Banking & Finance and Government

DOL initiates hold on fiduciary responsibility

Ruling will not be enforced April 10, but smaller firms work to get in line with standards.

March 24, 2017
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As the deadline for financial advisors to begin operating under the fiduciary responsibility rapidly approaches, the Department of Labor indicated it will not enforce the law until a full review of the regulation is complete.

On April 10, financial advisors working in retirement accounts will be required to act in the best interest of their clients under a DOL proposed rule that was passed under former President Barack Obama’s administration last year. However, President Donald Trump on Feb. 3 directed the Labor Department to review and if necessary, prepare an updated rule on fiduciary responsibility.

Earlier this month, Trump’s Labor Department proposed a 60-day delay of the rule’s implementation, which would push the effective date from April 10 to June 8. With no definitive ruling on whether that delay will occur, the DOL said it will not enforce the rule during the gap period between April 10 and the date the DOL actually issues the final ruling.

“This has been a confusing topic to follow, even for us financial professionals,” Grand Wealth Management Senior Advisor Steve Starnes said.

Starnes said the rule goes into effect in two stages. The April 10 deadline marks the first stage, in which the Department of Labor would have the authority to bring action against financial professionals not adhering to the fiduciary responsibility. The second stage goes into effect on Jan. 1, 2018 — the date on which clients themselves will have the ability to sue their advisor for not acting in their best interests.

“That distinction is important, because the Department of Labor has told all financial professionals ‘Don’t worry, we won’t hold your feet to the fire,’ because they’re also working on a review,” Starnes said. “But beginning January 1, it doesn’t matter if the Department of Labor is doing their job if I’m an aggrieved client.”

One of the primary causes for the DOL’s review is to determine whether the cost of adhering to the rule will adversely impact the firms scrambling to fall in line.

Starnes said some firms, like Grand Wealth, already operate under the fiduciary standard and won’t be affected by the rule. And bigger firms, such as Morgan Stanley, Wells Fargo and Merrill Lynch, should be able to cover those costs. But where the biggest impact may be felt is with the smaller, local firms that don’t already operate under the fiduciary responsibility.

Another aspect that could lead to the DOL rolling back regulations is the possibility the new rule may make it difficult for smaller investors to get access to financial professionals. As Starnes explained it, there is a possibility advisors may choose only to go after the big fish if it becomes more expensive for them to assist clients.

Regardless of what happens with the rule, Starnes said in the last year or so since the ruling passed, he has seen an uptick in the number of clients inquiring about whether or not he is a fiduciary.

“We get asked more often if we’re going to act as a fiduciary,” he said. “And what to look out for (as a client) doesn’t matter so much if this rule goes through or not if you ask your financial advisor if they’re acting in your best interests, because it’s more important to have an answer to that question.”

How long it will take the DOL to complete its legal and financial analysis remains to be seen. But as the April 10 deadline approaches, firms are inching toward operating under the fiduciary standard, even with the cushion of the DOL’s gap period.

“It’s kind of like the engines have started, everyone’s doing warm-up laps and we’re not sure if the race is going to start,” Starnes said. “The big firms are prepared, the smaller firms aren’t. But what the Department of Labor has said is they’re going to be understanding for now.”

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