The Obama-era fiduciary rule: what happens next?
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As the effective date of the U.S. Department of Labor’s fiduciary rule approaches this April, there are more questions than answers. The proposed changes to comply have required systemic overhauls of nearly every segment of the industry—from asset managers to advisors—and of every aspect of the way such services are provided. Although some consequences were anticipated, others were not.

While its intention is to increase transparency and choice for consumers, the fiduciary rule may actually cause the product shelf to shrink over time as manufacturers look to mitigate their risk, liability and time spent meeting more onerous due diligence requirements. This reduction in options may not be immediate, but as asset managers and manufacturers reevaluate their product offerings, they will place increasing emphasis on performance data and analytics—instead of relationships—and be forced to reevaluate how they will partner with intermediaries to offer competitive services. Ultimately, consumers are likely to find less retirement plan options.

The biggest question here is whether we will see major players exit the commission-based business altogether and move towards fee-based accounts. Merrill Lynch is leading this charge and others have followed. However, while the United Kingdom, European Union and Australia have already prohibited commissions, the U.S. is only discouraging this model—not banning it completely. International experience proves that the unintended consequence for those markets that prohibited commissions was a reduction in the volume of qualified financial advisors—creating an advice gap.

The non-commission model forced such advisors out of business, which left clients either directed toward automated robo-advisors or simply spurned. Clearly in specific situations, a commission-based model still offers benefits, hence the industry’s new focus on client behavioral profiles. These help to identify those customer segments who want—and are still willing to pay commissions—for more personalized advice.

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The unintended consequence of the fiduciary rule will be fewer advisors. Reduced profitability, particularly within firms who have exited the commission-based structure, will drive out those professionals who do not have the right licensing or capability to operate in a fiduciary capacity. This means more consumers will fall through the cracks.

Taking one step back, it must be acknowledged that the new fiduciary requirements will cause a gap in service in the near term, forcing all service segments—from sales managers to advisors—to reevaluate their client engagement efforts, and thus redesign their evaluation, training, monitoring, reporting and supervisory policies to ensure proper compliance as new fiduciaries.

The fate of the Labor Department rule under a Trump administration is far from one-sided. Most large firms are already 90 percent down the path of preparation for the April 10 deadline. While most believe that a delay is highly probable, we should expect that some of the measures these large players have judged to be generally in the best interest of clients are likely to be implemented regardless of any changes to the timeline. On the other hand, many smaller players are adopting a “wait and see” approach.

The game for all players at this stage is to manage against a spectrum of uncertainty within three scenarios: a delay to the ruling, which will pose significant uncertainty to the market, leaving many critical decisions and requirements in limbo; a rescind and replace by the new administration, an extremely cumbersome task which would likely be met with a fight from Senate Democrats; or a decision by the administration not to defend the rule in the courts, which would be the most cost-effective solution but would bring significant uncertainty and, worse, run the risk of inconsistent implementation for the industry.

This uncertainty in itself creates the potential unintended consequence of a bifurcated response from Tier 1 and Tier 2 players. Many Tier 1 firms may simply move forward with their initiatives (to realize returns on their investments), and use this opportunity competitively in order to differentiate their values and services to customers, versus Tier 2 providers.

Regardless of the final outcome this spring, there will be winners and losers in this impasse. Winners will include those with the most diverse firm economics, providing an array of investment service offerings, including financial planning, access to initial public offerings (IPOs) and alternative investments.

Asset managers will suffer as they recalibrate how to engage with external partners, create share classes that need to be reported to the U.S. Federal Trade Commission, and navigate other critical changes in an environment of declining revenue potential. Insurance businesses will likely face losses due to the complexity of their business model, licensing requirements for advisors, and new classifications and requirements for variable annuities.

Even the best, most thoughtful policy can have unintended consequences when undertaking such seismic shifts to a relatively archaic marketplace. As long as the end consumer ultimately benefits, the wins and losses are worth it. With insight and preparation, we can determine the best path forward to support industry, regulators and customers alike.

Kapin Vora is head of North America wealth management at Capco, a global business and technology consultancy and FIS company dedicated to the financial services industry. Matthew Berkowitz is a managing principal in wealth and investment management at Capco.


The views of Contributors are their own and are not the views of The Hill.