With Days to Go, DOL Rule Still Confounds Brokers
“I was hoping it wasn’t going to go into effect on June 9 or in January,” Robert Muh, chief executive officer of Sutter Securities, a 10-broker firm in San Francisco said of the DOL fiduciary rule.
“Me, too,” responded Brent Taylor, general counsel of UBS Financial Services, the 7,000-broker U.S. broker-dealer unit of the Swiss banking giant.
Speaking on a panel at the Financial Industry Regulatory Authority’s annual meeting late Wednesday, just two weeks before the fiduciary rule takes partial effect, they and other executives said firms and brokers are still struggling with how to deal with it. The rule requires brokers to put their customers’ interests ahead of their own in working on retirement accounts.
Cambridge Investment Research, an Iowa-based broker-dealer with a national sales force of just over 3,000 independent contractors, has many traditional commission-based advisors over 60 who are just waking up to reality, said Cambridge President and Chief Executive Amy Webber.
“Most had hoped that this was going to go away,” she said, despite the firm’s creation of a Fiduciary Services division aimed at guiding brokers on how to comply with the proliferation of customer-care standards (suitability on brokerage accounts, ERISA fiduciary standards on retirement plans, fiduciary standards on advisory accounts and on all retirement accounts). “They’ve just begun thinking about it over the last couple of weeks.
If UBS customers do not yet know whether they can maintain commission-based retirement accounts, it’s because the firm has still not publicly announced whether it will permit them, Taylor acknowledged. (The rule will allow such accounts, which the DOL said can lead brokers to sell more expensive products that generate trails or high commissions, if firms and brokers beginning in January 2018 sign best-interest contracts, or BICs, that can expose them to class-action lawsuits.)
Like much of the industry, UBS was hoping that the Trump administration would retract or further delay implementation of the rule that was originally scheduled to become effective last month and was championed by the Obama administration. Newly appointed Labor Secretary Alexander Acosta has not publicly discussed his plans.
“I understand that Secretary Acosta is thinking about it,” said UBS’s Taylor, “but I wouldn’t hold our breath in terms of anything being delayed.”
UBS’s delay in announcing its fiduciary-rule policies reflects its strategy to avoid “over-committing,” he said, a tacit reference to Merrill Lynch’s controversial announcement last fall of an outright ban on commission-based retirement accounts.
Senate Banking Committee Chairman Mike Crapo told reporters earlier at the Finra meeting that he has not been briefed on Trump administration plans for the DOL rule but hopes that it is dropped in favor of a harmonized best-interest standard across retirement and standard accounts administered by the Securities and Exchange Commission.
“I personally believe that the SEC is the appropriate regulator to deal with the issue, and if we can’t get some resolution soon, it’s my hope that we can further delay the process so that we can allow for that,” the Idaho Republican said, echoing the view of industry trade groups.
Sutter Securities’ Muh said his firm has already “moved out” more than 30 customers because “you can’t make money on a $35,000 advisory account.” He also repeated industry laments that the DOL rule “will drive many small firms out of business” and said he is trying to convince his fellow partners not to allow a BIC because of its litigation potential.
Cambridge has done triage on commission-based retirement accounts that aren’t worth the liability risk, Webber said, but has created a “small-account solution” to accommodate them. That’s something that “small firms” can’t afford to create or administer, she said, acknowledging Muh.
Large and small firms, meanwhile, are still struggling with how to ensure that their brokers don’t get entangled in reverse-churning charges from regulators by putting customers into fee-based advisory retirement accounts that they may be more expensive than commission accounts in which few transactions occur.
“You better make sure advisers are meeting with clients to review (accounts several times a year) even if there is no activity,” to justify charging an advisory fee, Steven Cutler, vice chairman of JPMorgan Securities and a former SEC enforcement division director told compliance officials at the Finra conference.