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Investor-protection rule is here to stay ... for now

  • Potential delay in remaining parts of the federal rule is likely no death knell for provisions already in place.
  • Opponents say the new regulatory requirements are hurting retirement savers with small balances.

Despite a possible delay in implementing the remaining provisions of a new federal investor-protection regulation, one thing seems clear to many observers: Requiring financial advisors to act in the best interest of their clients is an approach that's probably here to stay.

The Labor Department is requesting an 18-month postponement in the effective date of certain parts of the so-called fiduciary rule. Yet the provision that requires advisors to provide advice in retirement accounts that aligns with investors' best interests took effect June 9.

"The basic structure of a fiduciary obligation isn't likely to go away," said Duane Thompson, senior policy analyst at Pittsburgh-based consultancy Fi360. "There could be some interest in narrowing the scope of the definition of a fiduciary, but I think the [requirement] will stay in place."

The 18-month postponement request was outlined in a court brief filed Wednesday in Minnesota related to a lawsuit the Labor Department is a party to. If the delay is approved by the Office of Management and Budget, the effective date for complying with the rule's remaining provisions would be pushed out to July 1, 2019, from Jan. 1, 2018.

The pieces of the rule facing a delayed effective date pertain to specific written disclosures from financial services firms, including the requirement that advisors earning commissions on investments in retirement accounts sign a legally binding agreement putting their clients' interests ahead of their own.

While opponents are cheering the delay, they also say the parts of the regulation that already have taken effect are hurting investors.

"The fiduciary rule effectively limits choices for investors because the government and trial lawyers are the ones who define, under the rule, which investments are in the 'best interest' of investors," said John Berlau, a financial policy expert at the Competitive Enterprise Institute.

Loan officer financial advisor
Eric Audras | PhotoAlto | Getty Images

Opponents say the evidence of harm to investors lies in the fact that some brokerages are changing the way they approach management of individual retirement accounts, or IRAs.

For instance, at a congressional hearing in June, public testimony shows that Philadelphia-based Janney Montgomery Scott was in the process of moving "upwards of 10,000 of [its] customer retirement accounts" to "no-advice service desks."

"They are too small for the risks imposed by [the fiduciary rule] or too costly to place in an advisory account that would remove the supposed conflicts the [Labor Department] is trying to regulate," said Jerry Lombard, president of Janney's Private Client Group, in a statement given to a congressional committee on behalf of the New York-based SIMFA, which represents brokerages, banks and asset managers.

Meanwhile, the rule already has been undergoing a review, which was ordered by President Trump in February.

"Most investors already thought their advisor was legally required to act in their best interest. That wasn't [necessarily] true until June 9. The bar has been raised." -Duane Thompson, Senior policy analyst at Pittsburgh-based consultancy Fi360

The rule also remains in the crosshairs of congressional Republicans. Last month, a House committee approved a measure that would repeal the fiduciary rule and replace it with one allowing disclosures of potential conflicts of interest.

None of this sits well with fiduciary-rule advocates, who say the postponement request ultimately hurts investors.

"Unless and until [the Labor Department] sends a clear message that the rule is going to be implemented without further changes, firms are going to stall their implementation efforts, denying retirement savers the benefits of a fully enforceable best-interest standard backed by real limits on harmful conflicts [of interest]," said Barbara Roper, director of investor protection for the Washington, D.C.-based Consumer Federation of America.

Thompson, of fi360, said that while the debate rages on — potentially for an extra 18 months — the part of the rule already in place has served to enhance investor protection.

"Most investors already thought their advisor was legally required to act in their best interest," Thompson said. "That wasn't [necessarily] true until June 9. The bar has been raised."