Even if the Trump administration rescinds the U.S. Department of Labor’s proposal to require advisers providing retirement investment advice to avoid conflicts of interest, such as receiving commissions based on their recommendations, at least it will have made more potential clients familiar with the term “fiduciary.”
That’s the reaction among some area advisers who have been following the governmental saga of the so-called fiduciary rule, slated to go into effect in April. Advisers that are fiduciaries typically earn a percentage of assets under management rather than commissions on any financial products they sell.
A memo issued Feb. 3 by the new administration, however, has sown confusion over whether the rule will go forward as planned, be revised or done away with altogether.
The missive directed the DOL to review the proposal for anything that would make it harder for Americans to get retirement or financial advice.
Government Action?
Ed Hugler, acting U.S. Secretary of Labor, said in a news release that the department would “consider its legal options” to push back the coming implementation date.
Paul Hynes is a San Diego-based adviser registered with the Securities and Exchange Commission. He founded HearthStone Private Wealth Management in 2010. Today his website proclaims: “All fiduciary all the time.”
Since the rule was introduced, Hynes said clients have become more knowledgeable about how advisers are compensated.
“I think the fiduciary cat is out of the bag, and while they can delay, revise or even rescind, no one can take that away that new knowledge gained,” Hynes said.
He said while the law would have protected some additional consumers, it had some significant flaws, including the fact that enforcement would primarily take place via lawsuits — not a particularly consumer-friendly method. The proposal also includes an exemption for some types of compensation, which Hynes said could be used by advisers to skirt the rule.
Potentially Misleading
Joshua Wilson, chief information officer of WorthPointe Financial Advisors, which has dual headquarters in San Diego and Austin, felt the rule as written wouldn’t protect investors enough because it only addressed retirement investment advice.
“Calling it the fiduciary rule gives the impression it turns every adviser into a full fiduciary, but it doesn’t,” Wilson said. “It still leaves room for people to have conflicts of interest built into their compensation plan.”
Financial advisers that work for broker-dealers are held to a lower bar than fiduciaries: The products they sell need only be “suitable” for the client, not necessarily the best option out there. However, this can cost clients less than it would were they working with an adviser that charges a percentage of assets for their service.
Wilson said regardless of what happens with the fiduciary rule under the new administration, its introduction has given advisers who are fiduciaries a bit of a business edge.
“With this being brought to the forefront, more firms will start going the fiduciary route,” he said. “In the meantime, it will benefit us early movers.”
Like HearthStone, WorthPointe is a fee-only firm.
Businesses Must Prepare
Trevor Callan, co-founder of La Jolla-based Callan Capital, said preparing for the rule’s implementation has been relatively easy since his firm’s main work is with executives undergoing significant changes, from selling their business to preparing for an initial public offering, rather than retirement accounts.
Even so, Callan said he is hopeful the rule’s establishment — or simply the discussion engendered by its potential sidelining — will raise consumers’ awareness of the different platforms through which to get advice.
“This has made it clearer that there’s a difference,” Callan said.
Although it may seem as if the new administration aims to derail the proposal, businesses don’t have the option of acting as if it won’t become law.
“We can’t count on a delay or revision, so we have to move forward like the increased regulation is going to happen,” Callan said.
