The U.S. DOL Fiduciary Rule: A European Perspective

From my office in London, when I look at the newest U.S. Department of Labor (DOL) fiduciary rule from across the Atlantic, it appears that the regulations shift what a U.S. advisor is required to deliver to end-investor clients, from suitable advice to best interests. And that shift—toward the interests of end investors—appears to be happening nearly everywhere in the world right now, as my colleague, Tim Noonan mentioned just a few weeks ago.

Looking out for the little guy, globally

In the UK, the Retail Distribution Review (RDR) came into effect in 2013. The most significant change? Financial advisors here are no longer permitted to earn commissions from fund companies in return for selling those companies’ investment products. Similar to the U.S., there is also a greater pressure on fees, and investors now have to agree to fees with the advisor upfront. Financial advisors have to offer either independent or restricted advice and explain the difference between the two – essentially making clear whether their recommendations are limited to certain products or providers.

If it sounds like this was a hassle to implement, it was for many. But I believe there is also evidence of an improvement in the quality of advice for those looking to take it. For example, a higher minimum qualification for financial advisers was introduced in 2012, along with requirements for continuing professional development (CPD) and adherence to tougher ethical standards. The industry was forced to up its game. No doubt this caused heartburn among some industry members, but I believe end investors have benefitted, as have some advisors—particularly those whose practices were already fee-based.

The coming transparency

Globally, I believe that coming up next is a greater focus on reporting standards, particularly around reporting of costs. The European Commission Markets in Financial Instruments (MiFID 2), for example, is a new regulation that will come into force in January 2018, with a wide range of implications for costs, fees and product governance. Further out, a forthcoming piece of regulation called PRIIPs (packaged retail and insurance-based investment products) seeks to increase transparency of investment products, so investors can compare them more easily. This additional regulation is expected to go into effect in 2019.

In the UK, the Financial Conduct Authority (FCA) launched a consultation in October of 2016 that proposes a common reporting standard for all transaction costs—again to increase transparency and make comparisons easier. The FCA is also currently in the midst of their asset management market study, having published the interim findings in a November 2016 report. The intention of this study is to review whether there are competition issues in the asset management industry that prevent members getting value for money. This covers both defined benefit (DB) and defined contribution (DC) types of institutional plans for their employees.

Consistent global trends

In short, the world over, governments and regulators are trying to stand up for the little guy in three ways:

  1. Through the alignment of interest. Those in a position of influence—whether advisors or plan sponsors—are being forced to work in the best interests of end investors.
  2. Through removing potential conflicts of interest. In other words, moving advisors from transactional commissions to a fee-based structure.
  3. Through increased transparency. Regulations are requiring the transparent disclosure of fees and charges so that individuals can see what is being paid—and to whom.

In theory, and generally in practice, this all aims to be in the interests of the end investor—the little guy. But things don’t always go as planned, and three particular questions have arisen:

  • Does the overall cost go up? Implementing all these regulations and requirements may add inefficiencies, and inefficiency costs money.
  • Does an advice gap open up? Is it possible that some clients will now simply not be valuable enough (by dint of the amount of their savings) and get worse advice and outcome?
  • Finally, there’s the issue of too much information. Faced with greater cost transparency, are investors inclined to make better or worse choices? If they know the costs, they also have to make an assessment of the value added by each action in the chain. And that is not easy. For example, in an uncertain world, how does an individual make an assessment between the costs of a passively-managed U.S. large-cap equity fund for a couple of basis points versus a diversified multi-asset fund for 100 basis points? Cost alone would point to the former. Value for the money might point to the latter.

Questions like these might be daunting to some in the financial advisory profession. Now is certainly a time when many who are new to fiduciary responsibility might choose to seek the guidance of those who have expertise in the holding the fiduciary role. Russell Investments has been a fiduciary partner for many of its clients for over 40 years and we are prepared to help.

For more information about the DOL rule for advisors click here.


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