As more time elapses and more information trickles out about the Department of Labor's coming fiduciary rule, it is becoming more apparent that parties both inside and outside the regulatory clutch are still largely speculating about what lies ahead.
Proof of that can be found in the obvious split across the brokerage industry with regard to plans for allowing commissions in qualified retirement accounts once the rule takes effect.
It will take months, and possibly years, before the dust completely settles and the full impact of the DOL rule is felt. But in the meantime, the brokerage industry deserves some credit for trying to provide direction and clarity to individual reps and the broader financial advisory space.
The fact that we're seeing divergent approaches to the rule from the likes of Merrill Lynch and Morgan Stanley illustrates how much gray area some of the best-armed legal and compliance teams in corporate America are trying to navigate.
And you know it's a big, tangled web of a rule when the DOL has to issue what it described as the “first round” of answers to frequently asked questions.
As InvestmentNews reporter Mark Schoeff Jr. stated in his analysis of the DOL's list of FAQs,
the 24-page, 34-question document “doesn't have the clarity of the Ten Commandments.”
Some of Mr. Schoeff's takeaways on the FAQs are that the industry should expect the DOL to stick with the stated deadlines, that the rule favors fee-based and automated advice, and that it is intent on ending broker incentives.
The kicker, however, and the part that represents serious job security for compliance lawyers, is that the DOL has been far too ambiguous regarding the concept of compensation grids and the definition of “reasonable compensation.”
(Related read: Frequently asked questions on the DOL fiduciary rule's FAQs)
Clarity is undoubtedly what the advice industry craves right now, and what individual investors will ultimately need. But seeing Merrill and Commonwealth Financial Network move away from commissions in retirement accounts while Morgan Stanley joins the longer list of firms opting to stick with commissions should remind advisers that the DOL rule is still widely open to interpretation.
So far,
Ameriprise Financial, Cambridge Investment Research Inc., Cetera Financial Group,
Edward Jones,
LPL Financial,
Raymond James Fi-nancial and
Stifel Financial Network are sitting alongside Morgan Stanley in planning to allow advisers to operate in both a commission and fee-based capacity.
As InvestmentNews reported last week, most industry watchers and insiders are boldly coming down on the side of “it depends.”
“There's no right or wrong. It's a function of what the firms feel is appropriate for them,” said Denise Valentine, senior analyst at
Aite Group.
No doubt it's also a function of which compensation structure that portion of their business already uses or is moving toward.
AVOIDING BICE
At this point, the safe bet seems to favor an across-the-board fee-based business model that sidesteps the pesky best-interest contract exemption, or BICE, which allows for variable compensation if certain standards are met, but which also gives investors the right to bring class-action lawsuits against brokerages if they feel they've been wronged.
One might assume that the part about class-action lawsuits would pretty much take commissions off the table. But the brokerage industry attends to many masters, including providers of commission-based products and reps who still want to work for individual investors who might be best served through commission-based relationships.
(Related read: More: The most up-to-date information on the DOL fiduciary rule)
As firms continue to wade through the DOL rule to determine how they will proceed, brokers and advisers will gain clarity to help them proceed.
At some point in the not-too-distant future, we might come to realize the move by Merrill Lynch away from commissions was just throwing in the towel — or part of some larger strategy that takes into account the next big shoe to drop: A version of the fiduciary rule for taxable accounts.
