Attempts by President Donald Trump’s administration to block a new pro-investor law are unlikely to prevent the industry from moving to a business model where advisers put their clients’ interests first.
When the US Department of Labor (DoL) last year unveiled its fiduciary rule — which compels retirement advisers to put their clients’ interests before their own — many investors were surprised to find it was not already a requirement for all advisers.
At the time, it was widely unknown that while advisers registered with the Securities and Exchange Commission were required to act in their clients’ best interests, those working for broker-dealers were required only to give investment advice that was suitable for their clients.
The rule was supposed to take effect on April 10, but it is now in jeopardy after Mr Trump ordered a review in February.
Regardless of its fate, industry experts believe it would be difficult to reverse the impact it has already had on the retirement market. Investors have become more aware of what it means for advisers to act as fiduciaries — meaning they work in their clients’ best interests — and many advisers have poured substantial resources into complying with the requirements.
“The expectation of the client’s best interests being served is here to stay. It’s going to be hard to dial it back,” says Kenneth Laverriere, a partner in the compensation, governance and retirement group at law firm Shearman & Sterling.
Advisers have already spent a lot of money in preparing to comply with the new law, says Mr Laverriere. He expects that the operational and strategic changes advisers have put in place will “be tested in the commercial marketplace and pushed competitively”, with or without its implementation.
In February Mr Trump ordered the DoL to review the rule to assess whether it would lead to higher costs for investors and increased litigation for advisers. In response, the DoL offered to delay implementation until June.
Democrat politicians have claimed that the proposed reforms are a “responsible solution” to the problem of “unscrupulous” financial advisers. Citing an estimate from the Obama administration, they say conflicted advice costs retirement plan members around $17bn a year.
They note that the DoL designed the rule after a “thorough, transparent and multiyear process”, including six years of research that considered more than 300,000 comments. The Consumer Federation of America, a lobby group, heralded last year’s enactment of the reforms as “the most significant advance in investor protection for working families and retirees in at least a generation”.
Advisers’ fee structures — whether based on commission, a flat fee or some combination of both — and the costs involved will be among the main factors that go into assessing if advisers are working in the best interests of their clients. Advisers could be open to litigation if their fee structures and costs are deemed to go against a client’s best interests.
Morgan Stanley, Wells Fargo, Edward Jones, Raymond James and Ameriprise are among the broker-dealers that have said they will use an exemption in the DoL rule to allow advisers to act as a fiduciary while also charging commission. In contrast, Merrill Lynch, JPMorgan Chase, Capital One Investing and Commonwealth Financial Network have said they will ban commissions in retirement accounts outright.
Mr Trump’s campaign promises included rolling back financial regulation, which led to speculation that the fiduciary rule was vulnerable. A survey by asset manager Fidelity in January — before Mr Trump ordered a review — showed many advisers were in advanced stages of their preparation to comply with it.
Of the 323 advisers surveyed, 44 per cent said they were proceeding with steps to comply despite the potential postponement. Just under 20 per cent said they were on track to comply, but at a slightly slower pace. Only 1 per cent said they halted their plans completely, while 14 per cent said they had slowed down significantly.
Patricia Brennan, president and chief executive of broker-dealer Key Financial, says her company is continuing with its plans to comply, including charging a flat fee.
“We have made it a priority to rebalance every retail client’s portfolio before April 10 . . . until we can figure this thing out longer-term,” she says, adding that her company has spent time explaining the new rule and its potential impact to clients.