There has been a great deal of debate over the years regarding the Department of Labor (DOL) fiduciary rule. Recently, full implementation of all elements of the rule was delayed to July 1, 2019 while the ruling is under review.
Ultimately, what stands to be lost or gained from the implementation of this rule? Those are serious questions to be asked, and it is important to be educated on the pros and cons of the rule.
Overview of the DOL fiduciary rule
As laid out in a previous blog from Advicent, the DOL rule was initially proposed in reaction to loopholes contained within the Employee Retirement Income Security Act of 1974 (ERISA). The main objective of redefining who is categorized as a “fiduciary” is to ensure that anyone who gives financial advice on retirement accounts must prove that they are acting in their clients’ best interests.
At face value, it is unclear as to why Americans would oppose a ruling where an advisor is legally required to work in the best interest of his or her clients. The disagreement on this rule, however, lies in the details.
Pros and cons of the DOL fiduciary rule
Pros
- Safeguard millions in investing clients from paying needlessly steep commissions on investment products, and from purchasing investment products and making choices that are not in their best interest.
- Save retirement investors’ money: A 2015 report from the White House Council of Economic Advisers estimates that conflicts of interests by brokers cost retirement investors up to $17 billion per year.
Cons
- Many professionals in the financial industry would rather be held to a suitability standard, as the fiduciary standard would cost them money, both in terms of commissions and the added cost of complying with the new regulations. In fact, it is estimated that the implementation of the fiduciary rule could cost the industry an estimated $2.4 billion per year.
- The ruling could unfairly affect smaller and independent retirement advisors, who might not be able to afford the costs of complying with new regulations. The United Kingdom approved similar rules in 2011, and the number of financial advisors there has since dropped by 22.5 percent. Some fear that something comparable could happen in the United States.
- According to a study of 300 advisors in August 2017 from the Boston-based wealth management consultants Practical Perspectives, more than half of respondents do not feel well prepared for the rule’s implementation.
Conflicting viewpoints of the rule
Many investors feel more comfortable with the measures in place. Others believe the ruling is just unnecessary government intervention that forces advisors to follow procedures to ensure that the investor understands something that may have already been effectively communicated. Along with this argument, the additional cost for the advisor would probably eventually be passed on to the investor in the form of the advisor’s management fee.
There are also advisors that believe the implementation would not affect their practice either way. Based on the Practical Perspectives study, two out of three advisors feel they would have to make changes in their practice if the rule passed. In addition, while two-thirds of Registered Investment Advisors feel they would not have to make any changes, six out of seven broker-dealers feel they would have to make changes, and a general consensus is that these changes would be “dramatic.”
Regardless of what happens as the DOL ruling’s implementation is again delayed and faces possible revision, certain trends will remain present, according to Practical Perspectives. The industry’s movement away from commissions and towards fee-based or advisory platforms will continue. In addition, advisors are likely to decreasingly engage with smaller clients who may not be suitable using fee-based methods.
Advisors will continue to search for innovations in technology and practices that help them compliantly serve their clients while minimizing disruptions and regulations. Advicent will strive to enhance and develop tools to help keep advisors comfortable and confident in their ability to comply with fiduciary standards.