A mere 80 days separates President-elect Trump’s inauguration from the April 10, 2017 effective date for the Department of Labor’s (DOL’s) fiduciary standard rule. Yesterday, four industry experts gave their predictions on whether the rule will survive under the Trump administration.
Ron Rhoades is a professor of finance and financial planning at Western Kentucky University's Gordon Ford College of Business, and a researcher and writer on fiduciary-related topics. At the MarketCounsel Summit in Miami, he moderated a panel with three other participants: Blaine Aikin, executive chairman of fi360 and a recognized thought leader in the field of financial advice and fiduciary responsibility; Skip Schweiss, president of TD Ameritrade Trust Company, and a frequent lobbyist and advocate on behalf of fiduciary-related causes; and Knut Rostad, who co-founded and chaired the Committee for the Fiduciary Standard and co-founded and is president of the Institute for the Fiduciary Standard.
Rhoades and Aikin are thought leaders on APViewpoint and will soon be joined by Schweiss and Rostad.
The central issues attendees came to hear is whether the fiduciary rule will be implemented on schedule, delayed or weakened, or canceled outright.
Implement, delay or cancel?
Aikin said there will be some “level of delay,” but the rule will come into effect largely intact. Schweiss was less sanguine, but doesn’t think the rule is dead. “It is a final rule and to undo it would require a new rulemaking.” He agreed that a delay is likely, though. Rostad agreed with the others, but said the issue is whether there will be changes at the edges or at the core. “There will be certainty of uncertainty,” Rostad said.
Aikin said advisors need to decide if they want to commit to providing fiduciary advice and, if so, put in place the necessary processes to make that happen. He said that policymakers will not be enthusiastic about reversing direction and having to explain to the advisor industry why the changes they had made in anticipation of the fiduciary rule were unnecessary.
For there to be a delay, Schweiss said, Trump must first nominate a new Secretary of Labor, have that person confirmed, and then take the necessary actions to postpone the implementation of the rule. He said advisors should continue their work to get into compliance by April 10 or they run a “real risk” of failing to comply.
Rostad said advisors should look at the marketing side of their business. Merrill Lynch is boasting their adherence and fidelity to the fee-based side of the DOL rule in an aggressive advertising campaign, he said. Indeed, Merrill is applying the fiduciary standard not just to their retirement accounts, but to all accounts. “Marketing warfare could be reminiscent of the 1990s,” he said, when the fee-based model took hold and advisors were taking on the brokerage industry.
Rostad has been giving advisors communication materials to educate clients about what it means to be a fiduciary and what separates them from non-fiduciaries.
Could brokers roll back their commitment to the fiduciary rule?
As a practical matter, Aikin said it would be “very difficult” for the brokerage industry to reverse their commitment to the fiduciary standard. Competitively, brokers have been moving toward fee-based architectures and many are striving to be first-movers in a competitive environment, he said. Those firms are adapting their operations to use a financial-planning architecture with a team-based service model, and have changed their training programs to reflect this business model.
“The fiduciary approach to managing assets is a very good business model,” Aikin said, “and can advantage those who adopt it.”
Schweiss said that it could be difficult for publicly traded brokerage firms to acknowledge the sunk and wasted costs if they decide not to go ahead with adhering to the fiduciary standard.
Over the next 15 years, Aikin said he was more secure in his prediction that the fiduciary standard will prevail across the industry. There will be a place for “counterparty transactions,” he said, where each party is seeking to serve their own self-interest. Aikin said the broker and advisor models coexisted because of fundamental differences between counterparty transactions and fiduciary advice. In counterparty transactions, it is assumed both sides have comparable information. It should be okay for sophisticated parties to work in that environment, according to Aikin. “But when the skill and information differs,” he said, “the rules need to change.”
Aikin predicted that a three-tiered market would evolve: a low-end robo-driven marketplace for commoditized advice, a personalized market adhering to the fiduciary standard and a market for counterparty transactions.
The Obama administration succeeded in heightening the awareness of the fiduciary issue, Aikin said. “Half the world’s wealth is in the hands of fiduciaries,” he said. “We can look beyond compliance to what the marketplace demands.”
Schweiss said advisors will need to justify the expenses of the funds they choose, which will put pressure on manufacturers and on many of the revenue-sharing business models used by intermediaries. “The younger generation is more attuned to conflicts,” he said, “diving them to robo-type solutions.”
Can disclosure and transparency replace a fiduciary standard?
On this point, Schweiss was emphatic, “It does not work. It is set for exploitation.” It is not just a disclosure or transparency issue, he said. For example, Schweiss said that clients don’t read mutual fund prospectuses or the typical 40-page account-opening statements.
Rostad said the industry is still in the dark ages when it comes to fee disclosure. Clients don’t know what they are paying, he said. Rhoades cited a study that said that 70% to 80% of consumers were happy with their advisor, even though 30% to 40% didn’t think they were paying any fees.
Schweiss said that investment advisors are at a disadvantage versus brokerage firms because their industry is so fragmented. He urged advisors to talk to their congressional representative to even out the lobbying edge Wall Street has. Aikin urged the professional organizations, such as the CFP Board, to do their share to lobby for the fiduciary standard.
What will the future hold?
The fiduciary rule calls for reasonable compensation, but Schweiss said this is one of the most problematic issues. Reasonable is defined as not excessive based on the level of service an advisor provides. To justify a 100 basis point fee model, he said an advisor must provide holistic advice, not just asset management, because robo-advisors will provide comparable asset management at a much lower fee. “Be an expert,” Rhoades said.
Earlier in the day, former SEC commissioner Luis Aguilar said that he strongly supported the fiduciary standard, but is not very optimistic about the DOL rule. Absent an executive order, the rule cannot be done away with by the DOL, he said. He acknowledged that many organizations are changing their business models nonetheless, which makes it less likely that the rule will be overturned.
“Consumers are just flat-out confused,” he said, and we shouldn’t put the additional burden on them of having to figure out whether a proposed investment is suitable or whether their interests are being put first.
According to the MarketCounsel staff, if advisors are level-fee advisors (meaning that their compensation model is consistent across all products), then it’s easy. Otherwise, they have work to do. For example, if they are not using the least expensive (typically institutional) share class, they will have to justify whichever share class they use. Fee breakpoints have been confirmed as acceptable. But different fees for different asset classes may jeopardize an advisor’s level-fee status, and might force the advisor to go to the full best-interests exemption.
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