DoL Seeks To Delay Fiduciary Rule Until July 2019

The Department of Labor has been embroiled in several lawsuits challenging its new fiduciary rule, and in a brief filled in its Minnesota lawsuit with Thrivent Financial this week, the DoL indicated that it is submitting to OMB a proposal to delay the remaining parts of the rule from the current January 1st, 2018 implementation date, out to July 1 of 2019, instead. Notably, the core of the DoL fiduciary rule has already taken effect, but compliance is currently in a “transition period”, such that firms and advisors are required to adhere to the Impartial Conduct Standards (that they give best-interests advice, for reasonable compensation, and make no misleading statements), but don’t have to comply with the full scope of disclosure and other requirements of the Best Interests Contract Exemption. The proposed delay would extend the current transition period, allowing firms another 18 months before being required to step up to full compliance (and, notably, also extending the time period during which DoL fiduciary opponents can continue in their attempts to derail the rule further), and would also extend the time period before the indexed annuity industry must complete its transition from the existing PTE 84-24 rules to the full BIC requirements. Yet the latest proposal of the DoL to delay the rule is just that – a proposal – which still has to be reviewed by OMB (for up to 90 days), and then the DoL would release it to a public comment period (with comments being submitted by both fiduciary advocates and adversaries), and then a final change rule would have to be re-submitted to OMB if the comments were supportive of further delay… and it’s not clear yet whether the DoL actually has a substantive and legally justifiable reason to engage in a further delay (not to mention one as long as 18 months). Which means at this point, the latest proposed delay just adds another layer of uncertainty to the potential timing of the DoL fiduciary rule, and it won’t likely be clear if the new delay is even going to be a delay until this fall.

DOL Fiduciary Rule Should Be Upheld—Just Not the Class-Action Part

Last summer, the U.S. Chamber of Commerce and SIFMA filed a lawsuit to block the Department of Labor’s fiduciary rule. Texas Chief Judge Barbara Lynn ultimately ruled in favor of the Department of Labor (and not to stay the rule), the case was appealed, and now the U.S. Justice Department has filed its 135-page court brief to defend itself in the Appeals Court. In its brief, the Federal government continues to stand behind the fiduciary rule, but explicitly stated that it would not defend the provision of the rule that requires Financial Institutions to allow consumers the right to file a class action lawsuit when advice is provided to rollover IRAs. The shift is consistent with President Trump’s recent positioning in a separate case, NLRB v. Murphy Oil USA (which is currently pending before the Supreme Court)… although if the Trump Administration loses, it could become even more difficult for fiduciaries (and even FINRA) to require mandatory arbitration at all. For the time being, though, and in the context of the DoL fiduciary rule, the unwillingness of the government to defend that section raises the possibility (though it does not ensure) that the court could agree with the plaintiffs and ultimately strike down the class action requirement of the BIC exemption (and allow Financial Institutions to once again force consumers into mandatory arbitration, even in cases of alleged fiduciary breach). Given the string of legal losses that fiduciary opponents have faced thus far, the fact that the Department of Justice has pledged to continue to defend the fiduciary rule makes it likely that it will remain. However, the potential that the class action provision even could be struck down in court raises serious concerns about the overall enforceability of the DoL fiduciary rule with respect to IRAs, given that the Department of Labor has the right to set fiduciary rules for IRAs but not enforce them, and without the risk of a class action suit looming, Financial Institutions may simply decide that occasionally losing one-off mandatory arbitration cases against individual brokers is an acceptable “cost of doing business” while pushing the line on the fiduciary rule. And of course, in the meantime, the Department of Labor has already separately begun the process of potential further changes to the fiduciary rule with its recent Request for Information, suggesting that while the rule may “stick”, there is still substantial uncertainty about exactly what will remain in the final version next year.

How Some RIAs Sell Life Insurance Through A BGA Without A B/D

Executive Summary

One of the primary blocking points for those at a broker-dealer who want to transition to an RIA is how to handle insurance once they make the switch. Investment portfolios can be shifted from commission-based products with 12b-1 fees to institutional shares with an advisory fee… but there are still virtually no “no-load” insurance products (and few fee-based annuity products) available to RIAs. However, the reality is, RIAs actually can sell – and get paid for – many types of insurance and annuity products, without a broker-dealer relationship!

In this week’s discussion, we discuss how RIAs can leverage a relationship with a Brokerage General Agency (BGA) to get paid for implementing most insurance and annuity products, without a broker-dealer relationship!

The key is to understand the different types of investment and insurance licenses that exist. The Series 7 exam (to become a “General Securities Representative”) is actually only necessary to get paid a commission to sell “securities” – stocks and bonds, along with mutual funds, ETFs, and variable annuities and insurance. In turn, those with a Series 7 (or a Series 6) must have an affiliation to a broker-dealer, as technically it’s the broker-dealer that sells the product and collects a Gross Dealer Concession (GDC) commission, a portion of which is then remitted to the selling broker.

By contrast, in order to sell insurance products, it’s only necessary to have a life (and health) insurance license from the state, and to get appointed by the insurance company to sell their products. In some cases, there’s an overlap – given that products like variable annuities are both an annuity and a securities product. However, for those who just want to implement term life insurance, whole life insurance, or universal life insurance that is not variable, then the advisor simply needs a life insurance license… but not a Series 6 or 7, and thus the advisor does not need a broker-dealer, either!

Of course, this still raises the question of how an RIA gets appointed by a company to sell insurance in the first place, and manages product selection across a wide range of companies. If the goal is to sell fixed products, the solution is for an RIA to work with a Brokerage General Agency (BGA). Conceptually, a BGA is similar to a broker-dealer, except they only work in the realm of (fixed) insurance products. Fortunately, there are a lot of BGAs out there to choose from (some work nationally, many work regionally, and some simply operate locally), of which many will work with RIAs – for which the primary differentiators are the BGA’s service, breadth of products, and commission payouts (though notably because insurance commissions are standardized with the state insurance department, the products themselves will generally still be the same price to the client, regardless of the BGA).

But the bottom line is that if an RIA wants to sell fixed insurance products, then a broker-dealer relationship isn’t necessary, as the RIA can work through a BGA relationship instead. Though it’s important to remember that a BGA relationship must still be disclosed on Form ADV Part 2, and that CFP professionals at the RIA cannot call themselves “fee-only” if there are insurance commissions involved (even if paid to a separate-but-related entity)!

So with the DoL Fiduciary Rule taking effect, a lot of broker-dealers are changing right now. Everything from compliance policies to payouts to reps. In some cases, it’s really driven directly by DoL Fiduciary itself, which limits certain types of payouts and compensation that could be deemed an incentive to not act in the client’s best interest. In other cases, the truth is it’s just the change the broker-dealer wanted to make anyways and is doing it under the guise of the DoL Fiduciary.

