“In light of the outcome of U.S. Presidential election, what is the likely fate of the Department of Labor’s fiduciary rule? Will it be repealed before the April 10, 2017 implementation deadline?” Those are the two questions I’ve received most frequently since the early morning hours of November 9.
My answer, in short, is: The current speculations do not alter my view that the rule will go into effect as planned in April 2017. At the very least, advisors should plan with that scenario in mind.
Let me explain.
The rule definitely will come under renewed scrutiny in 2017
Proponents and opponents of the rule agree that it will bring about significant disruption in the financial services industry. Both sides probably also agree that this rule results in additional government intervention. Take those two factors and add in a new Administration whose campaign was focused on reducing regulation, and you have a recipe for heightened scrutiny and potential changes to come.
That said, it’s unlikely we will see significant changes – e.g. delay or repeal – to the rule before April 10, 2017.
- The rule is already law.
The new DOL rule went into effect in June 2016, so it’s already law. The rule gives firms until April 2017 to prepare to be a fiduciary under the new standards, and gives firms until January 2018 to prepare for the aspects of the rule that require greater operational changes (e.g., full Best Interest Contract).
- Making changes to a law is far from easy – and takes time.
A President cannot issue an Executive Order to repeal or delay a rule that is in effect. A series of procedures need to be followed which can take at least 60 days (and in the case of the current rule, it took six years!). There are faster-track options, such as an interim final rule but which require putting political capital at risk. For this option to provide significant relief to firms, the President-elect would need to message that in the next few weeks. Since this does not appear to be a top-5 priority for the new Administration, that political capital may be spent elsewhere.
- Congress is unlikely to intervene before April. It is highly doubtful there is sufficient bi-partisan Congressional support to repeal this law, and also doubtful there is enough support to organize efforts to delay it before April.
- A DOL No-Action Relief would be of little value. While new DOL leadership could signal that it will refrain from enforcing the rule (no-action) starting in April, that offer would be of limited solace due to the rule’s private right of action (which means that plaintiff attorneys can still bring actions regardless of the DOL’s decision!).
- The DOL could achieve limited changes through guidance. The DOL issued one FAQ in November and is scheduled to issue two more. New DOL leadership could try to make very modest gains with new guidance in 2017. Whether that is worthwhile will depend in part on what the next two FAQs say and, again, may be too little too late for an April date.
Expect changes to come about before January 2018
- Potential rule modifications to “soften” the rough edges. Although change may be hard to achieve before April, there is ample time for a new Administration to make changes ahead of the second implementation date which occurs on January 2018 date. The most likely change will be to push back the requirements that take effect January 2018 such as the written Best Interest Contract. Further changes may also occur such as softening the DOL’s prohibitions for variable compensation arrangements.
Even with heightened scrutiny and attention, a number of factors argue against the rule being entirely repealed.
- Global momentum. The basic principles underpinning this rule are found in current SEC and FINRA rule and in trust laws and jurisprudence that predate this rule by many decades. Analogs of this rule already exist in other global financial centers and will soon be extended to all major financial markets. That precedence and momentum make it very challenging to entirely roll back U.S. regulations.
- Business momentum. Many firms are well down the path of implementing in response to this rule. They have already spent a lot of money and time to adapt their business to the new paradigm. Moreover, after an initial period of shock and consternation over this rule, some firms have identified in it a path for renewed growth and with a competitive advantage. Both of these types of firms may be so far invested in the new rule that they may resist sweeping changes to the rule (or the April timeline) or at least may not advocate as strongly for change as they did previously.
- Political risk. Most voters still feel the tangible effects of the Global Financial Crisis and hold financial services accountable. This rule was intelligently branded and marketed to tap into that memory and address voters’ concerns about the role of financial service providers and the potential for another crisis. Because this rule is premised on ensuring financial advisors are working “in your best interest,” it would be exceedingly hard (politically) to oppose that message especially if repeal is seen as primarily benefitting “Wall Street.” This is yet another reason that it is unlikely that Congress will come together across party lines to repeal this rule.
The bottom line
Reading the DOL-rule tea leaves is an admittedly imperfect art. However, Russell Investments has been helping clients navigate the contours of fiduciary rules around the world for over 40 years. We also have over 20 years of experience in helping financial advisors balance their business goals and their clients’ financial goals.
Based on this experience, we know that the clients and advisors who succeed are typically those who anticipate, plan, and prepare for change – continually. Many of the practices that this new DOL rule will cause firms to implement are, in fact, some of the very same best practices we have promoted for years to help advisors succeed. For that reason, and the reasons mentioned above, we believe that it behooves all financial advisors to stay the course by continuing to cement the four pillars of a sustainable advisory practice.
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