Both the SEC and DOL have newly appointed leaders. But will this change the trajectory of the fiduciary standards debate
Alexander Acosta was confirmed as the Secretary of Labor on April 27, and Jay Clayton was confirmed as the Chair of the SEC on May 2. Acosta’s confirmation was met with calls for a further delay of the DOL fiduciary rule beyond the June 9 applicability date. But in a May 22 Wall Street Journal opinion piece, he acknowledged there was no principled legal basis for the delay. Clayton was urged to prioritize a uniform standard of conduct for all financial advisors, yet the topic was not a factor in his Senate confirmation hearings.
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The financial services industry and many members of Congress have regularly urged the SEC to lead this effort, and the last five SEC chairs have endorsed it in principle. In his opinion piece, Secretary Acosta stated that the SEC has critical expertise in this area, and he hopes, with this new administration, it will be an active participant. On June 1 Chairman Clayton issued a notice that the SEC would take a fresh look at standards of conduct and will accept comments on the matter.
But while a new administration and two new confirmations may affect the arc of the fiduciary debate, the industry has undergone fairly significant change and a number of trends are underway that won’t likely be reversed regardless of how federal regulatory bodies move forward.
The DOL effect: Three significant trends
The DOL’s promulgation of a revised, more encompassing ERISA fiduciary standard for retirement accounts (referred to as the DOL Fiduciary Rule) took six years. Changing a regulation that went through such extensive gestation is difficult, and if done in haste, could be more susceptible to legal challenges from the regulation’s supporters.
The extended period leading up to the final DOL rule catalyzed action like more extensive financial planning and advanced existing trends such as fee reduction. There are three significant trends the DOL has already influenced, which will likely continue to accelerate:
- Financial advisors who act as a fiduciary alongside the sponsor of a workplace retirement plan have a competitive advantage.
Plan sponsors face litigation and regulatory penalties if they breach their fiduciary duty to plan participants. It’s advantageous to work with advisors who can share a portion of the fiduciary responsibility.
Many broker-dealer firms recognize this advantage and are positioning themselves as effective partners on fiduciary matters. When it comes to employer plans, broker-dealers, to help avoid conflicts, have replaced or are in the process of replacing advisors’ variable commission-based compensation with level compensation. Some firms are also increasing the number of accredited plan specialists who are eligible to act as investment co-fiduciaries alongside the plan sponsor, and in certain instances, may require non-accredited financial advisors to partner with specialists on retirement plans.
- Financial advisors must adhere to standards of conduct when they recommend an IRA rollover from a retirement plan.
The significance of rollovers in retirement planning is evident: by 2020, IRAs are projected to be the single largest retirement vehicle, primarily due to rollovers from qualified retirement plans. Both FINRA and the SEC have set standards of conduct regarding rollovers, and many broker-dealer firms have adopted and even expanded on them in their policies and procedures.
- The need for regulatory harmonization is broadly recognized to alleviate confusion.
A 2008 RAND Corporation study for the SEC confirmed that investors are confused about the differences between brokers and investment advisors. Because wealth management involves advising on IRAs and taxable accounts, it can lead to three regulatory standards depending on the account type (FINRA standards apply to brokerage accounts, SEC standards to advisory accounts and DOL standards apply to any IRA).
Taking the lead from other English-speaking countries is increasingly difficult
At one time it seemed certain English speaking nations were on a common path. Australia and the U.K. have put in place uniform advisor standards, and Canada and the U.S. were close to following suit. However, the Canadian Securities Administrator recently changed course and will not introduce a mandatory standard, focusing instead on targeted reforms such as requiring different titles for fiduciaries versus sales agents. This is a different direction than what the SEC had previously taken when they allowed FINRA Series 7 license holders to refer to themselves as a financial advisor (the same descriptive title used by registered investment advisors or RIAs).
The new leaders of the DOL and SEC could work closely to create regulatory harmonization, but the degree to which they do so depends on how uniformly the financial services industry aligns behind a standard of care. But even before their confirmations, the financial services industry was already changing.
Trends are already in place, which are unlikely to be reversed, and the fiduciary debate is now more pervasive within the investing public. In this fluid environment, financial advisors should ultimately defer to their firms for guidance on policy, procedure, and the best course of action.
Article by Abram Claude, Columbia Threadneedle Investments