Advisor Insight

Investment industry sweats Trump stance on fiduciary rule

It's traditional for incoming presidents from opposing political parties to try to undo what their predecessors did in office.

President-elect Donald Trump will be no exception. Target No. 1 is President Obama's Affordable Care Act (Obamacare), followed perhaps by recently, and not-so-recently, negotiated free trade agreements. Trump has also said he will scrap many of the regulations stemming from the Dodd-Frank Act passed after the financial crisis.

Donald Trump at a campaign rally in Delaware, Ohio, on Oct. 20, 2016
Jonathan Ernst | Reuters

The investment brokerage industry, however, is hoping he'll also quickly take up the fight against the much-maligned fiduciary rule passed by the Department of Labor earlier this year. The rule — six years in the making — will impose a fiduciary duty on all advisors to retirement accounts, requiring them to act in the best interests of their clients. It's scheduled to take effect on April 10.

"To this point, litigation has been the only hope to stop the DOL rule, but now there are additional avenues to [achieve that]," said David Bellaire, executive vice president and general counsel for the Financial Services Institute. His organization is part of a coalition of business groups that filed suit in a Texas court to stop the DOL rule.

"I'm more optimistic now than I was before the election," he said. "The first step is to repeal the existing rule."

Bellaire said his organization supports a universal fiduciary duty for all investment advisors and for all accounts but wants the Securities and Exchange Commission to draft the rules. "The DOL is not the right entity to do this, and this is not the right rule," he said.

It is the law, however, and Trump's unexpected triumph notwithstanding, it goes into effect in a few months. While many firms and financial advisors hope that a new Secretary of Labor will delay or rewrite the rule, that the Justice Department won't defend it against litigation or that a Republican Congress will pass legislation to kill it, none of that will happen overnight. They can't afford to abandon compliance efforts already well under way.

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"There's no stopping this train," said Denise Valentine, senior analyst at Aite Group. "It's a law until someone says it's not."

The suddenly uncertain regulatory landscape poses difficult choices for firms that have undertaken changes to comply with the rule. Many would prefer not to change their business models, but they have also invested large sums to do that and in some cases adopted marketing strategies that emphasize their new and improved fiduciary posture.

"If there is no obligation to change, it's hard for firms to justify making costly changes," said Blaine Aikin, executive chairman of consultant fi360 and an expert on fiduciary issues. On the other hand, if they rely on the rule being repealed, they could be sorely disappointed. "It's a risky course of action to do nothing," he added. "There could be repercussions in the marketplace and with regulators."

Wayne Bloom, CEO of Commonwealth Financial Network, an independent broker-dealer and registered investment advisor with 1,650 advisors managing about $100 billion in assets, is taking no chances. Prior to the election, his firm announced it would scrap commission-based retirement accounts and lower the asset minimums for fee-based accounts, thereby avoiding the headaches involved in qualifying for exemptions from the DOL's best-interests contract.

He doesn't plan to reverse that decision. "You have to be going full bore in complying with the DOL rule," said Bloom. "We can't rely on Mr. Trump's administration to save the day."

LPL Financial, the largest independent broker-dealer in the country, undertook a similar overhaul of its retirement business in response to the rule and recently indicated it would not reverse course. Other firms, including Morgan Stanley, Raymond James, Ameriprise and Cetera, chose to retain commission-based retirement accounts and have been busy building systems and processes to demonstrate that those accounts are managed in clients' best interests.

Either way, the strategies adopted by firms will be hard to walk away from.

"A lot of major firms have spent millions to comply with the rule and have incorporated their strategies into their marketing messages," said Karen Nystrom, director of advocacy for the Financial Planning Association, a major supporter of the DOL's fiduciary rule. "They may want to take the high ground on this."

All eyes are on Merrill Lynch. The iconic firm with a thundering herd of 14,000 advisors announced it would do away with commissions in its retirement business earlier this year and trumpeted the move as a demonstration of its commitment to clients' best interests. If it decides to reverse course now, clients may have uncomfortable questions about what exactly is in their best interests and whether Merrill is indeed serving them. A spokesperson for Merrill Lynch declined to comment on the issue.

Surveys in the past have suggested that average Americans don't understand the fiduciary concept and generally assume that their financial advisors are acting in their best interests, regardless of how they are regulated. The heated debate over the DOL rule, however, has opened some eyes, suggested Nystrom.

"The number of people trying to understand the fiduciary standard and the general awareness of the issue has increased among the investing public," she said. "So many firms have spent money in marketing around the issue that it's going to be difficult to walk it back into the barn."

That will be true regardless of how President Trump weighs in on the issue.

— By Andrew Osterland, special to