What to Watch on the Fiduciary Front in 2018
January 9, 2018 by Lisa Beilfuss
The federal rule meant to protect retirement savers from conflicted advice was dealt a setback in 2017 as its full implementation was delayed. But consumers, state regulators and parts of the advisory industry have embraced its ideal of requiring retirement advice to be in investors’ best interest.
The Obama-era regulation known as the fiduciary rule has been unpopular with Republicans and some financial-industry executives who say it harms consumers by reducing choice and access to financial advice. Shortly after his inauguration, President Donald Trump directed the Labor Department to conduct a new economic analysis of the retirement-savings regulation with an eye toward its revision or repeal.
“We think it is a bad rule. It is a bad rule for consumers,” said White House National Economic Council Director Gary Cohn in an interview with The Wall Street Journal at the time. “This is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.”
In March, the Labor Department officially delayed the regulation’s originally planned effective date by 60 days, to June 9, as it launched its review. But new Labor Secretary Alexander Acosta concluded that “respect for the rule of law” precluded further delay.
The Labor Department did, however, delay key parts of the fiduciary rule until July 2019 as it accepts public comment and re-examines the rule’s economic impact. That process is continuing, but a Wall Street Journal analysis has found a significant number of fake negative comments posted to the Labor Department’s website. A spokesman for the agency told the Journal that it removes fraudulent comments brought to its attention.
Here are a few things to watch in 2018 as consumer awareness grows, the wealth-management industry adapts and regulators react:
Industry Buy-In
As of June 9, stewards of retirement savings have been required to put clients’ interests before their own. But while the best-interest standard went into effect, the delay in key provisions of the rule—including a best-interest contract and certain client disclosures—effectively makes it unenforceable.
“It’s the rule of law, but it’s very hard for plaintiffs’ lawyers to even bring a lawsuit” without those provisions, said Erin Sweeney, an attorney at Miller & Chevalier Chartered who counsels firms regarding fiduciary obligations.
Even so, many firms have made changes to how they do business in order to more easily comply with the new rule.
Bank of America Corp.’s Merrill Lynch has embraced the rule, running an ad campaign around the idea of fiduciary advice. Rival Morgan Stanley has allowed brokers to continue charging commissions, but it has lowered costs to aid compliance with the regulation’s “reasonable compensation” standard. Many firms have rolled out new computer-driven “robo” advisory tools—with low costs and automated investment services—to cater to smaller savers.
So far, adherence is proving lucrative as firms push customers toward accounts that charge a steady, annual fee on their assets, rather than variable commissions that can violate the rule and fluctuate along with market activity. Executives in recent quarters have credited the fiduciary rule for pushing up revenue. Merrill Lynch in its latest quarter said money put into fee-based accounts more than doubled. At Morgan Stanley, money put into fee accounts grew by two-thirds in the most recent quarter.
The fiduciary rule also has been underpinning a trend of traditional brokers leaving Wall Street firms in favor of independent shops, known as registered investment advisers, that have been held to a fiduciary standard on all assets for decades. Being an RIA alleviates incentives to sell certain types of products and presents a marketing opportunity as investors become increasingly aware of the differences between brokers and advisers.
“Fee-based, fiduciary models are the fastest growing areas of the industry,” JMP Securities LLC managing director Devin Ryan said. By 2020, research firm Cerulli Associates predicts that independent advisers will control more assets than Merrill Lynch, Morgan Stanley, UBS Group AG and other major brokerages combined.
States Step In
With the fate of the federal fiduciary rule in question, a number of states have moved to bolster their rules governing financial advice. The governors of Nevada and Connecticut signed bills to expand or amplify “fiduciary” requirements for brokers, while legislators in New York, New Jersey and Massachusetts have introduced similar bills.
Several other states, including California, have indicated interest in exploring such requirements, and a bipartisan group of 13 state treasurers wrote to Mr. Acosta, urging him to preserve the “common-sense measure.”
“This is a mobilization based on concerns that the DOL rule may be unhinged,” Ms. Sweeney said.
Observers have said Nevada is a test case, because its rule could expand the reach of fiduciary obligations to all investment assets and not just tax-advantaged retirement assets. The state’s securities division is writing the regulation and has said it would conduct a public hearing as part of that process after Jan. 1.
Industry groups have responded. In October, for example, a representative for the Securities Industry and Financial Markets Association, an industry trade group, expressed concern about a state-by-state approach to broker regulation and argued that any new fiduciary duties under Nevada’s law would violate an act of Congress passed 20 years ago to prevent patchwork regulation in financial markets.
Riding Point on the Review
Preston Rutledge, former senior tax and benefits counsel for the Senate Finance Committee, on Dec. 21 received full Senate confirmation as assistant secretary of labor for the Employee Benefits Security Administration. Mr. Rutledge takes on the job vacated by Phyllis Borzi, one of the architects of the fiduciary rule who left the agency at the end of President Barack Obama’s term.
Ms. Sweeney said a takeaway from Mr. Rutledge’s confirmation hearing is that he would like to see more cooperation between the Labor Department and other agencies when it comes to the fiduciary rule.
During his confirmation hearing before the Senate Committee on Health, Education, Labor and Pensions, Mr. Rutledge was asked about an earlier expression of “discomfort” with the fiduciary rule. In response, he said: “It wasn’t about the rule; it was about the fact that Treasury didn’t seem to be involved. Treasury ought to at least be at the table if this rule was going to create additional work for them.” (Violations of the fiduciary rule would trigger Treasury Department involvement via the Internal Revenue Service.)
While a finalized rule may not come before 2019, Ms. Sweeney said a new regulation—which would then be subject to public comment and potential revision—could come by the fourth quarter of 2018.
With Mr. Rutledge now installed, she said, “he’ll start to pull all the threads together and get this rolled up.”
Universal Fiduciary Rule?
While it remains unclear how the fiduciary-rule review will play out, observers say commentary out of the Labor Department and Securities and Exchange Commission suggest an increased likelihood that the SEC participates in crafting a standard that applies to both retirement and non-retirement assets.
The SEC largely stayed on the sidelines of the issue during the Obama administration. But the regulator, now led by Chairman Jay Clayton, is showing new interest. “I believe an updated assessment of the current regulatory framework, the current state of the market for retail investment advice, and market trends is important to the commission’s ability to evaluate the range of potential regulatory actions,” Mr. Clayton said in June, when the SEC solicited feedback on a potential rule.
Arjun Saxena, a partner at consulting firm PwC, said a new Labor Department rule isn’t likely to be finalized before 2019 and to “expect more time as opposed to less” if the agency coordinates with the SEC. “Anything from the SEC would be more complex,” he said, because it would cover all investment accounts.
Write to Lisa Beilfuss at lisa.beilfuss@wsj.com