DOL: Are You a Dinosaur, a Luddite, or a Well-intentioned Straggler?

Jun 22, 2017

DOL

Since Department of Labor Secretary Alexander Acosta announced a few weeks ago that he would not challenge the implementation date of the Fiduciary Rule and since the actual implementation on June 9, I have had lots of requests for statements, positioning and updated materials on my (our) position of the Rule. Most of the requests come from advisors who have either heard conflicting information from product providers, heard nothing from their BDs, or have a vested interest in hearing what they want to hear (delays or changes – a little thing called confirmation bias).

Each time I have been asked about an updated whitepaper, webinar or post, I keep referring back to our original work to see what else we could cover in a new piece. Our paper suggested, among other things:

  1. The DOL Rule (I am now referring to it as the fiduciary movement) will have a dramatic effect on everyone from product manufacturers and BDs, to advisors and investors.
  2. Profits, in the short term, will be affected, for the firms that move toward a higher compliance standard and that replace upfront loads with level compensation.
  3. The DOL Rule may only be the opening salvo in the fiduciary movement (see the bullet points below, regarding the SEC’s and the CFP’s first steps in the fiduciary arena).
  4. The DOL Rule, as written, focuses almost exclusively on compensation as the definition of conflicted advice – if you are paid in any means other than a flat fee from the client, you have a conflict – and it appears you always have a conflict in recommending services and products that pay you compensation on day 1, even when paid by your new client.
  5. BICs – Full contractual BICs may end up being a non-starter for clients. Having to provide a document that says you are creating an exemption from acting in the clients’ best interest will test the client/advisor relationship.
  6. See #5: Your fiduciary competitors will market against anyone that relies on the full BIC exemption.

Piling on

There is no question that the presidential election gave some hope to commission-focused advisors who wanted to protect their current way of doing business. I can understand that some advisors were hoping the Rule would be thrown out via lawsuit or executive order, but hope is not a strategy on which to run a business. While Secretary Acosta did hint/suggest there may be some changes to the Rule or related BIC requirements before the full enforcement date (January 1, 2018), is it really prudent to wait and see what happens?

Even though the law is currently in effect (meaning that you are now technically subject to the impartial conduct standards), my guess (and only my guess) is that we will see some minor changes in the Rule before the full enforcement date. If I were to bet, I would think that it will be in the area of enforcement (re: class action, and perhaps some of the operational aspects of full BIC implementation) but again, that’s only a guess. What I know, however, is that the trend is moving toward more fiduciary regulation. For example:

  • The SEC has started taking public comments regarding the potential of creating its own retail investor fiduciary standard
  • The CFP board recently revised its Code of Ethics and Standards of Conduct (PDF), which looks to close some loopholes on its fiduciary standard and pushes even wire house CFP holders to adhere to the standard when recommending investments, as well.

The trend is clear – the fiduciary movement is not going anywhere. Those advisors who have built an “economic moat” around their business are going to thrive, while the dinosaurs (those who don’t adapt) become extinct. The Luddites will fight the trend, but ultimately will lose to the movement. So let me say 4 words to those well-intentioned stragglers who still have not adapted (or at least started to adapt) their businesses: There is still time. 

The future is now

The well-intentioned stragglers who haven’t modified their practices yet will probably see some major challenges to their business models going forward:

  • BDs are already changing compensation structures and moving to  level compensation policies to help demonstrate conformance to the impartial conduct standards under the BIC. Still, just leveling out the fees doesn’t make you a level fee advisor (but may reduce your compensation).
  • Firms are breaking out fees and charges on platforms to be more transparent, and in some cases, raising platform fees to cover the costs that were being paid by the product sponsors though revenue-sharing arrangements.
  • Some firms have already eliminated  all C share compensation to reps beginning 1/1/2017, pending full contractual BICs acknowledging fiduciary responsibility (and liability) and others are considering doing so starting 1/1/18.
  • Advisors who have discretion on assets (think rep as portfolio manager) are questioning their fiduciary requirements, as BICs do not reduce or eliminate exposure.
  • Advisors are also questioning their use of proprietary products and platforms, as it may be harder to justify their actions.
  • Additionally firm-level policies and procedures, as well as additional compensation disclosures, may be required before the first of January 2018 rolls around.

If you are a well-intentioned straggler, understand that enforcement beings in January. Start today by downloading the whitepaper, reviewing your workflows and building out the plan. Summer months tend to be slower, so why not use the time to build out a plan?

The next announcement regarding the fiduciary movement may bring further delay – or it could step up enforcement. We have shown that the movement could be good for your business; use those good intentions and get started.

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John Anderson

John Anderson

John Anderson is the creator and lead author of Practically Speaking blog and Managing Director of Practice Management Solutions for the SEI Advisor Network.

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