Some would say that less than a month into his presidency, Donald J. Trump has unleashed mayhem on the retirement advice industry; others would say he has saved it from a terrible mistake.
One thing everyone would agree on: All hell has broken loose.
“The world is upside down,” said Knut Rostad, president of the Institute for the Fiduciary Standard. “Uncertainty and ambiguity will be the watchwords of the day.”
Nearly a year ago, the matter of raising standards for investment advice seemed settled — at least as far as retirement accounts were concerned. That's when the Labor Department issued a final rule that would require financial advisers to act in the best interests of their clients in 401(k)s, individual retirement accounts and other qualified accounts.
The initial implementation date was set for April 10 of this year, and the final implementation was to occur on Jan. 1, 2018.
Today, three months after Mr. Trump defeated Democratic candidate Hillary Rodham Clinton in the white-hot race for the presidency, the fiduciary debate is essentially back to square one. And it's shaping up to be more contentious than ever.
In a Feb. 3 memo, Mr. Trump instructed the DOL to review the investment advice rule to determine, among other things, whether it prevents some retirement savers from obtaining advice, or threatens to disrupt the industry with a flurry of lawsuits against firms. The memo did not specifically ask for a delay in the rule's implementation, but that's where things are headed.
During that delay, which most likely will span six months, the rule will be revised if not outright replaced with something more to Wall Street's liking. In between, there will be lawsuits as well as steps — and half-steps — taken independently by some companies to satisfy the spirit of the law, if not its letter.
“Many compliance professionals must be pulling their hair out.”—Hillel Cohn, Partner at Morrison & Foerster
Speaking of lawsuits, a Dallas federal judge upheld the Labor Department's fiduciary rule last Wednesday, dealing a crushing setback to financial industry attempts to kill the measure. Chief Judge Barbara Lynn granted summary judgment to the DOL, and shot down each of the major arguments submitted by the plaintiffs, a group of nine industry trade groups. The ruling came the same day the Department of Justice asked for a stay in the proceedings, which was denied.
“Many compliance professionals must be pulling their hair out,” said Hillel Cohn, a partner at Morrison & Foerster.
Indeed, everyone — from pundits to lawyers to industry trade groups and C-suite executives — is trying to divine how the long-running battle to impose a higher standard of care over retirement assets will play out.
“Our message is 'Prepare to pivot,'” said Rob Cirrotti, Pershing managing director of investment and retirement solutions.
Once the Trump-ordered regulatory impact assessment is complete, the rulemaking process for a replacement regulation could take a year or more.
Congressional Republicans likely will try to advance legislation that would halt the rule. Meanwhile, proponents of the measure will surely fight as hard to save it as they did to get it enacted.
Fiduciary advocates, who assert the DOL rule would protect workers from high-fee investments that erode retirement savings, had been on offense throughout the Obama administration to get the rule over the finish line.
They now find themselves playing defense to salvage the measure.
“We need to remake messages to better speak to investors and leaders outside Wall Street and Washington,” Mr. Rostad said. “We need to remake messages to challenge dubious or misleading statements.”
The financial industry, too, is changing its approach to the debate.
Watch: Advisers react to Trump's DOL fiduciary rule decision
First, they attacked the DOL rule for being too complex and costly, arguing that it would make giving and receiving advice more expensive and price investors with modest assets out of the market. Now, they are on the offense. Many are lobbying for a different fiduciary rule, one that would apply to all retail accounts under the Securities and Exchange Commission.
“If we achieve a delay or repeal of the rule through executive, legislative or judicial means, no one should expect that we will simply revert to the status quo. This fiduciary world is our 'new normal,'” Dale Brown, president and CEO of the Financial Services Institute, said in a speech last month at the group's annual conference.
In the nearly seven years the Dodd-Frank financial reform law has been in place, the SEC has not used the authority it was given under the measure to promulgate a fiduciary rule.
It's not clear whether Mr. Trump's nominee for SEC chairman, securities lawyer Jay Clayton, will make the rule a priority or whether he could find at least two commissioners on the five-member panel (that currently has only two members) to back a rule if he does.
But the Labor Department's version is not dead yet.
“It is a final rule, and I don't think it's going to be that easy to repeal,” said Skip Schweiss, managing director for adviser advocacy and industry affairs at TD Ameritrade Institutional.
If the rule doesn't survive intact, parts of it may live on, such as enhanced fee disclosure.
More importantly, many firms have already invested millions of dollars in preparing for the rule, lowering fees on products and making other changes to comply.
“Once you've made that commitment, it's a force that's hard to turn back,” said Blaine Aikin, executive chairman of fiduciary training firm Fi360.
Indeed, one consultant said he is counseling advisory firms to forge ahead regardless of uncertainty about the DOL rule's future.
“They're taking this opportunity to create more trust with their clients,” said Chad Carmichael, a principal at North Highland Co.
“What's here to stay is the fiduciary mindset that the DOL rule has brought about. It's more about the best-interest standard than the paperwork required by the rule.”—Rob Cirrotti, Pershing managing director of investment and retirement solutions
The notion that the ethos surrounding the DOL rule will remain — even if the rule in its present form does not — is one that can be heard from former Obama administration officials as well as industry leaders.
“What's here to stay is the fiduciary mindset that the DOL rule has brought about,” Mr. Cirrotti said. “It's more about the best-interest standard than the paperwork required by the rule.”
But the details of what a new rule will look like will catalyze more battles.
ALL ABOUT DISCLOSURES
The provision of the DOL rule that would allow investors to file class-action lawsuits against advisers was anathema to the industry, which said it would sharply raise liability risk for firms. Instead of a private right of action, a new fiduciary rule is likely to be disclosure-focused, if industry has its way.
“We're very supportive of enhancements” of investor protection, Richard Lampen, president and CEO of Ladenburg Thalmann and FSI chairman, said at the FSI annual meeting. “Enhancements are going to be heavily disclosure-oriented — of improving disclosure, of simplifying disclosures, of making disclosures and explanation of conflicts more user-friendly for investors who will be receiving them.”
In July 2011, the Securities Industry and Financial Markets Association outlined what it called a “fiduciary framework” in a letter to the SEC. Under the SIFMA approach, the standard of care would “apply on an account-by-account basis” and would exempt the charging of commissions and fees, such as marketing and distribution fees for mutual funds. Similarly, the Dodd-Frank law prescribes safe-harbor for commissions, proprietary products and principal trading in an SEC rule.
“We believe the DOL's flawed fiduciary rule is harmful to retirement savers,” SIFMA executive vice president and general counsel Ira Hammerman said in a statement.
If SIFMA puts forward its fiduciary framework again in the wake of the DOL rule's demise, it will get resistance from Mr. Rostad.
“It is nothing short of basically taking the sales suitability standard and stamping 'fiduciary' on it,” he said.
On the other hand, an idea endorsed by the SEC Investor Advisory Committee may gain the support of fiduciary advocates and generate opposition from the industry. In 2013, the group proposed lifting the broker exemption in the 1940 Investment Advisers Act as one way for the SEC to move ahead with a fiduciary rule.
“Don't allow [brokers] to call themselves advisers if they're salespeople,” said Kurt Schacht, IAC chairman and managing director of the CFA Institute. “We would suggest to the SEC that this is the simple solution.”
One thing, however, is certain. In the aftermath of the DOL rule, nothing will be simple.
“It could be crazy around this world for a couple years to come,” Mr. Schweiss said.