Banking & Finance and Government

DOL’s amendment leaves firms scrambling

Fiduciary rule requires financial advisors to act in best interest of clients, eliminate commission-based services.

December 2, 2016
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A rule change concerning fiduciary standards for financial advisers has shaken up the industry — but the shockwaves might not last long.

The Department of Labor’s amendment to the fiduciary rule clarifies the blurred line between the fiduciary and suitability standards, while requiring all retirement plan advisors to fall in line with the fiduciary standard — that is to say all financial advice doled out must be in the best interests of the client. Employers have until April 2017 to get into full compliance, but the impending changes have investment firms scrambling to get there.

“At the moment, firms are in turmoil,” Synergy Wealth Management Managing Principal Fred Iacovoni said. “Anecdotally, I know of one in particular that was closing its doors, there are several others considering it or are closing in the near future, and the large firms, they are gearing up for lawsuit after lawsuit. They’re hiring more lawyers than they are advisors, because they’ve been working under a standard that’s now outdated and has not been in the client’s best interest.”

Iacovoni said Synergy always has been a “hardliner” for keeping up with the highest standards of the industry, and the changes are something his firm has advocated for a number of years. Likewise, Greenleaf Trust chairman William D. Johnston said his firm has held that responsibility in high esteem since its founding in 1998.

“We’ve got an advantage, we’ve got a head start,” Johnston said. “There are a lot of financial services companies that have never heard of this stuff. And so, they’re going to have to get up to speed quick, and I don’t know that they really can, so there are also companies that know they can’t get there and fulfill the fiduciary responsibilities now — so that may provide some opportunities down the road.”

However, all that scrambling may be for naught, as one of President-elect Donald Trump’s advisors has been vocal about his opposition to the fiduciary rule. Hedge-fund investor Anthony Scaramucci, who was a top adviser to Trump throughout his campaign and is a member of the president-elect’s transition team, promised at an industry conference in October that Trump would shred the law if elected.

Post-election Trump has proven to be less predictable in enacting his campaign promises, however, walking back his call for a full repeal of the Patient Protection and Affordable Care Act and backing off his pledge to pursue criminal charges against opponent Hillary Clinton. How the Trump administration will approach the Department of Labor’s changes remains murky.

Should the law be repealed before going into effect April 10, 2017, it likely would upset many of the firms that have spent large sums of cash to make sure they are in compliance with a law that no longer exists. If that were to be the case, however, it is possible those firms would continue to operate under the fiduciary standard, as the public relations aspect of doing so still would be beneficial.

As those larger firms moved to remain in compliance with the changes, one of the main components at the heart of the law, eliminating commission-based advisory services, already has started to take shape. The Wall Street Journal reported in October that Merrill Lynch moved to end all commission-based options for retirement plans effective April 10.

Conventional wisdom suggests stepping back from that ledge might make consumers question whether their advisor truly is acting in their best interests and, thus, propel a market-driven demand for services under the fiduciary standard. But, like the law itself, the crystal ball is cloudy when trying to predict how each organization will move forward should the law be repealed.

“My fear as someone who is concerned about the consumer is that these firms will ultimately view the consumer as someone who is not paying a lot of attention,” Action Point Financial CEO Ben VerWys said. “Whether that’s right, wrong or indifferent — because there are plenty of people who knew and do care about it — it is not difficult to envision a board of directors sitting around a table discussing how the consumer doesn’t know if they changed their minds.

“My instinct is that No. 1, at the end of the day, the majority of these firms are publicly traded and have to put the shareholders’ best interests first — not the clients.”

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