But regardless of the cause, I’m hearing from a lot of advisors lately who are working at broker-dealers and are considering whether to shift and become and RIA instead, with the caveat that they don’t want to lose their ability to implement insurance and annuity products for certain clients who may need it. I want to talk about that for today’s “Office Hours,” and respond to a particular question that came in from…we’ll say her name is “Patti.” So Patti asked:

“Dear Michael, I formed a hybrid RIA, but I’m finding the BD part to be expensive. While I did it to keep my Series 7 active, I was mostly interested in being able to still sell insurance and annuities. Can an RIA still sell those solutions without being a hybrid? Depending on who I ask, I keep getting conflicting answers.”

Great question, Patti. Unfortunately, this is an area where I find there is a lot of confusion out there, which isn’t helped by the fact that most advisors ask their broker-dealer for guidance and their broker-dealer, frankly, doesn’t want to lose them because it’s profitable to keep them. And, as a result, broker-dealers don’t always give the clearest guidance. So let me try to help set the record straight.

When You Need A Series 7 License

The starting point for this is the Series 7. The Series 7 exam is called the General Securities Representative Examination because it’s meant to assess your competency to be a “General Securities Representative.” Now, in this context, security is a financial asset that’s sold or traded in financial markets. And so, having a general securities license means you’re licensed to sell virtually any type of security. That would include stocks and bonds, ETFs and mutual funds that hold stocks and bonds, and even variable annuities or variable life insurance which hold stocks and bonds.

But the key here is that a Series 7 exam is all about being able to sell securities investments (stocks, bonds, vehicles that hold stocks and bonds [including mutual funds], variable life, and variable annuity contracts). And so, if you want to get paid a commission on those products, you need a Series 7 license, or at least a Series 6, which covers all the “packaged” investment products like mutual funds, variable annuities, and variable life. Technically, the Series 7 just expands on that by allowing all the other “general” types of securities; individual stocks and bonds, options and derivatives, etc.

In addition to the Series 6 or Series 7 license, you need a broker-dealer to actually facilitate as the broker for those product sales. Because technically, the company brokers the transaction and you are the registered representative of the company. That’s why when the client buys a stock or a bond, the commission is paid to the broker-dealer which then shares a portion of their income with you because you’re the representative.

Similarly, that’s why when you sell a mutual fund, the commission is paid to the broker-dealer. It’s literally called a Gross Dealer Concession, or GDC. And then the broker-dealer pays out a portion of that to you as their representative. That’s the compensation for delivering the company’s brokerage services to the client. So, if you want to sell securities products, you need a Series 6 or a Series 7 license.

Now, this is different than getting paid an Assets Under Management (AUM) fee to provide ongoing investment advice or discretionary management of an account. That requires becoming a Registered Investment Advisor, or an RIA, so that you can actually get paid an advisory fee. That’s the separation; if we’re going to get paid a commission, we need a securities license with a broker-dealer. If we’re going to get paid an advisory fee, we operate as an investment advisor and register as an RIA. And the Series licenses are specifically about getting paid a commission or receiving a 12B-1 fee, which itself is a form of a commission.

When You Need A Life Insurance License [Time – 4:23]

By contrast, when you sell insurance products, you need a life insurance license from the state. Typically, that’s a life and health insurance license which permits you to get paid to sell life insurance, disability insurance, long-term care insurance, and, as the name implies, health insurance. Annuity products generally also fall under a life and health insurance license.

In addition, you have to get appointed with an insurance company if you’re actually going to sell and get paid to sell that particular company’s products. In some cases, there’s an overlap, because products like variable annuities are both an annuity and a securities product (because it’s a variable annuity where the client’s money will be invested in the underlying stocks and bonds through an annuity contract). And as a result, selling variable annuities or variable life insurance require both a life and health insurance license for the insurance or annuity wrapper and completing at least a Series 6 exam or the broader Series 7 license to get paid a commission for the fact that it’s a security product.

But the key point here is that’s a requirement only for selling variable insurance and annuity products. If you want to implement term insurance, whole life insurance, or universal life that is not variable – either a standard UL policy or an indexed universal life policy – then you need a life and health license, but not a Series 6 or a Series 7 unless you don’t actually need a broker-dealer either.

Advisors selling fixed insurance products do NOT need to have a broker-dealer relationship!

Similarly, if you just want to sell long-term care insurance or disability insurance, then you need a life and health insurance license, but no Series exam and no broker-dealer relationship. And even in the context of annuities, you can sell a fixed annuity, indexed annuity, or a lifetime immediate annuity with only a life and health license and no Series exam or broker-dealer relationship. It’s just the variable annuity and the variable life that actually requires the Series license and the broker-dealer.

Selling Life Insurance Under An RIA Through A BGA

The key question for Patti in all of this is whether she wants to sell fixed insurance annuities under her RIA or variable insurance annuities under her RIA? If the goal is to sell fixed products, a health insurance license is necessary, but a broker-dealer relationship is not. Patti would only need the broker-dealer relationship if she wanted to sell variable products, or at least have a desire to keep trails and maybe remain broker of record for existing variable insurance or annuity products.

It’s also worth noting that Patti would really just need the Series licenses and a broker-dealer relationship to get paid a commission on a variable product. With the rise of new fee-based variable annuities under DoL Fiduciary, Patti could even recommend variable annuities with only an insurance license and no broker-dealer. Because technically, you don’t need a BD relationship to recommend an annuity, you need it to get the commission. But if you’re going to recommend the variable annuity and charge a separate advisory fee for the advice, you can do that, once again, with the standard RIA and a standalone life and health insurance license.

For many, the practical question is how exactly do you get appointed with and work with an insurance company when you’re an RIA? And the answer to that is what’s called a Brokerage General Agency (BGA). In practice, you can think of a BGA as similar to a broker-dealer. It’s a couple networks with multiple products and provides support and assistance to those affiliated with them to sell the products. Except, while a broker-dealer is built to do securities products, a BGA is built to do insurance products.

RIAs can sell fixed insurance products by partnering with a Brokerage General Agency (BGA)!

 

So if Patti decides that she doesn’t want or need to do variable insurance or variable annuities but still wants to be able to sell fixed annuities and non-variable insurance – so term, whole life, UL, disability, long-term care insurance, etc. – then she doesn’t need a broker-dealer, but she does need a BGA relationship.

The good news is that there are a lot of BGAs out there. A few work nationally, many work regionally, and some simply operate locally for insurance agents in the area. If you’re searching for one, you may need to ask around to a lot of BGAs in your area to find one that’s willing to work with you as an RIA. Because, the reality is, many BGAs are used to working with career insurance agents who sell a high volume of insurance and may not necessarily want to work with an RIA that will only occasionally place insurance products with them. But there are definitely BGAs out there that will work with RIAs.

