By now, it’s certainly no surprise that the Department of Labor has issued its long awaited missive on fiduciary duty. With over 1,000 pages, there is a lot to absorb; however, I believe the DOL has done a Solomon-like job of streamlining, simplifying and clarifying the rule. Although like many other supporters of the fiduciary concept, I too would have liked to see something stronger, the thrust of the DOL presentation of the rule(s) that resonated with me was:
“Today a loophole will be closed making the system more fair.” I agree, the actions of the DOL will absolutely make the system “more fair.”
I believe that given the realities of today’s political constraints, e.g., an SEC governor who opines that the rule “…seems to ignore the chorus of voices that questioned whether it will restrict middle-class families' and minority communities' access to professional financial advice by making retirement advice unaffordable." [Michael Piwowar] and the views of some legislators, “This fiduciary rule will harm countless Georgians who have worked hard to make sure they make wise financial decisions for their families’ futures…For families across the country, this rule is essentially the Obamacare for retirement planning, and I will do everything I can to overturn this rule.” [Sen. Johnny Isakson]. Along with the multiple millions of dollars spent lobbying against the implementation of a DOL rule, the result is amazing and to be applauded.
Some of the issues that seem to be missing in the seemingly endless commentary on the rule are:
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The argument that small investors (e.g.., “the countless Georgians”) will lose access to advice. Balderdash. First, brokers DO NOT provide advice. If they did, they would have to do so as investment advisors and would already be held to a fiduciary standard. Second, there is a large universe of fiduciary advisors (RIAs) who are ready, willing and able to provide substantive advice. Third, as we’ve already seen, traditional commission-based platforms will quickly find a way to continue to operate under the new rule, e.g., “LPL Cuts Prices, Account Minimums Ahead of DOL Fiduciary Rule.”
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Although few investors and, for that matter, few investment professionals understand the difference between rule-based regulation and principals-based regulation, the DOL does. As it noted “Rather than create a highly prescriptive set of transaction-specific exemptions, the Department instead is publishing exemptions that flexibly accommodate a wide range of current types of compensation practices, while minimizing the harmful impact of conflicts of interest on the quality of advice.”
Rather than a check list of rules, firms are provided significant latitude subject to the principal that the firms and its advisors act as fiduciaries. No wiggle room here.
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It’s still a lumpy playing field. While IRA’s may be subject to fiduciary standards, the old “suitability” standard with all of the potential conflicts of interest will still hold true for non-IRA accounts.
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Where the buck stops. Under the current suitability standard, if there is a dispute, the ultimate responsibility for proving the claim rests on the shoulders of the client. Under a fiduciary standard, the responsibility shifts to the advisor. This is a distinction not lost on compliance departments. As a consequence, I believe the enforcement of fiduciary standards will not be a result of detailed rules and micro-managing regulators but rather the actions of firm compliance departments and ultimately the results of arbitration and court rulings.