Even supporters of DOL fiduciary rule call for modifications

The Investment Adviser Association wants a safe harbor for sales conversations. Meanwhile, Morningstar suggests a replacement for the best interest contract exemption

Apr 18, 2017 @ 1:59 pm

By Mark Schoeff Jr.

Even supporters of the Department of Labor's fiduciary rule are still looking to tweak the measure.

For instance, the Investment Adviser Association wants the regulation modified so that advisers who are already fiduciaries can promote their services to prospective clients without fiduciary responsibility being attached to the pitch.

Morningstar Inc., the investment research firm, suggested that the DOL take the controversial best-interest contract out of the rule and replace it with automated third-party reviews of portfolios.

These are two of the recommendations which surfaced as comment letters started pouring into the agency again. Monday marked the deadline for responding to the issues raised by President Donald J. Trump in his Feb. 3 memo to the DOL.

Mr. Trump directed the agency to update the economic and legal analysis of the rule -- which would require financial advisers to act in the best interests of their clients in retirement accounts -- and revise or repeal the regulation if it was found to reduce investors' access to retirement advice, increase their costs, disrupt the financial industry or cause an increase in litigation for financial firms.

The DOL delayed implementation of the rule for 60 days -- from April 10 to June 9 -- to conduct the reassessment. As of June 9, two provisions of the rule -- one expanding the definition of who is a fiduciary and the other regarding impartial conduct standards -- will become applicable. The agency said that it will complete its review by Jan. 1, the final deadline for full implementation.

Between now and then, the IAA hopes that the DOL eases restrictions surrounding conversations between advisers and clients prior to the client's signing a contract with the adviser.

"[T]he department should categorically exempt pre-contractual communications from the definition of 'recommendation' in all cases where an SEC registered, fee-based adviser, acting as such, will be a fiduciary after entering into a contractual arrangement with the client," wrote IAA president and chief executive Karen Barr in an April 17 comment letter. "[F]ree flow of information will best promote the interests of retirement investors by enabling them to understand and distinguish the services of various candidate advisers, and permit advisers the flexibility to be as responsive and provide as much information as they desire in pre-contractual discussions."

Morningstar takes aim at the part of the rule that is most divisive and probably the most likely to change -- the best-interest contract exemption. Under this provision, financial advisers are allowed to charge commissions and take other forms of compensation that would normally violate a fiduciary standard as long as they sign a legally binding agreement with clients to act in their best interests.

Opponents of the rule charge that the DOL is out of bounds in creating a private right of action. Supporters say that the contract is necessary to put teeth in the rule.

Morningstar, which estimates that class action suits stemming from the rule could total $70 million to $150 million annually, is proposing an alternative to the contract.

"We believe that an auditable big-data system provided by a neutral third party for reviewing individual portfolios across a firm, as well as the reasons advisers recommended rollovers to [individual retirement accounts] and in support of advice within IRAs, could substitute for the Best Interest Contract Exemption while still protecting investors," Aron Szapiro, Morningstar director of policy research, wrote in an April 13 comment letter. "[S]uch a uniform prudence standard and data assembly system will likely be developed in any case to help firms defend against lawsuits."

Over the next several months, the agency will have to sift through many ideas like this one in what will likely be thousands of comment letters.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

May 02

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

When can advisers expect an SEC fiduciary rule proposal and other regs this year?

Managing editor Christina Nelson and senior reporter Mark Schoeff Jr. discuss regulations of consequence to financial advisers in 2018, and their likely timing.

Recommended Video

Path to growth

Latest news & opinion

Bond investors have more to worry about than a government shutdown

Inflation worries, international rates pushing Treasuries yields higher.

Morgan Stanley reports a loss of advisers after exiting the protocol for broker recruiting

The firm said it lost 47 brokers in the fourth quarter, the most in any quarter of 2017.

Morgan Stanley's wealth management fees climb to all-time high

Improvement reflect firm's shift of more clients into fee-based accounts priced on asset levels, which boosts results as markets rise.

Legislation would make it harder for investors to sue mutual funds over high fees

A plaintiff would have to state in their initial complaint why fiduciary duty was breached, and then prove the violation with 'clear and convincing evidence.'

Relying on trainees, Merrill Lynch boosts adviser headcount in 2017

Questions remain about long-term effectiveness of wirehouse's move away from recruiting experienced brokers.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print