Will the Fiduciary Rule Ever Become Law?

RIA Central Investment Forum Follow-up

Current Events

Last week, Matt Crow and I presented at RIA Institute’s 3rd Annual RIA Central Investment Forum, and this question was asked to the crowd of 70+ industry participants in attendance.  Only about half the audience raised a hand.  This comes after another delay last week, further extending the rule, now set to go into effect June 9th.  Even most of those at the conference who thought it would eventually become law thought this deadline was too ambitious.

So why the delay?  Many at the conference felt that President Trump’s recent directive for the DOL to carry out an exhaustive “economic and legal analysis” on the rule’s potential action would cause further deferral, and may have been by design.  A few weeks later, on March 10, 2017, the DOL issued a memorandum noting the possible implementation of a 60 day hold on implementation, so no one should really be that surprised by this latest development.  Also, later that month, the world’s two largest asset managers, BlackRock and Vanguard, called for a more significant delay, so the DOL could sort out its more confusing and controversial elements and give advisors an opportunity to digest the potential impact it might have on their business.

Still, not everyone is in favor of waiting to implement.  Nearly 178,000 of the 193,000 letters received by the DOL during the 15 day public comment opposed the 60 day deferral.  In the end, though, it was simply unrealistic to expect the DOL to carry out a full review of the rule within 60 days.

On balance, it should be common sense and best practices for financial advisors to disclose potential conflicts of interest and act in their clients’ best interest (fiduciary or not).  We must remember, however, that much of the advisory industry traces its origins to Wall Street stockbrokers, some of whom almost never had their clients’ interests in mind.  This rule is really just one more step in the evolution of the commissioned salesperson to an actual fiduciary that started with ERISA’s initial definition of the “investment advice fiduciary” in 1974.

So according to our panel of industry participants at the RIA Institute conference, this proposed rule only has a 50% chance of ever becoming law.  We feel that’s a bit low, but it may not matter.  Since the issue has gotten so much media and public attention over the last year, the few advisors who are not acting as fiduciaries will likely not be competitive in a business now dominated by low fee products and conflict disclosures.  Merrill Lynch scrapped commission-based individual retirement account fees in October, and we expect other brokerage firms to follow suit independent of the rule’s legislative outcome.

We presented on a completely unrelated topic at the conference but enjoyed this discussion on the fiduciary rule (as much as one can enjoy such a boring topic).  We’ll keep you posted on future developments but maintain that the fiduciary standard will become common practice regardless of what happens on June 9th.