Financial planners at odds over implications for the retirement services industry
Earlier this month, President Donald Trump ordered the review (and subsequent delay) of a Department of Labor investment-advice rule that would require financial advisers to act in the best interests of clients seeking retirement services, requiring them to disclose any conflicts of interest or fees they receive from entities they recommend to clients.
The DoL’s final fiduciary rule was slated for an April 10 implementation by the Obama administration, but Trump’s Feb. 3 directive is expected to result in a six-month delay that is likely to lead to its revision or replacement.
The executive order, and a White House memorandum that followed soon after, instructed the DoL to “examine the fiduciary rule in order to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.”
“One of the priorities of my administration is to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses,” Trump said in the memo. “[The rule] may significantly alter the manner in which Americans can receive financial advice, and may not be consistent with the policies of my administration.”
The review will include an economic and legal analysis on the potential impact of the rule, disruptions it might cause to the retirement services industry and whether it is likely to result in price increases for such services (as well as whether the rule might result in more litigation).
The rule — and Trump’s decision to delay it — has both advocates and opponents.
Those in favor of Trump’s order to delay its implementation argue that it is overly complex, costly and could result in increased prices for retirement services. Meanwhile, proponents contend that it would protect lower- and middle-class retirees from receiving advice that does more to benefit advisers than clients.
One proponent of the rule is the Financial Planning Coalition, which holds the organizational stance that it would protect millions of Americans currently planning for retirement.
“With just two months to go before its implementation date, the president has effectively given the green light to maintain the status quo of conflicted financial advice,” the Coalition said in a Feb. 3 news release. “The president is directing the Department of Labor to produce an outcome that will likely lead to either a complete gutting of this thoroughly vetted consumer protection or lead to its outright demise.”
The Coalition maintains that many firms and independent contractors had already implemented the new rule prior to its taking effect — and many saw it as a positive step in the industry.
“Already we are seeing benefits for retirement savers in the form of lower fees, more options and firms developing additional ways to serve middle-income Americans,” according to the release.
“The president’s action is welcome news.”
— Scott Tipton
Certified Financial Planner Kris Tower is the managing director of Denver-based American Portfolios and president-elect of the Colorado Financial Planning Association, a member organization of the Financial Planning Coalition.
He said that, regardless of whether the rule is revised or replaced, clients should be aware that not all financial advisers currently act in the best interest of their clients.
“Rule or no rule, this is where the industry is moving anyway,” he said. “As the clients are moving in this direction and some of the best advisers in the industry are moving in this direction, the firms will eventually follow.”
Tower said that at least half of his new clients ask whether he is a fiduciary (a financial advisor legally obligated to act in a client’s best interests) and that awareness has driven more advisers to embrace that model. He attributes that trend to the consumer skepticism that grew out of the Great Recession.
“I think that everyone knows at least one person who feels like they were sold shoddy goods from a financial services professional,” he said. “I think people are waking up to the fact that there are multiple ways to consume financial advice … and that it shouldn’t be a ‘buyer-beware’ situation walking into a financial adviser’s office.”
Tower said that the regulation would have little effect on most advisers, but instead targets sales-driven firms that deal in “high-commission, low-quality financial products.
“The rule isn’t really designed for us,” he said. “It’s designed for the kinds of people we don’t associate with on a professional basis.”
Those “people” include big banks and corporate brokerage firms where salaries are commission-based and sales numbers are often seen as more valuable than quality customer service, Tower said.
Enforcement of the rule would come largely by way of a “best interest contract exemption.” The BICE is written into the language of the rule and is essentially a contract that ensures the adviser is acting as a fiduciary in the best interest of the client. It also would provide owners of IRAs and 401(k)s the kind of legal recourse that is currently unavailable under the current system.
The National Association of Insurance and Financial Advisors directly opposes the rule — for seemingly similar reasons its proponents support it.
According to the Feb. 3 statement from NAIFA, the organization maintains that Trump’s order may prevent harm to Americans planning for retirement.
“It makes perfect sense for the administration to delay implementation of the Department of Labor fiduciary rule,” NAIFA President Paul Dougherty said in the statement. “Compliance deadlines imposed by the rule are quickly approaching, so it would make little sense to keep advisers, financial institutions and their clients in limbo while the administration undertakes its thorough review of the rule.”
NAIFA’s concerns with the rule relate to additional legal liability for advisers, increased costs for consumers and limited access for middle-market consumers seeking retirement services.
“It shouldn’t be a ‘buyer-beware’ situation.”
— Kris Tower
Another of the rule’s opponents is U.S. Rep. Scott Tipton, R-Colo., who called it “another one-size-fits-all regulation from Washington bureaucrats who have no idea what is best for families in Colorado.”
Tipton said that he has heard from financial advisers and their clients in cities like Pueblo and Grand Junction who expressed concerns that the rule would limit retirement options.
“The president’s action is welcome news,” he said. “The last thing the federal government should do is make it harder for families to get the advice they need.”