Update: Trump Move on Fiduciary Rule Sows Relief…and Confusion
(Updates to reflect the White House’s characterization of its action as a memorandum, not an executive order, and to say that it asks for a review rather than outright delay of the rule.)
The White House’s move to review, and perhaps eliminate, the Department of Labor’s fiduciary rule could shield brokerage firms from elevated compliance costs and class-action lawsuits but is unlikely to impede the movement to lower fees and commissions that the rule has already engendered, brokers and consultants said on Friday.
“In general wealth managers are going to be relieved,” said Kapin Vora, head of the North American wealth management practice at Capco, a consulting firm. “[The rule] was going to be enforced through litigation, and costs for that, and for governance, could have gone through the roof.”
The flip side is that so much has been invested by brokerage firms and product manufacturers to change business models and convince clients of their support for a fiduciary standard that it will be difficult for them to walk back many of the changes they have made, he and others said.
President Donald Trump on Friday afternoon signed a memorandum to the acting Secretary of Labor directing him to review the potential harm and costs of the rule to investors and the retirement services industry and to repropose it if he determines that it adversely affects access to retirement information and financial advice.
Draft versions of the memo circulated earlier Friday had called for a six-month delay in implementing the so-called conflict-of-interest rule, which has been adopted by the Labor Department and goes into effect on April 10.
Opponents of the rule quickly celebrated the President’s action, characterizing it as an attack on an expensive and ineffective Obama-era policy.
“President Trump’s action to delay the #fiduciary rule is a wise one,” House Speaker Paul Ryan tweeted. “It’s Obamacare for financial planning.”
“The Department of Labor will now consider its legal options to delay the applicability date as we comply with the President’s memorandum,” acting Labor Secretary Ed Hugler said in a statement. The DOL held three days of hearings on the rule last year, following months of review and public comment, as it attempted to shield itself from allegations that it failed to perform sufficient cost/benefit analyses.
The brokerage industry has split over responding and preparing for the rule, which had been under development for application to retirement accounts for six years.
Led by Merrill Lynch, some have embraced changes that in the long run advance their strategies of steering wealthy clients to fee-based investment accounts while moving the less affluent to no-frills automated investment “robo-like” programs or to self-managed accounts through their own or rivals’ discount brokerage arms.
Merrill, whose parent Bank of America is highly averse to the potential costs of class-action lawsuits that the current rule permits, told its 14,000-plus brokers in October that it would not permit them to sell mutual funds in retirement accounts or offer new commission-based accounts to meet the rule’s prohibition on variably priced products. It also launched an expensive media campaign telling the public that it was “committed to your best interest. Not the status quo.”
Friday’s memorandum will not induce Merrill to make major changes in its policies but gives some breathing room, officials at the firm said. Merrill could, however, become more aggressive in selling complex, high-fee structured retirement products to wealthy investors, said Matthew Berkowitz, head of Capco’s retirement practice.
Merrill officials declined to comment but said that wealth management head Andy Sieg told brokers in an internal memo on January 20 that “depending on what is announced we may need to adjust the timelines for certain operational changes we have announced to ensure an orderly transition and a good client experience.”
Other firms, including many insurance-industry affiliated broker-dealers with independent sales forces, waxed poetic about Trump’s move on Friday, saying they support a broad fiduciary standard that would affect all brokerage accounts, not just retirement accounts.
“On behalf of the retirement savers who depend on their financial advisors, we applaud the [P]resident’s action, which will delay a rule with devastating consequences for so many people,” said Dale Brown, president and chief executive of the Financial Services Institute, which represents so-called independent brokerage firms.”[T]he Department of Labor fiduciary rule would have not only made it harder, but impossible, for many hard-working Americans to access critical retirement advice.”
While almost all brokerage firms have prepared for the rule change, those that have not announced new policies to brokers or the public out of negligence or calculated strategies are likely to be celebrating the review.
UBS AG’s Wealth Management Americas division has not formally instructed its 7,000 brokers on policy changes but executives have told brokers they were pleased they had not issued outright prohibitions in advance of the rule’s implementation, as Merrill did. On the other hand, UBS executives last week said they have already saved recruiting costs because the rule’s conflict-of-rule provisions restrict bonuses tied to meeting future sales goals.
Anticipating the change, Raymond James Financial CEO Paul Reilly last week said his Florida-based firm appears to have been lucky in delaying any policy pronouncements because its 7,100 advisors will be saved the embarrassment of having to tell clients that they weren’t actually going ahead with so-called “best interest” policies that restricted some retirement accounts.
Morgan Stanley, the biggest brokerage firm as measured by its almost 16,000 brokers, had flaunted its decision to give clients “choice” by offering both commission and fee-based accounts, but behind the scenes was instructing them to proceed very carefully in documenting that switches from commission to fee accounts, or vice versa, were being recommended in clients’ best interests. The rule was aimed at deterring brokers from selling products that were more lucrative to them instead of being the absolutely best approach for clients.
“We’ve been instructed to forge ahead as if the rule were going to be in place,” a broker said Friday morning before Trump issued the memorandum.
Underscoring the high cost of complying with the rule’s “best-interest contract exemption” (BICE) that permits commission-based retirement account products, he said that brokers in his complex were warned earlier this week to “carefully record, when we open fee-based accounts for commission customers, that we explained to the client that we are becoming more strategic and expect more activity that would lift costs in their commission accounts.”
“We will continue to move forward with many of the initiatives we have underway,” a Morgan Stanley spokeswoman wrote in an email Friday afternoon, “reflecting our ongoing commitment to raising the standard of care we provide our retirement and non-retirement clients.”
Independent financial planners who already operate under a fiduciary standard that requires them to work in clients’ best interests expressed regret over the White House’s apparent rollback, but said it could help fiduciary-bound advisors differentiate themselves from brokers who operate under the less rigorous customer standard of “suitability.”
“Regardless of the back and forth we’ve seen around this rule, this debate has served to elevate the visibility of the fiduciary standard,” wrote Skip Schweiss, a managing director at TD Ameritrade, which offers business and trading services to planners who are registered investment advisers.
“The train has already left the station,” Paul Pagnato, founder of a Reston, Va.- based RIA and a former Merrill Lynch broker, said of the public’s embrace of the fiduciary standard. “It will continue to be a major differentiator for the independent world.”
Barbara Roper, director of investor protection at the Consumer Federation of America, said the White House’s effort to impede the rule her organization has strongly supported is devastating. “Trump voters didn’t elect him to roll back protections for working families and retirees,” she tweeted after the executive order was signed. “They want fiduciary protections.”
Capco’s Berkowitz was more upbeat. “The concept of best interest is not going to go away …now that you’ve had all these firms change their business models to comply with the rule,” he said. “I would expect advisors to continue to ensure there is unconflicted advice.”