Making the most of another delay in the DOL's fiduciary rule

The worst outcome would be if the regulation is gutted after the review.

Aug 20, 2017 @ 12:01 am

After seven long years of argument and comment, one would expect that the Labor Department's fiduciary rule would be a done deal, and would now be going into full effect.

Alas, no. While the DOL has allowed parts of the rule to go into effect, it has sought an 18-month delay in the implementation of other parts of the rule, allowing confusion and uncertainty to reign over the financial services industry, especially the broker-dealers that have long opposed it.

The regulation requiring all financial advisers providing investment advice to retirement accounts to act in the best interests of their clients — that is, as fiduciaries — has gone into effect. Advisers must also charge reasonable compensation and avoid "misleading statements" about investment transactions and what they are being paid.

However, the DOL had said previously that until Jan. 1, it would not pursue claims against fiduciaries "who are working diligently and in good faith" to comply with the fiduciary rule.

The 18-month delay currently being sought is expected to allow the Labor Department, now under the direction of a new administration, time to at least reconsider the best-interest contract exemption and tweak it. The BIC exemption is a device the DOL inserted into the rule to allow broker-dealers to continue working on commissions.

However, many brokers-dealers and insurance industry executives argue that the BIC is too complicated and even unworkable, and raises potential liability costs. They say it is an invitation for class-action lawsuits driven by lawyers.

The BIC exemption requires those wishing to continue to earn commissions to acknowledge the adviser's and the financial institution's fiduciary duty to the client, to disclose compensation and other fee information, to warrant that neither the adviser nor the financial institution will make misleading statements pertinent to the transaction, and to supply the client with a list of steps the adviser and the institution will take to mitigate potential conflicts of interests.

The financial institution must also provide clients and the public with detailed information on every product it or its advisers offer. The contract must be signed by the client, the adviser and each financial institution whose products are being offered to the client.

The delay being sought by the DOL should be unnecessary after seven years of debate between the agency and sections of the financial services industry still strongly opposing the rule. The DOL did make a concession to those who wish to continue to work for commissions: the BIC exemption.


But some good might come from the delay if aspects of the BIC can be simplified without harming the overall concept that everyone advising investors on retirement investments must act as fiduciaries and place the clients' interests ahead of their own.

The delay might also give advisory firms, especially smaller ones, more time to adjust their systems and practices to the fiduciary rule, and to absorb the costs of the transition. It might also give the DOL time to examine industry studies that purport to show high costs of transition, and firms dropping smaller accounts, and determine their validity. If valid, while also considering the flip side of costs to investors for inaction, then adjustments should be made to the rule.

Another possible benefit of the delay, and any further discussion and possible tweaks, could be that at the end of it, all sides might finally feel their concerns have been heard and at least grudgingly accept the rule.

Finally, the delay might get the Securities and Exchange Commission to decide whether it will enter the discussion, and if so, to work with the Labor Department to produce complementary rules and avoid confusion. While the DOL rule pertains to retirement accounts, an SEC rule would apply to all retail investors.

The worst outcome from the delay would be for the fiduciary rule to essentially be gutted after the review. Investors, even those with small portfolios, should be advised by investment professionals acting as fiduciaries, who put the interests of clients ahead of their own. Nothing less is acceptable.


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