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Fiduciary rule opponents not throwing in towel just yet

Thomas Perez, U.S. Secretary of Labor, speaks during a U.S. Labor Department news conference at the Center for American Progress in Washington, D.C., on April 6, 2016.
Drew Angerer | Bloomberg | Getty Images
Thomas Perez, U.S. Secretary of Labor, speaks during a U.S. Labor Department news conference at the Center for American Progress in Washington, D.C., on April 6, 2016.

It's not over 'til it's over!

Opponents of the new fiduciary rule — imposed in April by the Department of Labor, requiring financial advisors who provide retirement advice to put their clients' best interests above all else — have yet to throw in the towel.

On June 22, the House of Representatives tried to override President Obama's veto of legislation preempting the rule. Yet it failed to get the needed two-thirds majority.

As expected, a slew of financial industry groups — including the Securities Industry and Financial Markets Association and the U.S. Chamber of Commerce — filed a lawsuit to stop the rule earlier this month. Despite major changes to the DOL's reworked proposal, the claimants contend the rule remains a byzantine structure that will force new obligations and high costs on advisors to corporate 401(k) plans and individual retirement accounts.

"American families are losing billions of dollars because of an out-of-balance system," said Labor Secretary Thomas Perez. "With the finalization of this rule, we are putting in place a fundamental principle of consumer protection in the retirement landscape."

The rule will take effect in stages beginning in April 2017, Perez said.

"There were some helpful changes regarding the disclosure requirements, but the rule as a whole still has major deficiencies," said Alice Joe, managing director of the Chamber of Commerce's Center for Capital Markets Competitiveness.

Joe said the rule is particularly hard on small businesses that want to set up an employee retirement plan, and she argues that the DOL did not adequately address industry concerns with the rule. It will force advisors to act in the best interests of their clients. "We believe in a 'best interests' standard, but we disagree with the manner in which the DOL implemented the rule," said Joe.

"I wouldn't say the rule is a fait accompli, but I think the odds favor it taking effect on schedule. If the rule is blocked, it will be difficult for firms to change course." -Blaine Aikin, executive chairman of fi360

The claimants picked a good venue for their litigation. The U.S. District Court for the Northern District of Texas is notably sympathetic to the business community. They also have uber-employment lawyer Eugene Scalia arguing their case. Scalia, the son of former Supreme Court Justice Antonin Scalia, has had plenty of success in litigation against rules issued by federal administrative agencies.

Scalia, a lawyer with Gibson Dunn & Crutcher, will have a tough time arguing that the DOL doesn't have the authority to issue rules on ERISA accounts such as 401(k) plans, though he may have more grounds to argue that the application of the rule to IRAs is a new and undesirable initiative by the department. It will also be hard to argue that the DOL acted arbitrarily, given the extensive hearings, comment periods and changes to the rule since it was first proposed in 2010.

"I wouldn't say the rule is a fait accompli, but I think the odds favor it taking effect on schedule," said Blaine Aikin, executive chairman of consultant fi360 and a noted expert on fiduciary issues. Even if the Texas court does delay implementation of the rule, Aikin believes the momentum for change in the advisory industry can't be derailed.

"Firms are already doing a lot to prepare for this," he said. "If the rule is blocked, it will be difficult for firms to change course."

Wavebreak | Vetta | Getty Images

Advisory firms have until next April to comply with the new rule. Many hope that it may yet be forestalled, but they can't risk not being ready if it isn't.

LPL Holdings, for example, got out ahead of the final proposal by lowering fees on its advisory platform in March by nearly 30 percent compared to current pricing, according to the firm, and it will reduce account minimums to $10,000 from $15,000 later in the year. "The changes announced today position both LPL and our advisors for growth and increased market share," said LPL president Dan Arnold in a prepared statement.

The move by the biggest independent broker-dealer in the country — the group expected to face the biggest impact from the DOL rule — is a sign of the times. It will be costly and complicated for the entire industry, particularly those firms not currently operating in a fiduciary environment.

"There's a general assumption that the DOL rule is going to force pronounced change [on the industry]," said Dave Welling, managing director of technology consultant SS&C Advent. "It's unquestionably a catalyst for change in how advisors do business, how they interact with clients and how their firms keep track of it all."

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A major outcome of the rule is a likely acceleration of the move to simple, transparent fee-based relationships. The growth of the fee-based RIA model could get another jolt from the change. Transaction-based commissions are not prohibited under the DOL rule, but they will require more disclosures and messy explanations for exemptions from the best interest contract that forms the heart of the rule. Firms are more likely to reduce the revenue streams of fund loads and distribution fees in favor of simple asset-based fees. "We already see it happening in the broker/dealer networks," said Welling.

The rule will be a boon for tech consultants such as Welling's firm, which has about 2,500 financial advisor clients. A recent survey by SS&C Advent found that 85 percent of tech professionals in the industry expected their compliance budgets to go up significantly because of the rule. Welling said firms are already spending on technology to improve their customer facing client portals and their document management systems.

"When you get 85 percent of the industry agreeing on anything, it's a landslide indicator that they see major change ahead," said Welling.

— By Andrew Osterland, special to CNBC.com