What’s next for the fiduciary rule?

Revisiting the fiduciary rule offers financial services firms an opportunity to show that they are protecting the interests of people saving for retirement.

By Ken Mungan, Chairman of the Board, Milliman.

The regulatory change that’s come to be known as the “fiduciary rule” represents an attempt by the Department of Labor to clarify the role of investment advisors for certain types of retirement plans, and to help control costs associated with their services. The reform effort spanned both of President Barack Obama’s terms in office, and was set to become effective on April 10, 2017. Insurers and other financial services providers created new products and implemented new governance processes in order to comply with the impending rule.

The election of President Donald Trump cast uncertainty onto these efforts. Soon after his inauguration, President Trump issued an executive order requiring review of the fiduciary rule, setting in motion a 60-day review process. This does not cancel the rule outright; because the rule was already effective, the administration must issue a new rule via the formal federal rulemaking process, during which time the old rule may still hold sway. The Department of Labor has issued guidance to the effect that they aren’t going to conduct enforcement actions until the dust settles.

Financial institutions, asset management firms, financial advisory practices, and insurers have all launched no-commission products in fee-based accounts to supplement traditional commission-based accounts—in other words, they are hedging their bets and planning to accommodate both types of plans. With courts involved, there will be challenges aiming to continue the rule or get rid of it. It would be harder to imagine a state of greater uncertainty for the companies and individuals affected by the rule.

There are good reasons for the debate. In theory, having someone legally bound to act in your best interest sounds like a great idea, but the reality is somewhat more complex. For some retirement products, all the work goes into explaining the product initially, and very little activity happens after the investment takes place. An up-front commission might actually make sense in these cases, as opposed to the fee-based model that is likely to dominate fiduciary relationships, in which the advisor earns a percentage on the client’s assets year after year.

In fact, studies have demonstrated that fee-based models are not always less expensive than commission-based models. One study by Morningstar predicts that “full-service wealth managers may convert commission-based IRAs to fee-based IRAs to avoid the additional compliance costs of the Department of Labor rule. As fee-based accounts can have a revenue yield upwards of 60% higher than commission-based, this could translate to as much as an additional $13 billion of revenue for the industry.”

In this environment, a fee-based account held over the time spans typical of retirement may cost the bearer more than commission-based products. There are extremely low-cost, do-it-yourself accounts available, but once a professional advisor joins the team, there will be a price. Consumers who only make a small number of trades per year may also prefer commission-based accounts.

The vocal debate over the fiduciary rule has served at least one important purpose: it has shed much light on issues and gaps in the financial system for people saving for and living through retirement. For one thing, it has created broader awareness of what a fiduciary is, and led investors to seek relationships of a fiduciary nature. More people now understand that when they retain the services of an investment advisor or wealth advisor, that individual is not necessarily held to a fiduciary standard. In some cases, this may be empowering investors to take a more active role in choosing the type of advisor that’s best for their needs—although this may not always be a fiduciary.

Unfortunately, with all the attention paid to fees, there has been less discussion of the equally important issue of risk management, which can be as or more important to individuals trying to fund their retirement years. They face the possibility of living longer than they planned (longevity risk), the need for access to significant amounts of capital to pay for large expenses (liquidity risk), the potential erosion of purchasing power over time (inflation risk), and more. One could hope that in revisiting the fiduciary rule, these issues will receive more attention.

There is also an opportunity for the process to address clear weaknesses in the existing fiduciary rule. First would be reducing the reliance on class action lawsuits as the mechanism of dispute resolution. Such litigation can drag on for years, cost enormous amounts of money, and provide simplistic solutions to complex problems, typically either no benefit to the plaintiff or devastating impact to the defendant—or both. A wider range of resolution options would benefit all parties. The current rule also fails to fully address how existing plans fit into the new world. Additional guidance here would be welcomed by financial services providers of all kinds.

In any case, the revision of the fiduciary rule is a prime opportunity for the administration and the companies who provide financial services and advice to demonstrate that they are acting in the fiduciary spirit and protecting the interests of people saving for retirement.

The concept of having an advisor act in in your best interest has taken hold in the public’s mind, and market competition and consumer demand will likely push in that direction regardless of what happens in the debate over the current fiduciary rule. Many of the best-known advisory firms have already put the protocols, documentation, and technical systems in place to act as fiduciaries. They may want to capitalize on these substantial investments both to compete and win more customers in an increasingly competitive marketplace, and to demonstrate to shareholders and the public that they are progressive when it comes to serving their customers.


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