In fact, a few I know like working with RIAs because by the time we evaluate the client’s situation, do the financial planning, and make a recommendation, there’s a very high likelihood that the client follows through and buys the insurance, which is a good deal if you’re a BGA in the business of getting insurance sold. And a lot of RIAs work with people who, shall we say, have above-average net worth and affluence, and consequently tend to buy above-average-sized insurance and annuity policies.

In terms of choosing a BGA, most will ultimately compete on service – their ability to know the available products, help you navigate the marketplace, assist you with all the licensing and appointments, help you actually implement the policy, and make sure you get paid.

Beyond that, the reality is that larger BGAs that do a higher volume of insurance business may also potentially be able to pay slightly better commission payouts as well, but I find there’s not a ton of variability from one BGA to the next. Though, there can be some, because insurance is still a volume business and brokers – including Brokerage General Agencies – that put through a higher volume can get better deals.

But it’s important to know that every BGA is going to get the same product for your client. It’s not as though one BGA gets a long-term care policy or term insurance policy at a discount to the others. The consumer rates, the premiums, are standardized by the insurance company and filed with the state insurance department. Therefore larger BGAs with a higher volume might be able to negotiate better payouts on what you sell, but they’re generally not going to get cheaper pricing on the policies themselves. That’s not a lot of reason to shop amongst BGAs in most cases.

Disclosing An BGA Insurance Relationship On Form ADV Part 2

For advisors who are switching to an RIA and want to keep doing fixed insurance and annuity business (but are at least ready to let go of variable products and the investment commissions and walk away from old 12B-1 trails), the path is to form an RIA and then establish a relationship with a BGA (Brokerage General Agency).

It’s important to remember that if you do go this route, you still need to disclose the BGA relationship as an outside business activity and another source of compensation in your RIA’s Form ADV Part 2. This is absolutely a conflict of interest the SEC expects you to disclose. And, in addition, it’s worth noting having an insurance relationship with your RIA means you are not allowed to call yourself “fee-only.” Even if you create a separate company for your RIA to contract with the BGA to receive insurance commissions. If you, as the CFP certificant, will ultimately participate in the commissions through a company you own when you deliver the services to clients, then you’re receiving both fee and commission compensation and you have to disclose it.

I find this gets mixed up all the time. There was an incident a couple of years ago where CNBC named their top fee-only financial advisors, and nine out of ten got insurance commissions. They were an RIA, but they had insurance commissions. And this was a whole issue that arose with Jeff and Kim Camarda and the CFP Board. The Camardas had a “fee-only RIA” as standalone, and then a separate insurance company that they also owned that was receiving commissions from their clients. And the CFP Board publicly admonished them because, as CFPs, they were still receiving commissions. It was through a related party, but they were getting the compensation.

The Camardas fought the ruling, but ultimately, the judge held the decision for the CFP Board. And the latest proposed updates to the CFP Board’s Standards of Conduct would go even further in making it crystal clear that paying commissions to a related party entity in connection with your financial advice to clients, is still a commission to the CFP and it means you are not fee-only.

You can decide whether having the fee-only label is even useful to you or not. I’ve actually written more than once; I don’t think it’s actually a great marketing term. Being a fiduciary is very important. Marketing as fee-only, not necessarily. But I do want to warn you if you decide to participate in insurance commissions as an RIA, you are not fee-only anymore, so don’t market yourself that way. Even if your RIA only gets fees, commissions those clients pay that come to you directly or indirectly via your related entity is still a commission.

Obviously, a lot of RIAs just choose to outsource this altogether and let a third party firm implement the insurance and get the commission for the work they do to implement the policy. You don’t have to participate in the commission at all. I know a lot of advisors who have a background in insurance feel like it’s natural to do. But recognize, in financial planning, we regularly give tax guidance to clients, but we still refer preparing the tax return to the CPA. We talk about estate planning strategies with clients, but we still refer out the estate planning documents to an attorney. We may review automobile and homeowner insurance policies, but we still refer out the implementation to a P&C agent.

In the same manner, you can advise regarding insurance as part of your comprehensive plan and still refer out the implementation. There’s nothing sacred about implementing the insurance and, frankly, introducing the conflicts of interest that it entails. Especially when you look at all the other stuff we don’t implement but simply advise on, and then hand off to dedicated professionals that do that for a living.

As we wrap up, getting back to Patti’s original question about whether she still needs to be a hybrid RIA with an expensive broker-dealer relationship just to implement insurance and annuities with the clients, the answer is “It depends.” Because it depends on whether she wants to do variable life insurance and variable annuities, which do require a broker-dealer relationship, or whether she’s only looking to do fixed annuities and fixed forms of insurance like term, whole life, UL, disability, and long-term care insurance. Because, for the latter, you don’t actually need a broker-dealer. You just need a Brokerage General Agency (BGA) relationship. And even if you want to do variable annuities, if you use a fee-based product with no commissions and just charge a separate advisory fee, that’s still okay with just an RIA and a BGA relationship and no broker-dealer.

And while you do have to disclose it in your RIA’s Form ADV Part 2, it’s worth noting the BGA relationship really is separate. A hybrid broker-dealer is the broker-dealer often wants to do oversight on the RIA. With a BGA, they will not require compliance oversight of your RIA the way that a lot of broker-dealers do if you hybridize with them. The BGA is just going to live in their insurance realm, because that’s what they do.

It’s worth knowing as well that there are some RIAs even that split the difference. They’ll form a BGA relationship to still do fixed insurance and annuity business, but refer out the variable insurance annuity business (particularly if they don’t do a lot of variable business as it’s just easier to occasionally refer out than to introduce the hassle of a broker-dealer relationship if it’s going to be a very small portion of their business pie).

Although, again, with the rise of fee-based annuities that don’t pay commissions since the DoL Fiduciary Rule, I suspect we’re going to see more and more RIAs that just decide to do this with the BGA relationship, and terminate their hybrid broker-dealer relationships, since that BD is going to be less and less necessary in the future as more and more products go fee-based and fixed insurance doesn’t require the BD anyways.

So what do you think? Have you considered selling insurance through a BGA? Do you think more advisors will drop their hybrid structure and move to a BGA relationship after DoL Fiduciary?

Why Actively Managed Mutual Fund Performance Is About To Improve

Executive Summary

This week is the first that financial advisors must operate under the Department of Labor’s fiduciary rule, subject to Impartial Conduct Standards which require that they must give best interests advice, for reasonable compensation, and make no misleading statements. While much has been said about the impact this will have for advisors and their clients, there’s also a not-well-discussed secondary shift that will be triggered by the DoL fiduciary rule, which will impact actively managed mutual funds and their performance in the coming years – in a “surprisingly” positive way.

This week I will be covering how the DoL fiduciary rule will likely end out causing an improvement in the return performance of actively managed mutual funds, thanks to the rise of clean shares and a shift in how brokers are compensated for recommending such funds!

