President Donald Trump issued an Executive Order on Feb. 3, 2017, addressing the Department of Labor's fiduciary duty rule. However, with a mere two months left until the April 10 implementation date, those opposed to the DOL rule as well as those in favor should view the Executive Order as a political move that will change nothing in the short term, for two reasons: it did not change the timeline, and the investment industry is well down the path toward being ready for April.
The DOL fiduciary rule was established by the previous administration to strengthen requirements that advisors act in clients' best interests. The final rules released one year ago outlined new responsibility for advisors, particularly those who may be compensated by commissions and those dealing with rollovers from qualified plans.
Many advisors and those developing tools to help provide impartial advice feared that the President, with the wave of a pen and political posturing, would unravel considerable efforts undertaken to change investment compensation, guidance tools and more. However, given the Trump order, many believe that the rule will remain in some form. If the Trump administration or courts do modify or overturn it, the expectation will undoubtedly remain among consumers and employees that advisors and plan administrators will act in their best interests.
White House Wording
The announcement from Trump noted that the administration wants to "empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses." He claims the Executive Order seeks to help the people in Middle America who voted for the President, as opposed to himself and his supporters. However, it does not acknowledge the concerns over conflicts of interest by advisors that led to the tightened requirements.
The order asks that the DOL "prepare an updated economic and legal analysis" to determine whether the rule is likely to harm investors and their access to retirement information, disrupt the industry or may lead to an increase in litigation or the price of investment services.
It did not delay the implementation. Realistically, could Trump have objected to the basic premise of the rule requiring financial advisers to act in their clients' best interests when dealing with retirement accounts?
Instead, the order merely states that, if they conclude that the "Fiduciary Duty Rule" is detrimental to investors, the DOL is supposed to propose a rule "rescinding or revising" the regulation.
New Tools Reshaping Advisement Arena
Critics of the DOL rule have long asserted that it increases costs and complexity in the investment arena - hence the DOL review requested by the President. However, the reality is that the financial industry has already invested in the creation or enhancement of countless tools to help advisors address their clients' needs and goals, whether they are in the investing phase or drawing down balances post retirement.
There is concern that many people will be driven into index funds or other passive investment options based solely on costs. But the new tools and a more comprehensive discussion with clients about fees, potential net returns and more should enable a more thorough discussion about risk tolerance, cost-basis analysis, diversification, rebalancing and other elements to help ensure that the advisor is acting as a fiduciary with all clients. Automated computer programs can offer output from the basic to complex, according to several companies touting new tools.
The Potential Consequences
The DOL fiduciary rule required investment firms, advisors, plan sponsors and others in the financial industry to spend time preparing for the implementation. Trump's effort, unlike other Executive Orders issued during his first month in office, seems to recognize the impact a stronger White House action would have made.
Barring changes to the rule between now and April 10th, the rule is still set to go into effect. However, Trump could send another memorandum, with a different directive, to the DOL.
What does this mean for service providers and investors? The following consequences are left lingering:
- There is a chance that the applicability date is delayed for six months to even a year. As a result, retirement plan service providers will not need to comply with the regulation on April 10.
- Service providers will only need to comply with the current fiduciary regulation (i.e. the “old” rules). Investors who are concerned about conflicts of interest affecting the advice they receive can and should seek out advisors who are already willing to act as fiduciaries.
- Recommendations for plan distributions and rollovers, as one-time recommendations, may not be fiduciary acts (except that DOL Advisory Opinion 2005-23A and FINRA Regulatory Notice 13-45 will continue to apply).
- Congress is drafting several bills that would create an alternative definition of fiduciary advice and, in some cases, establish a fiduciary standard of care for advice to IRAs and 401(k) plans.
Despite the whirl of 'on-again/off-again' news regarding changes to the impending DOL regulation, advisors, as well as their clients, should embrace the concept of serving as a fiduciary and finalize their implementation plans. The DOL fiduciary rule implementation is imminent.
This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
