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Regulation and Compliance > Federal Regulation > DOL

The DOL fiduciary rule's future remains murky

By Melanie Waddell

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The head of the Senate Homeland Security and Governmental Affairs Committee recently told Labor Secretary Thomas Perez to halt implementing the Department of Labor’s “burdensome” fiduciary rule because it will likely be “undone” by the incoming Trump administration.

In a Nov. 22 letter to Perez, Sen. Ron Johnson, R.-Wis., chairman of the committee, told Perez that like DOL’s overtime rule, which was halted recently by a Texas federal judge, there is also “substantial likelihood” that DOL’s fiduciary rule will be dismantled.

“I urge the Labor Department to cease implementation of the regulation immediately to spare low- and middle-income Americans, financial advisors and small businesses from the unnecessary and avoidable burdens that will drive up the costs of services and decrease access,” Johnson told Perez in his letter. “I hope the Labor Department will acknowledge the reality of the situation and avoid imposing unnecessary costs and burdens in further implementation of regulation that will very likely be rescinded.”

In late February, Johnsnon released a study that charged DOL with “ignoring and rejecting” concerns raised by the Securities and Exchange Commission on how to craft its rule to change the definition of fiduciary on retirement advice, resulting in a “flawed process” in devising a plan that “could ultimately hurt American retirement savers.” Johnson’s committee also held a hearing in April on DOL’s rule.

Meanwhile, Phyllis Borzi, assistant secretary of Labor for DOL’s Employee Benefits Security Administration, refused Thursday to concede that the fiduciary rule that she championed and fought so hard to see passed would be defeated by the incoming Trump administration.

See also: DOL rule faces certain death under President-elect Trump

“We know that once these market forces have been unleashed, we’re not really going back to the old days,” Borzi said during remarks at the Consumer Federation of America’s financial services conference in Washington.

“I’m not going to speculate on what a future administration would do, but I will say this: The customer-first principle that’s embodied in this rule has already taken hold in the marketplace, and companies are not going back; they are going to continue to move in that direction. The speed at which they move may vary depending on what happens, but I’m not going to conclude that this rule is going away.”

Borzi will soon depart her position, along with Labor Secretary Thomas Perez.

Labor’s fiduciary rule, six years in the making, “is already effective,” Borzi said, noting its first set of principles take effect in April. “It’s a really, really, really important rule,” she said, acknowledging that Perez was her secret weapon in getting the rule across the finish line.

She reiterated the fact that during the rulemaking process, DOL “met overwhelmingly” with the rule’s opponents. But, she continued, “We knew this [rule] was the thing to do. We knew that it would require lots of changes in business models that had been well-established for decades.”

She added: “Are there unintended consequences and changes we could make to make it better? Of course.”

Barbara Roper, CFA’s director of investor protection, noted Borzi’s tenacity in seeing the fiduciary rule through. “She wasn’t going to quit because it was hard,” Roper said in introducing Borzi.

In separate comments, Roper, a champion of Labor’s rule, said: “We understand that the rule is fighting for survival, but I don’t take for granted that we’ll lose that fight, particularly because firms are so far along in compliance. Even if the rule is overturned, it still will have an impact on the way firms run.”

New research arrives on the rule’s impact

Last week, a new study was released that finds advisors in the U.S. are likely to abandon mass-market clients because of Labor’s fiduciary rule.

According to CoreData Research, which polled 552 U.S.-based advisors and was conducted by the firm’s UK arm, 71 percent of the advisors plan to “disengage from some mass-market investors” because of the DOL rule. On average, these advisors estimate they will no longer service a quarter (25 percent) of their mass-market clients — creating a potential advice gap for low-balance investors, the research states.

See also: Survey: advisors fear consequences of DOL fiduciary rule

“The election of Donald Trump introduces a degree of uncertainty over the fiduciary rule,” said Craig Phillips, head of CoreData Research International. “However, our research suggests the rule could result in mass-market clients being left out in the cold, creating the prospect of an advice gap in an echo of what happened in the U.K. when the [Retail Distribution Review rule] came into effect.”

A previous CoreData study revealed UK advisors believed the RDR had created an “advice gap,” with more than half (52 percent) claiming its introduction negatively impacted mass-market investors.

The CoreData research of U.S.-based advisors, which was not commissioned, also found that 58 percent of advisors currently receiving commissions will move away from the practice by 2020 in order to get ahead of potential future regulation, and that 94 percent of advisors believe smaller clients “orphaned” by advisors are likely to turn to automated advice.

The CoreData research of U.S.-based advisors also found that:

      • Two-thirds (64 percent) of advisors view the impact of the fiduciary rule on mass-market investors as largely negative. And 60 percent believe the fiduciary rule will have a negative impact on at-retirement clients.
      • A third (35 percent) of advisors will likely add an automated advice service to their business because of the fiduciary rule.
      • Six in 10 advisors (62 percent) say they will increase ETF recommendations in their retirement accounts due to the rule.
      • 60 percent of advisors say they will decrease allocations to non-traded REITs and 57 percent say they will limit offering variable annuities in retirement accounts due to the fiduciary rule.
      • Three in four advisors (74 percent) think the fiduciary rule will be expanded to nonretirement accounts.
      • In the long term, 55 percent of advisors believe, commission on retirement accounts will eventually be banned. Twenty-four percent of this group believe commission on all accounts will be banned.
      • Almost half (45 percent) of advisors believe investors would rather have cheaper, non-fiduciary advice than more expensive fiduciary advice.
      • Over a third (36 percent) of advisors plan to hire additional staffers as a result of the rule, and 86% plan on working more hours per week.
      • Nearly all advisors (95 percent) see the financial advice industry moving toward a model based on transparency and full disclosure.

Related:

A DOL fiduciary rule compliance checklist

One consequence of the DOL rule: more risk-averse advisors

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