Experiential Wealth

Fiduciary Rule – A Never Ending Saga

Feb 7, 2017 | Individuals, Institutions, Opinions, Plan Sponsors, Regulations

As a part of Candidate Trump’s promise to rollback regulations during his campaign on February 3, 2017, President Trump signed an executive memorandum[1] instructing his Secretary of the Department of Labor (DoL) to rescind or revise the Fiduciary Rule[2] after analyzing and preparing an impact study. The Secretary is asked to consider the following questions:

  1. Would investors have a reduction in retirement savings options, information, retirement product structures, or related financial advice?
  2. Would investors or retirees be harmed by dislocation or disruptions in the retirement services industry?
  3. Would the Fiduciary Rule give rise to increased litigation and elevate costs payable for retirement services?

In its not so elegant contorted manner, the Obama’s DoL pushed the Fiduciary Rule through under significant and intense industry (lobbyist) pressure. The regulation has since made a significant impact that reverberated across the entire retail investment product manufacturing and service delivery chain.

Since the Fiduciary Rule became law on June 7, 2016, the industry has been rushing to meet the April 2017 application deadline. Brokerage and advisory firms had to review their policies and procedures, and every firm had to make adjustments or exit the retirement business. A number of wire houses stopped charging commissions on individual retirement accounts, while mutual fund sponsors rolled out new lower fee share classes. The Fiduciary Rule redefines (by removing backdoors) fiduciary and holds fiduciary advisers to the Best Interest Standard for the benefit of the investor. At the same time, it places a fiduciary standard on IRA assets and the decision around rollover which were not previously subject to ERISA standards. By creating the Best Interest Contract Exemption (BICE), the regulation funneled otherwise conflicted conducts into a path that holds advisors and their employers liable and subject them to civil litigation.

The three questions posed in President Trump’s executive memorandum perpetuate the line of argument used for years against the adoption of the Fiduciary Rule. Industry lobbyists have argued that, under the Fiduciary Rule: 1) fewer investment choices (thus competition) will be available which would harm investors (regardless if these vanishing choices may not be in the best interests of the investors), 2) fewer advisors will serve the retail market, leaving Americans without needed financial advice (regardless if the ability for these conflicted advisors to serve the market is due to unreasonable fees generated through product sales) and 3) litigation risk places a cold blanket over the retirement industry that would prevent innovation and increase costs (regardless of the fact that competition is already here from robo-advisers or efficient advice providers who charge a lower to much lower fees in delivering similar services).

Acting U.S. Secretary of Labor, Ed Hugler, issued a statement[3] on Friday: “The Department of Labor will now consider its legal options to delay the applicability date as we comply with the President’s memorandum.”

We suspect the DoL will soon trigger a delay to the application date of the new law by six months or longer depending on the amount of time the DoL expects to complete the study. In the meantime, the Fiduciary Rule will not become applicable. This leaves firms and advisors in limbo. Lobbyists will be pushing for the rule to be rescinded or to have a seat at the table for reconstructing the Fiduciary Rule. The DoL has completed and commissioned many impact studies on this matter, and doing more studies is simply to seek talking points to justify a position or direction. Questions 1 and 2 of the Executive Memorandum may be subject to debate. Question 3 can only be answered in the affirmative as the Best Interest Contract was created to allow investor breach of contract claims, which will increase costs.

We expect the main portion of the rule to remain intact and the more controversial and administratively cumbersome portion to be revised. Lobbyists will again work overtime to defeat or reshape the Fiduciary Rule. The more contemporary question should be how does one “drain the swamp” while swimming in it?


This commentary is for informational purpose only and should not be viewed as providing legal or regulatory advice. Opinion expressed herein should not be relied upon in any decision making regarding the subject matter.

[1] https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-memorandum-fiduciary-duty-rule

[2] http://webapps.dol.gov/FederalRegister/PdfDisplay.aspx?DocId=28806

[3] https://www.dol.gov/newsroom/releases

© Chao & Company. Ltd. 02-2017