Most predictions about the likely impact of the Department of Labor’s fiduciary rule is that it will lead to a (continued) decline in the use of actively managed mutual funds, and support the ongoing rise of passive ETFs, thanks to the fiduciary rule’s focus on low cost. But the truth is, that there actually is no requirement in the DoL fiduciary rule that financial advisors eschew actively managed funds and switch to lower cost passive funds. The only real requirement is that if an advisor is going to use an actively managed fund, that there needs to be a clear reason and justification for paying that active manager’s fee. And if you can make the case for the active manager, there’s nothing wrong with using the actively managed fund.

There is, however, a requirement to use the lowest cost share class if multiple share classes of the same fund are available. This is why we’ve seen the launch of T shares and clean shares – which either pay a uniform 2.5% upfront commission and 0.25% trails, or eliminate commissions entirely with the broker-dealer then wrapping a levelized commission around the whole fund or account. And this matters, because mutual funds currently have to report their performance net of commissions and broker compensation. But as broker-dealers shift to being compensated by levelized commissions outside of the funds (even if the consumer still pays a 1% fee via the broker-dealer equivalent to the 1% trail in a C share), the mutual fund itself will no longer have to count the broker’s compensation against their own performance!

And this is important because a lot of mutual fund managers have not been underperforming by the amount of the manager’s fee, but instead, they’ve been underperforming because of the drag of the broker’s commission compensation. Which means, “suddenly”, we’re going to start seeing the average actively managed mutual fund begin to improve on its performance… starting this week, with the rollout of the DoL fiduciary rule (and the rapidly rising adoption of clean shares in particular). Not because mutual fund managers are necessarily managing any differently or better, but simply because they’re no longer paying broker compensation out of their own performance track records! Ironically, this may even handicap RIA performance reporting relative to brokers, given that brokers typically point to mutual fund performance (which will not include the broker-dealer’s level commission payout) instead of account performance, whereas advisors in an RIA that want to market GIPS-compliant performance track records will still have to follow specific rules requiring a full accounting for fees.

In the end, this shift may still result in a roughly-similar total cost to consumers – whether it’s a 1% AUM fee, a 1% commission, or a 1% broker-dealer payout wrapped around clean shares – but the net result nonetheless is that with a shift to clean shares, reported performance for actively managed mutual funds is going to start looking better. Which means in a few years, we may suddenly be talking about how much better actively managed mutual funds are doing again. But it won’t be because “the pendulum swinging from passive to active”… or because that’s when the Fed started accelerating their rate increases… or whatever else happens economically from here. It will be because DoL fiduciary reconfigured how brokers get paid, reducing the need for 12b-1 fees, reducing the expense ratio of actively managed mutual funds, and improving the reported performance of the mutual fund itself!

DoL Fiduciary Doesn’t Kill Mutual Funds, Just Share Classes

I know most predictions about the impact of the DoL fiduciary rule is that it would lead to a declining use of actively managed mutual funds and support for the ongoing rise of passive ETFs thanks to the fiduciary rule’s focus on low cost. But the truth is, there’s really no requirement in the DoL fiduciary rule that advisors have to assume actively managed funds and switch to lower cost passive funds. The only real requirement is that if an advisor is going to use an actively managed fund, there needs to be a reason and a justification for paying the active manager’s fee. And if you can make the case for the active manager (i.e. they have reasonable performance), there’s nothing wrong with using an actively managed fund.

Secondarily, though, there is a requirement under the DoL fiduciary rule that if there are multiple share classes of the exact same fund, you better use the lowest cost version available to you. And to further ensure that advisors aren’t even tempted towards a small subset of higher cost funds that might pay them better, financial institutions have a requirement under DoL fiduciary to make compensation uniform across an entire category of investment products. Which means, while there may be cost differences between passive and active funds, the advisor or broker must be getting the same compensation for all of them regardless of which one is used. And this requirement that compensation must be uniform across mutual fund share classes is indirectly why I recently predicted that I think we’re going to see a total collapse in the number of mutual fund share classes in the next year or so.

Because, the truth is, the primary reason there are so many mutual fund share classes (e.g., some companies have more than a dozen different share classes) is basically because they have a dozen different arrangements to pay brokers to sell their products. And when compensation has to be uniform, the mutual fund share classes you need become uniform as well, and that’s why we’re seeing the launch of T shares and clean shares. So T shares, for those of you who aren’t familiar, will have a uniform commission paying 2.5% upfront and 25 basis point trails every year thereafter no matter what fund company it is and clean shares are just like what they sound, completely clean. No commissions, no 12B-1 fees at all.

DoL fiduciary doesn’t kill actively managed mutual funds, just reduces the number of share classes!

 

Now, obviously, even with clean shares, the broker still has to get paid, but that’ll happen by simply wrapping a levelized commission (such as 1% a year) around the whole brokerage account by the broker-dealer themselves, and the end result is actually that broker-dealers are going to start looking more and more like RIAs that buy institutional class shares and wrap their 1% AUM fee around it to manage it.

In fact, in the DoL guidance, when they confirmed that fiduciary rule was going to go forward on June 9th, even pointed out that they might look at issuing new rules with another streamlined exemption similar to the level fee fiduciary exemptions, specifically for brokerage firms using clean shares and this AUM style of perfectly level commissions. Which means, simply put, there’s going to be a lot of dollars flowing into clean shares in the coming years.

How DoL Fiduciary Will Lead To Better Mutual Fund Performance

So here’s why this all matters from the perspective of the performance of actively managed mutual funds. As the entire brokerage industry shifts from A shares to lower commission T shares (and particularly from C shares to clean shares), the cost structure of mutual funds themselves begins to change. Now, this isn’t necessarily about the difference to the end consumer. You can pay a 1% trail on a C share or you can pay a 1% fee to a broker who uses a clean share. Either way, the consumer pays 1%. But the flow of payments is different. Instead of the consumer as mutual fund shareholder paying 1% out of the fund, the consumer is going to pay 1% directly to the brokerage firm who will remit a portion to the broker because the mutual fund itself is a clean share which means the cost of compensating brokers will no longer be paid from mutual fund assets, which means the mutual fund no longer has to count broker compensation against their own performance.

Just think about that for a moment. What happens when every mutual fund currently paying 1% trail to a broker suddenly no longer has to carry that 1% fee as part of the fund’s expense ratio? Think about what that does to performance. When you drop the expense ratio of all of those mutual funds by an entire 100 basis points per year indefinitely. This is a profound shift. We all know that one of the primary blocking points that keeps actively managed mutual funds from outperforming is their cost, right? There are actually a decent number of mutual fund managers who do outperform their benchmarks on a gross basis, just not net of fees. SPIVA actually did a study recently and found that in some of the less efficient international categories, the majority of fund managers actually outperform gross of fees.

