Only a few months ago I wrote How the DOL’s New Fiduciary Rule Will Affect Retirement Advice. In doing so, I threw three years of law school education out the window and broke one of the profession’s cardinal rules: Never speak in absolutes! (As if “never” weren’t an absolute!). I’d like to take this opportunity to formally apologize to my legal writing professor.
I also want to talk about how the recent decision by the President to instruct the Department of Labor (DOL) to review the fiduciary rule might affect financial advice in the future.
A brief recap of the fiduciary rule
The DOL’s fiduciary rule requires that financial advisors who advise on retirement accounts must act as fiduciaries, i.e., they have a legal responsibility to act in their clients’ best interest. (Why only retirement accounts and not, say, brokerage accounts? The DOL is authorized to regulate retirement advice under the Employee Retirement Income Security Act, which applies only to retirement accounts). Proponents of the rule argue that people expect retirement advisors to act in their best interest, much like doctors and lawyers do. Requiring such people to act as fiduciaries aligns expectations with reality. The law should also make it harder for unscrupulous advisors to sell clients high-cost investments. Opponents counter that the law will increase business costs, which will be shifted to consumers in the form of higher fees. After an almost eight-year-long battle, it appeared that the yeas had it and the fiduciary rule was set to go into effect this April.
Oh the times they are a changin’… maybe
Last month, President Trump ordered a review of the law. (You can find the official White House memorandum here). In the review, he asks the DOL to (re-)review the fiduciary rule and if it finds that the rule will adversely affect investors or otherwise “not be consistent with the policies of [the Trump administration],” to either rescind or revise the rule.
The Trump administration has made its preference for deregulation very clear, which has led to many premature declarations of the rule’s ultimate demise. And while I believe it’s likely the DOL will either abolish or revise the rule in its current form, I can see at least three possible outcomes.
- Fiduciary rule is rescinded and business returns to the way it was. It’s very possible that the DOL will determine that the rule is inconsistent with the administration’s policies or that it could adversely affect investors, in which case the DOL could rescind the rule. Retirement advice would continue very much as it did in the past, with financial advisors held to two different standards of care when giving retirement advice: a fiduciary standard (advice giver must place client’s interest above his own interest – the SEC rule which applies to investment advisors) and a suitability standard (advice must be suitable to a client’s objectives, means and age – the Financial Industry Regulatory Authority rule which applies to brokers).
- Fiduciary rule is revised and advisors are held to a (likely) lower fiduciary standard. Doing away with the rule is not the only option. The White House memo clearly states that the DOL could recommend to revise the rule. The rule in its current form is the result of lots of compromises and various revisions over time. (Technically it’s a different fiduciary standard from the one that applies to Registered Investment Advisors – although it’s similar). It would likely take a long time, but it’s possible that a revised fiduciary rule could be implemented, albeit in a different form, in the future. In this state of the world, I would expect that changes would tend to dilute rather than strengthen the rule from the individual investor’s perspective, but on the whole would be more investor-protective than the current suitability standard that applies to much retirement advice.
- Industry adoption of the fiduciary standard trumps (get it?!) the need for a formal rule. One effect of the fiduciary rule debate over the past few years is that investors have started to take notice and actually care whether their financial advisor is a fiduciary or not. It’s possible that you still don’t know what a fiduciary is, but if you do there’s a high likelihood it’s because you learned about it from news stories about the DOL fiduciary rule. And public opinion matters. As of today, the country’s three largest brokerages, Merrill Lynch, Morgan Stanley, and Wells Fargo Advisors, all say they will continue to make changes to their business models to comply with the fiduciary rule regardless of what happens. Under this scenario, the DOL could eliminate the rule and the financial players who had previously lobbied so strongly against the rule in the first place might voluntarily adopt it.
It will be very interesting to see how this story develops over the next few months. Consumer advocates will complain if the rule is abolished. Business leaders will decry it if its implementation moves forward. But one thing seems clear: the times they are a changin’.
