The Department of Labor’s pending revision of the fiduciary rule for retirement plan advisors is part of an international movement that may not stop in the United States with this one revision, says John Anderson, head of practice management solutions at SEI Advisor Network.
Other countries have enacted or are considering more extensive revisions of financial regulations, and the consequences abroad should serve as a warning for United States advisors, he says. SEI, a provider of asset management, investment processing and investment operations solutions around the world, also has operations in the United Kingdom, where extensive revisions of fiduciary standards have recently been enacted.
The DOL is soon expected to issue long-debated new regulations for plans covered under the Employee Retirement Income Security Act (ERISA), and advisors should get out in front of the issue now and talk to clients beforehand, says Anderson.
“Tell clients how you are going to comply with the new rules and why it can be good for them,” Anderson says. “Do not wait and play defense after the rule comes out.”
The United Kingdom revised its fiduciary rule in 2013. The revisions, which outlawed commissions for many advisors and required more transparency, applied to all advisors, not just retirement plan advisors. Australia also issued extensive fiduciary rule revisions. Changes are also under way in Canada, says Anderson.
“This is an international movement, and I would not be surprised if it eventually goes beyond advisors for ERISA plans in the United States,” he says. “We also do not know if the Securities and Exchange Commission or Financial Industry Regulatory Authority will want more stringent rules than what DOL imposes.”
The bottom line is that advisors in the United States should prepare themselves for further revisions in the future, he says.
The consequences of these revisions in other countries are relevant here, he says. In the U.K. within the last three years, 25 percent of the advisors have been forced out of business and 60 percent of the bank-affiliated advisors have left the business. The new fiduciary rules make compliance too onerous for smaller advisors, Anderson says.
This especially affects young advisors who rely on commissions until they can build up a book of business. It also will affect succession planning for older advisors because there will be fewer young people coming up to take their place, Anderson says.
The retail distribution review, or RDR, as it is known in the United Kingdom, was designed to introduce more transparency and fairness into the investment industry. The most significant change is that financial advisors are no longer permitted to earn commissions from fund companies in return for selling or recommending their investment products. Instead, investors now have to agree to fees with the advisor up front. In addition, financial advisors also have to make clear whether their recommendations are limited to certain products or product providers.