Now, obviously, it’s kind of a moot point if a mutual fund outperforms gross of fees but not net of fees because the consumer only gets the net return, but the problem is that a lot of mutual funds have not actually been underperforming by the amount of the manager’s fee. They’ve been underperforming because of the drag of the broker’s commission (the original commission plus 12B-1 fees). Those aren’t investment management costs. Those are marketing costs borne by shareholders thanks to the 12B-1 rules that allow expenses for marketing to be paid from mutual fund assets, and therefore count against mutual fund performance.

But again, with the shift to both lower commission T shares (and especially the clean shares), the cost will still be paid by the consumer, but not out of mutual fund assets in a manner that gets held against their performance. Which means, suddenly, I think you’re going to see actively managed mutual fund performance is going to start improving starting now… starting this week. Not necessarily because they’re managing any differently, but simply because they’re no longer paying broker compensation out of their performance.

DoL fiduciary will improve mutual fund performance by reducing drag from broker compensation!

The Beginning Of The End Of The 12b-1 Fee

When I look back over the years, I find it somewhat ironic that asset managers haven’t tried to fix this for themselves earlier, given that their performance is often getting buried by the cost of the broker and not their actual management fees. Because, if you go back to the roots of mutual funds, it didn’t always work this way. For the first almost 50 years of mutual funds, they only covered management fee costs, not broker costs for commissions. It changed in 1980 when we passed the rule 12B-1 that allowed, for the first time, for expenses to market and distribute mutual funds (including and especially the compensation of brokers) to come directly from the mutual fund assets, and therefore the fund’s expense ratio, and therefore the fund’s performance.

Arguably, back then, it didn’t matter as much. The fund industry was reeling from the bad performance in the 1970s, trying to get growth going, and they found if they paid 12B-1 fees to the rising number of independent broker-dealers, then registered reps would sell their funds and bring in assets to the fund. And, since people just weren’t as performance sensitive back then, it wasn’t as big of a deal. Remember the time? We launched the 12B-1 fee…in frankly, probably just coincidentally, what was the eve of the great bull market of the 1980s and the 1990s. So most people were pretty happy with their results, and they didn’t even have good tools to analyze mutual fund performance to compare to a benchmark anyway. So no one cared about relative performance to benchmarks that much. And even if they did, they didn’t know how to measure it.

But now, we have the internet, and both consumers and advisors themselves have a huge number of solutions at their fingertips, including Morningstar itself to show them exactly how their mutual funds are performing net of fees relative to a benchmark and passive alternatives. And, as we know, the results haven’t been very good, especially as average investment manager improves, which paradoxically reduces the amount of alpha available on the table – as folks like Larry Swedroe or Andy Berkin have been writing about.

So, now we’re in a world where investors are more performance sensitive because they’re more easily able to measure investment performance against benchmarks, and their fund managers are still allowing the marketing expenses of the fund company paid to brokers to be applied against their performance records.

At least until this week, when DoL fiduciary takes effect and we see the rise of clean shares. And I suspect that once more mutual fund managers realize this (that if they switch to clean shares, they can get broker compensation out of their performance records) they’re going to push for it, because it makes their performance look better. And this may actually be the beginning of the end of the 12B-1 fee altogether.

A Handicap For RIA Performance Against Brokers?

Now, ironically, one final thing that’s worth pointing out in this phenomenon where brokers’ costs of buying clean shares will no longer be counted against mutual fund performance itself, is that is kind of unique broker-dealers Because, if you’re an RIA,  your advisory fees absolutely get counted directly against client performance. In particular, if you’re an RIA that wants to market a GIPS-compliant performance track record, there are very specific rules about how to construct those performance composites and their associative fees to ensure that net performance is reported properly. And if the RIA has firm reports on performance, it’s always reporting net of fees.

So, I suspect that in broker-dealers using clean shares will primarily point to the performance of their mutual funds. Not necessarily performance of the account, because the account is net of the brokers fee, but the mutual funds will not be. Which means, mutual fund will get reported gross of broker compensation but RIA performance will get reported net of AUM fees. Which ironically, means now the fee drag pressure is on RIAs more whereas, in the past, it was on broker-dealers, because that’s just the reality of how we’ve tended to construct the comparisons. We look at RIA firm performance against mutual fund share class performance in broker-dealers.

We’ll see how this plays out. Perhaps the industry and consumers themselves will coalesce around some kind of a reporting process that tracks advisor aggregate performance whether at broker-dealer or RIA and it looks like net results, net of all cost and regardless of whether they’re applied at the advisor level, the broker-dealer level, or the fund level. Maybe Morningstar itself will get into the fray at some point? I think this is…frankly, how performance should be tracked, right? Net of all fees. But that’s not always practical with the available technology and reporting processes today, and DoL fiduciary and the rise of clean shares is certainly rearranging a lot of common industry practices.

But the bottom line is just to recognize that with the rise of clean shares, there is a fundamental shift in how brokers are getting compensated now, even if it doesn’t change the total cost to consumers. Because, again, for the consumer, I can pay a 1% commission trail or I can pay 1% AUM fee. It’s still the same 1%, though it dramatically changes the expense ratio of the mutual fund, and therefore the performance of mutual funds themselves who will no longer be saddling their performance records with broker compensation.

Which means that in a few years, I think we’re going to end up talking about how suddenly actively managed mutual funds started doing better in Q3 of 2017. And it won’t be because the pendulum swinging from passive to active… or because that’s when the Fed started accelerating their rate increases… or whatever else happens from here. It will be because the DoL fiduciary reconfigured how brokers get paid, reducing the need for 12B-1 fees, and reducing the expense ratio of actively managed mutual funds and improving their reported performance.

And with major broker-dealers and wirehouses now rationalizing which funds to keep on their platforms and eliminating a lot of higher cost and lower performing funds, I think a lot of the weakest funds actually will die from the lack of flows in the coming years. These funds probably should’ve gone away in the first place, but that means the surviving funds going forward, on average, are going to be even better, right? The higher quality crop with the lower expenses, with the better average performance of actively managed funds in the future.

So watch out for this trend. I think you’re going to see a lot coming out about it in the next year or two as we suddenly say, “Wow. Mutual funds suddenly seem to be performing better and this is why.”

I hope that helps and provides a little food for thought about what I think is important but not well discussed secondary shift that’s underway thanks to the DoL fiduciary rule. THave a great day, everyone!

What The Latest Milestone Actually Means

Today, marks the applicability date of the Impartial Conduct Standards under the Department of Labor’s fiduciary rule, a process that was almost 6 years in the making (although technically the rule doesn’t take effect until 11:59PM tonight!). Notably, though, the primary part of the fiduciary rule that is taking effect is just the Impartial Conduct Standards that financial advisors must act as fiduciaries (at least regarding retirement accounts); the additional fiduciary agreements, policies and procedures requirements, and (website) disclosure rules, won’t kick in until January 1st of 2018.

