Major parts of the Department of Labor’s (“DOL(’s)”) new fiduciary rule may- ultimately- oh, so sssslowly- meet their demise. We among the industry have watched in agony with each new twist and turn, spent countless hours reviewing and analyzing the rule and may now wonder what value has been gleaned from all the trauma. Here are a few thoughts about what we have learned:
Sound Practices Prevail
The transition relief from full implementation of the fiduciary rule requires that a fiduciary rendering investment advice comply with the impartial conduct standard. That requires acting only in the best interest of the client, receiving no more than reasonable compensation and making no misrepresentations about services and fees. No formal written policies, procedures or contracts are required.
On its face, this looks simple. Remember: no formal written policies, procedures or contracts are required. Closer evaluation reveals some gaps, however. How do you know you are acting in the best interest of a client if you have no policies or procedures to guide you? Can you tell what is reasonable compensation for services without benchmarking other fees? Might a client believe that you have lied about what services you will perform if you do not describe those services in a well- written agreement?
While not required, having clear policies and procedures, benchmarking your fees and maintaining clearly understandable contracts simply makes sense. Each is a best practice that is likely to increase understanding among parties and to produce happy results. This is nothing new.
Follow the Money- Always
Rollovers are at the core of the fiduciary rule. Retail investment expenses and advisor compensation for an individual’s account will routinely be higher than under a comparable but institutionally priced investment inside a plan. It has been a long-standing rule, however, that an advisor cannot use his or her authority as a fiduciary to gain additional compensation. These transfers therefore create the ideal setting for a conflict of interest. Deep Throat’s caution to Bob Woodward consequently applies. “Follow the money.” If the path leads to more money than keeping the money in the plan, you may have a problem. Investigate and correct as needed.
Good Forms Are Terribly Difficult to Draft but Quite Useful
Many of us have spent the last several months engaged in the arduous task of drafting new forms to support recommendations to switch from a commission-based plan to an advisory arrangement or to rollover assets from an employer-sponsored plan to an IRA or rollover assets between IRAs. The options available to a client seem endless and difficult to explain. When properly completed, however, a good form can be a thing of beauty.
A well-crafted form serves as an educational tool, in and of itself. Written in plain English, it can guide a client through each element of the complex array of available options. This type of disclosure permits the client to make an informed choice, even when the information may be painful to provide.
Once completed, a form becomes a permanent record of the educational process, the recommendations made and what advice was accepted by the client. That’s a nice thing to have on hand in the event of an examination by a regulator. More importantly, it creates an understandable reference document for your client.
The Move of One Regulator to the Front of an Issue Does Not Motivate Another to Take its Stance
The industry has been clamoring for decades for clarity about what fiduciary duties are owed when recommending transfers from plans. The DOL first released its groundbreaking guidance about rollovers in Advisory Opinion 2005-23A, leaving many issues in doubt. Many practitioners hoped that much of the ambiguity would be resolved by the Pension Reform Act of 2006. Unfortunately, new ERISA Section 408(g) was found by many to be unworkable and few advisors have utilized this PRA exemption. FINRA was slow to come to the party but announced its guidance in 2013 with Regulatory Notice 13-45. Among other things, it clearly specified factors to be considered in making a rollover decision.
The DOL’s first attempt at drafting the new fiduciary rule came in 2010, but it withdrew that work in the face of industry outrage. The current rule was published as a final rule April 8, 2016, which became partially effective June 7, 2017, with the survival of the remainder of the provisions now uncertain.
Despite all this activity, we have yet to hear from the SEC, the agency charged with primary responsibility for regulating investment advice. Chairman Jay Clayton released a statement June 1 of this year, conceding that, “the Department of Labor’s Fiduciary Rule may have significant effects on retail investors and entities regulated by the SEC. It also may have broader effects on our capital markets. Many of these matters fall within the SEC’s mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation.” With that, he created a new email box for the public to respond to specific questions. There is no definitive commitment as to when the chief regulator may provide any guidance on this important issue.
Data and Statistics Cannot Change a Firmly Held Political View
Much has been written about the thousands of pages, hours of testimony and reams of published studies that have been expended in bringing the fiduciary rule to its current state of unreadiness. The undercurrent of the regulation is clear: its authors fundamentally believed that the industry has taken unfair advantage of retirement investors and needs to be changed. An EBSA News Release, issued April 6, 2016, included bold face bullet points, charging that “Conflicts of Interest in Retirement Advice Are Hurting the Middle Class,” “President Obama Is Cracking Down on Conflicts of Interest,” “Conflicts of Interest in Retirement Advice Cost Savers Billions of Dollars.”
The entry of a new administration brought with it a new political view. The DOL’s the web page for the news release just quoted now includes this proviso, “Please note: As of January 20, 2017, information in some news releases may be out of date or not reflect current policies.”
And so the stance of our regulator has changed. Stay tuned.
Investment advisory services offered through Independent Financial Partners, a Registered Investment Adviser
Independent Financial Partners is not owned or controlled by LPL Financial.