treasury to consult with the Financial Stability Oversight Council and report to him within about four months on the extent to which existing “laws, treaties, regulations, guidance, reporting, record-keeping requirements” and other policies support a list of “core principles” published as part of the new executive order.
These core principles, guidelines for the Trump administration’s approach to its oversight of the U.S. financial system, include pledges to:
- Empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth.
- Foster economic growth and vibrant financial markets through more vigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral risk and information asymmetry.
- Make regulation efficient, effective and appropriately tailored.
Regarding the memorandum likely delaying the rollout of the DOL rule, Knut Rostad of the Institute for the Fiduciary Standard, a proponent of the measure, says it’s “deeply disappointing and entirely expected.”
At least, adds Rostand, it’s been expected since Trump won the general election in November. Had Hillary Clinton won the election, it was expected she’d have maintained the financial-regulatory policies of former President Barack Obama, who championed the DOL rule.
On the bright side, Rostad says Trump’s order “brings a new opportunity for fiduciary advocates to rethink strategies in line with how dramatically the positions of the field have shifted.”
Making a football analogy, Rostad says “fiduciary advocates were three touchdowns ahead and in the red zone, about to score in a blowout.” Now, he sees proponents of the DOL rule "behind in points and on defense” with “Tom Brady on the march about to score on us.”
Meanwhile Steven Kaye, CEO of AEPG Wealth Strategies in Warren, N.J., worries that a delay of the DOL rule will “create more confusion" in the market.
Kaye, whose independent RIA manages about $800 million, has been telling clients and prospects about the basics of the new rule. This has taught him that novice investors are particularly unaware of such regulatory issues. As a result, he worries these “uninitiated” investors will be “vulnerable” as a result of the delay.
But for those already acting in a fiduciary capacity for their clients across the board, Kaye sees the executive order as a “big win.” He characterizes a DOL rule rollback as “a great marketing tool” to help educate clients about the advantages of going with a fiduciary advisor.
“We’ve already been telling investors about the importance of conflict-free advice,” Kaye says. “Now, we’re going to be shouting that message from the rooftops.”
Reaction from big brokerages to the executive orders as they pertain to a DOL rule delay has been muted. Pre-election, when it looked like a sure thing, the two biggest of these firms announced plans to take different approaches to compliance with the DOL rule.
In October 2016, Merrill Lynch said it would ban trade commissions on retirement accounts altogether to stay compliant with the rule-to-be. Shortly after, Morgan Stanley opted to let its advisors use an exemption clause allowing for commissions on retirement accounts with appropriate and specific disclosure to clients.
Merrill, the retail brokerage unit of Bank of America, answered a series of specific questions with canned quotations from Andy Seig, its top executive.
“We will continue to implement a heightened standard of care for delivering personalized investment advice, especially for investment advice about retirement accounts,” Seig says in a remark forwarded to FA-IQ by Merrill’s public relations team. “We look forward to working with the new administration, the new secretary of labor, and other relevant agencies to improve current rules and regulations for the benefit of our clients.”
Seig adds that Merrill may have “to adjust the timelines for certain operational changes we have announced to ensure an orderly transition and a good client experience.”
Merrill declined to say whether it will reverse its policy banning commissions on retirement accounts. It also declined to say whether Merrill advisors have left the firm — or joined it — because of its DOL policy.
Morgan Stanley tells FA-IQ it “will continue to move forward with many of the initiatives we have underway, reflecting our ongoing commitment to raising the standard of care we provide our retirement and non-retirement clients.”
Ex-Morgan Stanley wealth manager Lester Botkin, now chief investment officer at Botkin Family Wealth, says that despite his old employer’s plan to allow sales commissions under the DOL rule, the firm has been allocating more and more resources in support of its fee-based advisors.
Botkin predicts the DOL rule’s rollback under Trump won’t change that — even as its policy of leaving “the door open for advisors to work with clients on a commission basis in certain circumstances” makes them seem “particularly well-positioned for any post-DOL world.”
Still, like Kaye, Botkin believes the DOL-rule delay could help independent fiduciary firms like his — which manages around $200 million — differentiate themselves in the marketplace.
“One of our main reasons for opening our own practice was so that we could work in a less-conflicted environment,” Botkin says. “Our firm plans to continue to avoid at all costs pushing commission-based products on clients.”
Andy Puzder, the Trump nominee to head the DOL, has yet to be confirmed by the Senate. His nomination hearing has been delayed indefinitely.
Edward Hugler has been acting labor secretary since January 20 when Obama appointee Thomas Perez resigned.
In addition to the Treasury Department, the Financial Stability Oversight Council consists of the Treasury as well as the Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the Consumer Financial Protection Bureau.
The interim secretary of the Treasury, a holdover from the Obama administration, is Jack Lew. Trump’s nomination for that post is Steve Mnuchin.
Additional reporting by Bruce Love and Rita Raagas De Ramos.