However, financial institutions have already begun to send out information to clients about various changes that may be occurring under the fiduciary rule, as many firms have already been implementing changes just to ensure they comply with the Impartial Conduct Standards (and some have been making announcements today). In the meantime, though, the fiduciary rule is still not a done deal, even though the Impartial Conduct Standards are applicable today, as House Republicans just included a proposal to repeal of the DoL fiduciary rule in the new Financial Choice Act (though it doesn’t appear to stand much chance of passing the Senate as-is), a similar piece of legislation was just proposed in the Senate (though it too is still subject to a Democratic filibuster), and OMB just posted a notice that the Labor Department will soon be soliciting public comments about potential modifications to the rule.

Still, the odds of a full repeal seem low, though there is much discussion about whether the rule might at least be changed, particularly with respect to the controversial class action lawsuit provision (which some claim will raises costs, and others suggest are an essential point of accountability to ensure financial institutions take the rules seriously), though some have also warned that the disclosure requirements may still be problematic for some advisory firms (e.g., RIAs that do not qualify for the level-fee fiduciary streamlined exemption).

Nonetheless, the fact remains that the fiduciary rule is now official and on the books, and even though the Department of Labor itself has indicated it will not be aggressively enforcing through the end of the year as long as firms try to comply in good faith, the rule is already driving substantial positive changes in the industry, from simplification in mutual fund share classes with the rise of “T shares and clean shares” to new product filings that should expand the accessibility of various no-load insurance and annuity products to fee-based financial advisors. And all financial advisors should be certain that going forward, they have clear documentation in their client files, for every IRA rollover, that analyzes the costs and performance of the old plan against what the advisor proposed, to substantiate that the rollover really was the appropriate recommendation for the retirement investor!

Despite No More Delay, DoL Fiduciary Still Not A Done Deal Yet!

EXECUTIVE SUMMARY

The big news this week was an Op-Ed published by Labor Secretary Acosta in the Wall Street Journal that declared, in no uncertain terms, that there will not be any further delay in the Department of Labor’s fiduciary rule beyond June 9th. Despite all the industry protests, that have continued for more than a year, and various attempts at (further) delays, financial advisors who provide investment advice to retirement investors will be required to adhere to the “Impartial Conduct Standards” after June 9th, requiring that they give Best Interests advice, for Reasonable Compensation, and make No Misleading Statements… as any fiduciary should. However, the permanence of the rule on June 9th still doesn’t mean the fighting over DoL fiduciary is done yet!

As regular followers of this blog know, the fact that the DoL fiduciary rule will not be delayed further shouldn’t be news. As has been discussed here repeatedly in the past, and now fully confirmed by Secretary Acosta, the requirements of the Administrative Procedures Act simply left “no principled legal basis” to further change or delay the June 9th applicability date. However, it’s crucial to recognize that the full DoL fiduciary rule is still not going into effect come June 9th, because part of the prior delay also delayed enforcement for most of the rule until January 1st of 2018. As a result, there is no actual Best Interests Contract… annuity agents will not have to honor the Best Interests Contract Exemption between now and the end of the year (and can rely on the less stringent PTE 84-24 when selling annuities into an IRA instead)… new disclosure requirements won’t apply… and firms can still sell proprietary products while brokers receive conflicted compensation!

What does apply, though, is the requirement to adhere to the Impartial Conducts Standards, which is the core of what it takes to be a fiduciary under the rule: providing best interests advice, for reasonable compensation, and make no misleading statements. However, there will be no requirement to actually sign a Best Interests Contract, which means there won’t necessarily be a full fiduciary contract in place, and in turn means it’s not really clear how enforceable the fiduciary rules will really be through the end of the year. Especially since the Department of Labor itself said, in a follow-up 11-page 15-question FAQ, that it will be focused on “compliance assistance” in the coming months (and not necessarily focusing on citing violations and doling out penalties).

But the real reason it matters that full DoL fiduciary enforcement won’t be coming until the end of the year, is that it provides another 6 months for fiduciary opponents to lobby for modifying the rule. In other words, DoL fiduciary may not be getting repealed and the June 9th date is final, but that doesn’t mean this is the final rule. President Trump’s Executive Memorandum back in February, which directed the DoL to re-evaluate the rule and consider amending it, is still in effect, and a proposal may be coming. In fact, Secretary Acosta’s Op-Ed emphasized that while the rule is final, the Department of Labor is still considering revisions to the fiduciary rule, but that “the process requires patience”, and that there may even be another enforcement delay (further into 2018) while the DoL considers new exemptions or other potential revisions as it issues a new Request for Information and new Public Comment periods.

In the end, this means that while a new fiduciary rule may soon be the law of the land for all retirement accounts, what, exactly, will be required to comply with that fiduciary rule in the long run, is still wide open and uncertain. The Impartial Conduct Standards requiring best interests advice, for reasonable compensation, with no misleading statements, will take effect soon. But the true obligations of Financial Institutions to monitor and oversee that activity, and the nature of enforcement and accountability for the fiduciary duty, is still not yet fixed and permenant… so get ready for a whole lot more DoL fiduciary debate over the next 6 months!

Why The Latest DoL Fiduciary Delay Is Likely The Last

Yesterday, on April 10th, the Department of Labor’s new fiduciary role and the requirement that advisors engage in a best-interest contract with their clients didn’t happen.

Last week, the DoL finalized a new regulation that enacted a 60-day delay to the applicability date for the original fiduciary rules. So, as a result, that final DoL fiduciary rule that was supposed to hit on April 10th is now pushed out to June 9th instead.

Many commentators have been suggesting that the DoL fiduciary rule delay, this 60-day delay, is just the first of what will probably be multiple delays, and that opponents of the fiduciary rule would just keep delaying it, delaying it, delaying it, until eventually, they find a way to kill it. In essence, suggesting that the DoL fiduciary rule is never actually going to happen.

But I wouldn’t be so sure about that, particularly when you delve into the details of what this delay actually said.

What The DoL Fiduciary Rule 60-Day Delay Actually Said

Because the headline announcement was just that, “The DoL fiduciary rule has been delayed 60 days, from April 10th until June 9th.” But the final regulation that was approved, the actual document that substantiated this delay, wasn’t just some brief regulation with a page that said, “We delay it by 60 days.” It was a 63-page regulation, with a number of other key changes and even a few things that have been viewed by the industry as surprises.

The first surprise in the ruling was that not only is the new definition of fiduciary delayed until June 9th, but the requirement to actually implement the best-interest contract exemption, which is the whole crux of the new fiduciary rule, was actually further delayed until the end of the year. Once we now get to June 9th, the only thing that will actually apply are the so-called impartial conduct standards, which says that advisors must give best-interest advice for reasonable compensation and make no misleading statements.

