After multiple back-and-forth debates with my Inside Information audience, I’m picking up surprising opinions about the Department of Labor’s (DOL) fiduciary rule and its imminent demise.
Make no mistake, there will be a demise as the new administration takes office. Anthony Scaramucci is a member of President-elect Donald Trump's transition team executive committee and has been cited as the person Trump leans on for advice when he’s making policy in the financial sector. He is also a leading candidate to be the new SEC chair and has compared the DOL rule to the legalization of slavery. Specifically, he said, “It’s about like the Dred Scott Decision.” To say he has a repeal on his agenda is to say that he’s breathing oxygen. It may not happen before the DOL’s effective date of April 10, but you can bet the brokerage firms won’t have to get their clients to sign a BIC exemption form[1] after, say, June of this year.
Most of my newsletter subscribers are already fiduciaries, and I was expecting them to be big fans of a rule that expanded fiduciary requirements. I was surprised to discover that they actually have a lot of negative feelings about the DOL rule.
Their arguments against the rule come in two parts:
- Since they already act as fiduciaries, they resent the idea that some government agency is trying to impose regulations making that a requirement. This came up in my detailed explanation of what fee-only advisors would have to do to comply with the DOL rule – among other things, provide clients, before any advice is rendered, with a pledge that you will act as a fiduciary at all times in the relationship, and be careful not to comment too specifically on their current situation before that pledge is offered and signed. You also have to document the relative fees, quality of funds and scope of services between the client’s 401(k) plan and the IRA portfolio you’re proposing.
Who needs all that extra work?
Fiduciary advisors take pride in their decision to forego conflicts of interest (and the revenues that are available through them), and to act in the best interests of clients. If you’re required to do so, it takes away from this client-empowering decision. And if you’re required to fill out a lot of paperwork proving that you’re not trying to rip off the client when you give routine advice, it takes time away from client relationships and generally feels insulting and intrusive.
- Advisors who act as fiduciaries also believe that the DOL rule risked diminishing one of their most important competitive advantages. Several advisors told me that they routinely put a fiduciary pledge in front of prospects who are considering their options, and invite the prospects to obtain a similar pledge from the broker who is bidding for their business. (Never has one of these documents come back with a broker’s signature.)
But when brokers are required to comply with the DOL rule, their attorneys will routinely create a contract that talks about a fiduciary obligation, and many brokers will adopt a level-fee compensation model which looks a lot like how fiduciary advisors are compensated. The result is that brokers are able to look more like fee-only advisors to the prospects who are shopping around.
Who needs the extra competition?
This is why many fee-only advisors, who you would think would be mourning the imminent demise of the DOL rule, are cheering that demise instead. They plan to continue to act as they always did, including offering the fiduciary oath. They will start creating a paper trail proving that the IRA portfolio they recommend is superior to the 401(k) plan’s options, but this information will be compiled in their own format and to the extent they feel is relevant. In other words, they’ll follow the spirit of the DOL rule as a best practice, but voluntarily.
And meanwhile, they’ll get to keep the marketing distinction between somebody who acts in the best interests of clients and somebody whose compliance department fears the legal consequences of a signed fiduciary oath. As an added benefit, the publicity around the DOL rule, and the publicity that is sure to attend the Scaramucci-led scuttling of a rule that would require brokers to act in the best interests of clients (and the interesting argument that acting in a client’s best interests is somehow bad for the client) will only enhance the public’s awareness of the difference between a fiduciary advisor and a broker.
In other words, the fee-only advisors I’m talking with in my Inside Information audience think we’re about to get the best of all worlds: a rule which lays down a standard, a lot of publicity around the fiduciary distinction, the elimination of the rule (and the paperwork the rule entails), more publicity around the fiduciary distinction, and the opportunity to keep that distinction as a marketing advantage.
And advisors will embrace new best practice that is voluntary rather than government-mandated and enforced, which lays out in dollar terms the advantages of following a fiduciary’s advice.
After hearing their arguments, I’m starting to come around. Maybe the deregulatory environment our profession is moving into isn’t so bad after all.
In the next installment, I’ll offer some new software tools that will make it easy to comply with the DOL rule, and longer-term, to create your own best practices around documenting the IRA rollover recommendation from a variety of angles.
Bob Veres’s latest book, The New Profession, is available on the Inside Information website: http://www.bobveres.com.
[1] A BIC exemption form is an acknowledgement by a client that the broker with whom they are working is exempt from certain aspects of the DOL fiduciary rule.
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