But the remainder of the disclosure rules for best-interest contract won’t apply on June 9th. The full depth of the policies and procedures requirements for financial institutions won’t apply on June 9th. Advisors won’t be required to acknowledge in writing that they’re fiduciaries to clients on June 9th, which means they won’t be bound in IRA accounts to a contractual fiduciary duty and won’t be at risk for financial institutions being sued for fiduciary breach in a class-action lawsuit, for any fiduciary failures that might happen after June 9th and before the end of the year.

In addition, because the full best-interest contract exemptions are delayed to the end of the year, that also means that variable and fixed-index annuities will not be subject to the best-interest contract exemption at all this year, not even after June 9th. They’ll stay under the old PTE-84-24 rules instead, which is a really big deal because annuity marketing organizations that help annuity companies distribute their annuity products through independent annuity agents have been really struggling with the best-interest contract requirements, because annuity marketing organizations don’t actually count as financial institutions.

As a result, they couldn’t sign off on the best-interest contract. The annuity companies didn’t want to do it because they didn’t really have oversight of the agents, and the agents couldn’t do it because the rules require a financial institution. So, we were stuck in this limbo with annuities in particular, and the annuity marketing organizations have been applying the DoL to become financial institutions and be recognized as such, so that they can sign off on a best-interest contract, but that process (or any other potential regulatory relief) has still been pending.

But with the best-interest contract exemption delay until the end of the year, annuity agents and annuity marketing organizations don’t have this problem now looming, not today and not June 9th. They don’t have to deal with it until 2018.

In other words, this wasn’t really just a 60-day delay. Much of it was actually an eight-month delay, from April 10th, all the way until the end of the year, for most of the key provisions, the “teeth” part, the enforcement part of the fiduciary rule. At a high-level, a fiduciary obligation is still going to be applicable on June 9th. But in practice, from June 9th until the end of the year, it’s basically a rule with lots of wiggle room and very little actual enforceability, particularly in IRAs, until we get to 2018.

The DoL fiduciary BICE requirement has been effectively delayed 8 months, but it isn’t going away!

 

Why The Fiduciary Delay Reduces The Likelihood Of More Fiduciary Delays

Here’s why all this matters. The industry has been fighting hard, basically ever since the final version of the DoL fiduciary rule was re-proposed, back in 2015, to stop the rule from happening. They lobbied the DoL to prevent it, change it, or at least water it down. They sued the DoL after the rule was issued, claiming that the DoL overreached and that they’d acted too hastily. They lobbied congressional republicans to pass a law to block it. They lobbied the current administration to delay it.

That last piece was ultimately what led to President Trump’s decision to issue a memorandum back in February that suggested the rule needs to be revisited. But it’s important to recognize that the rule is still a done deal on the books. It was finalized last year. It was formally adopted and effective. That’s why even when President Trump won the election, we noted on this blog, in “Office Hours,” the day after the election, that his victory was notgoing to lead to an immediate repeal of the rule, even though that’s what all the publications were writing at the time.

Because when you delve into how this actually happens, the president can’t just undo an existing regulation. It’s a violation of the Administrative Procedures Act. That’s also why even when President Trump finally took action, he still didn’t unwind the rule. In fact, originally, there was discussion he was going to delay it by 180 days. He didn’t delay it by 180 days. In fact, he didn’t even delay it by 60 days. He directed the Department of Labor to issue a proposal to consider whether to delay it by 60 days.

Now, that’s ultimately what the DoL has done, but it did so under substantial pressure and threat from consumer advocacy groups, that they would sue the DoL for making hasty changes. The industry fighting the rule is in a very awkward position now. They claim that the DoL rule, which ultimately took five-and-a-half-years (from first proposal in 2010 until it was finalized in early 2016), was too hasty. They sued the DoL on the basis that the rule was done too hastily.

It’s very hard now to say the rule should be killed or substantially changed in the next 60 days or 180 days, while simultaneously claiming that the prior change, which took 10 times as long, was too hasty. Simply put, if the DoL changes too much, too quickly now, to try to unwind the rule, they really are going to get sued, and there actually is a material risk. They would lose.

The DoL risks a lawsuit by trying to change the fiduciary rule too far, too fast!

 

In addition, the challenge now is the media has caught wind of this, and the public has caught wind of this. Rolling back the fiduciary rule is wildly unpopular with the public. Ultimately when the DoL did their 60-day delay, they noted that they ended up getting 190,000 comment letters about the delay, and over 90% of them opposed any delay. That was for a two-week comment period, just about delaying, 190,000 comment letters, and almost 180,000 of them said, “Don’t delay.”

It’s really hard to substantiate much real change to the rule when the public is overwhelmingly in support, making quick changes are at risk from a lawsuit from fiduciary advocates for violating the Administrative Procedures Act, and the DoL’s hands are just largely tied because it really was a done rule, last year.

A New Regulatory Impact Analysis Of The Fiduciary Rule? [Time – 7:50]

That’s why the only way that the rule can realistically be changed at this point is they have to do a new cost-benefit analysis, a new regulatory-impact analysis, something that provides some kind of new light about why, perhaps, the fiduciary rule would somehow be harmful after all.

Frankly, I’m still not sure how the industry is really going to make that case. They’re already being buried in studies out there about the problems with the industry’s conflicts of interest and how consumers are being harmed by those conflicts of interest. It’s not just about the fact that advisors are paid or even paid commissions. Advisors have a right to get paid. That’s part of why the fiduciary rule didn’t actually ban commissions.

It is about the fact, though, that substantial investor inflows keep going to funds with known-to-be inferior performance, where those funds coincidentally pay commissions or pay higher commissions. That was actually the driving force of that widely cited stat that the lack of a fiduciary rule will cost investors $17 billion. It wasn’t just about advisors getting paid. It was about a subset of salespeople posing as advisors, selling clearly inferior investment products when superior alternatives are available.

That’s part of why President Trump’s memorandum directed the DoL not only to propose a 60-day delay, but also to solicit comments about a new regulatory impact analysis, basically a new cost-benefit analysis of the trade-offs of a fiduciary rule, one that would look at three primary areas: whether the fiduciary rule is reducing access to retirement advice, causing dislocations or disruptions in the retirement industry that might harm investors, or whether the DoL fiduciary rule will likely cause an increase in litigation that leads to an increase in prices that investors would pay for retirement.

That comment period is actually open now. It was a 45-day comment period, opened alongside the 15-day comment period for the 60-day delay, to conduct this regulatory impact analysis of the rule. That comment period actually closes next week, on April 17th.

But with that 45 day impact analysis comment period closing, it’s still not clear that the DoL could possibly have enough time to substantively evaluate the comments, take them in, write a new rule, propose the new rule, have that proposal with actual changes subject to another comment period, take that feedback, draft a final rule, submit that to OMB, get that back for review, get it approved, and then publish it in the Federal Register, all by June 9th. In fact, one of the primary criticisms from the industry about the 60-day delay is that they fear it’s not long enough to actually stop the rule, and I think they’re right. It’s not.

I’m not even sure that there are any grounds at this point to delay it further, because the best-interest contract exemption provisions, the big onerous part for the industry, already got delayed until the end of the year. Only the somewhat unenforceable on its own, impartial conduct standards, are…and that’s the only part that even kicks in on June 9th.

Now if the industry still tries to fight for another delay, fiduciary supporters can point out, “Hey. You’ve already got until the end of the year to finish your compliance systems, your policies and procedures, your new disclosures. You got transition relief. Why should we grant more?”

Modifications Maybe, But Delays Are Probably Dead

The key point here is that the industry may have gotten more time to adjust out of this 60-day delay. It’s actually, I think, a little bit of a misnomer to call it a 60-day delay, because a lot of it was really an 8-month delay, but that still means all-the-more that when the rule becomes applicable on June 9th, even with the partial initial provisions and the rest that kick in later this year, it’s getting harder and harder to stop or delay or kill the rule, because you can’t even claim you don’t have time to adapt to changes by June 9th, because you don’t have to actually do most of them by June 9th. You only have to do them by the end of the year.

Ultimately, I think what you’re going to find is this conversation is about to shift from killing the fiduciary rule, which just isn’t going to happen, to modifying it. Ultimately, as I suggested to all of you back in November, the day after the election, I think modification is still actually a likely outcome. The DoL fiduciary rule may be here to stay, because the president doesn’t really have the authority to rescind it, and the DoL doesn’t really have the authority to kill it, and there’s too much support now with 193,000 comment letters, with 90% support, but we could modify it.

Because I’ve talked to a number of broker-dealers that are actually acknowledging now that, while the rule is a tough transition, if you’re a leading broker-dealer, and you’re actually well-positioned to handle compliance, this is a business opportunity for you to gain market share from all the other broker-dealers that might be lagging, which means even the broker-dealer community now is kind of split on the rule. If you’re ahead on compliance and adoption, you actually want this thing to go through, to grow your market share, but you might want it to be modified a little. Maybe dial back the threat of that class-action lawsuit provision.

In the meantime, we’re seeing services like Vanguard Personal Advisor Services and Schwab Intelligent Advisory ramping up with very low account minimums and cost of 28 to 30 basis points, for a human CFP financial advisor, which is really taking away any industry credibility for that whole argument that small investors won’t be served or lose access to advice, because the reality is major firms are already offering even cheaper services for those advisors, under an advisory environment. That’s actually the irony of this. The broker-dealers are claiming that consumers will lose access to advice, but, legally, they’re not even in the business of giving advice. Legally, they’re salespeople in the business of selling products, and their advice has to be solely incidental. It’s Vanguard and Schwab that have launched actually investment advisory services as RIAs, there to give advice, with low minimums, at lower cost than most of today’s brokers.

The bottom line is simply this. For all the talk about DoL fiduciary rule dying or going away, it’s really not. I think it’s been wishful thinking of a subset of very vocal industry firms that are fighting the rule, but the tide has shifted. More and more industry firms have come into compliance. They’ve built the compliance systems that they had to do, and they’re ready for it. Some of them even want it now, because their fiduciary preparedness is a competitive advantage.

In the meantime, hasty actions to kill the rule from DoL face the risk of a lawsuit that might well win. Congress could kill it, but congress is gridlocked, and the senate can filibuster to keep the DoL rule from changing, and Senator Warren’s office has already been rallying the democrats around the rule to prepare for that.

It’s getting harder and harder even to make the case for a delay of the rule from here, when so many of the compliance deadlines were already pushed out not just to June 9th, but all the way to the end of the year.

For any of you listening, if you haven’t finished your own preparations for DoL fiduciary yet, I really encourage you to be doing it now, because I think the rule is really coming. It may get modified. It can even get modified after the fact. Maybe we’ll dial down the class-action provision. Maybe we’ll adjust some of the disclosures, but we’re now in the phase of incremental changes to the rule. Repeal just does not realistically seem to be on the table anymore, which, frankly, I think ultimately is a good thing, not only for consumers but for those of us who are real financial advisors who want to regain consumer trust and are tired of having our whole industry’s trust dragged down by a small subset of salespeople posing as advisors, that are causing consumer harm.

But in any event, I hope that’s some food for thought about the current state of the DoL fiduciary rule and why modification is still a maybe, but further delay is probably dead at this point.

DoL Sends Final Fiduciary Rule Delay To Office Of Management And Budget (Greg Iacurci, Investment News)

This week, the Department of Labor sent the final version of its delay proposal to OMB for review, following its brief 15-day comment period. If approved, the rule delay will come back to the DoL to publish in the Federal Register in the coming weeks. However, given that there were over 1,100 comments submitted about the proposed delay, fiduciary rule supporters are questioning whether the DoL could have possibly read and incorporated all the feedback in the barely-2-week time period between when the comment period closed, and when the final delay proposal was submitted this week to OMB. As a result, there is still a possibility that OMB could decline the DoL’s proposed delay upon review, and/or that fiduciary supporters could sue the DoL for a hasty multi-week rulemaking process, especially in light of the fact that fiduciary opponents have already sued the DoL for claiming its multi-year process of formulating the rule was too hasty in the first place. In the meantime, the public comment period for proposed changes to the DoL fiduciary rule is also open, until April 17th; if/when the fiduciary rule delay is made final, pushing out the applicability date to June 9th, there will still likely be another proposal to come forth that may further delay or modify the rule, based on the second comment period closing next month.

Commission-Based Clients Don’t Want Fee-Only Accounts

In a recent J.D. Power survey, almost 60% of investors at full-service commission-based firms said they would “probably” or “definitely” take their business elsewhere if they were forced to switch into a fee-only model. The results highlight concerns that as many brokerage firms look at switching to fee-based accounts or other more levelized compensation approaches under the DoL fiduciary rule, that many consumers will be unwilling to stick with the change. In other words, at least some segment of those who have chosen commission-based accounts appear to have proactively chosen the path – which helps to explain why many firms looking at fee-based accounts are still aiming to preserve at least a self-directed brokerage option. Though, in point of fact, this perhaps simply helps to illustrate that if advisors are going to charge ongoing fees, they need to provide ongoing value, and that consumer perception is that commission-based advisors aren’t providing ongoing value (and therefore the consumers don’t want to switch to pay an ongoing fee). In fact, the J.D. Power study also shows that consumers who do use fee-based accounts are actually more satisfied with what they pay than those who pay commissions. Which means those who choose to pay ongoing fees for ongoing services really are more satisfied with what they get. But clearly, the results show that not everyone wants to pay ongoing fees for that level of ongoing service and advice. Similarly, a recent Spectrem Investor Pulse study also found that only 2/3rds of investors say they’re familiar with the term fiduciary, and even fewer know what it means, and, as a result, few are willing to pay more for fiduciary services… although 65% did agree that a fiduciary rule for advisors was necessary.