The DOL rule is the nightmare of many financial advisors. Described as “Byzantine”, it is confusing, litigious, full of loopholes, and generally speaking, a hassle. Most advisors seem to hope the SEC will draft up its own rule and come up with something better. Charles Goldman, a senior wealth management figure and CEO of AssetMark, says that the solution for the SEC may very well be to simply extend the Investment Advisors Act of 1940 to every individual providing paid advice. Its is a simple rule which protects clients by obligating advisors to disclose conflicts of interest and put their client’s interests ahead of their own. The SEC already has the administrative arm in place to enforce the rule, unlike the DOL, which relies on lawyers and courts.
FINSUM: A disclosure-based rule governing all types of accounts would be vastly superior, in our opinion, to the current rule. Hopefully the SEC moves in this direction.
The comment period of the DOL’s most recent delay of the fiduciary rule has been getting, as usual, some very strongly worded comments. But one of the most interesting things to emerge has been the fissure between RIAs’ view of the delay, and the opinion of broker-dealers. B-Ds are loudly in support of the delay, but RIAs say that pushing the rule farther out is likely to lead to confusion and additional costs for investors. Financial Engines, the giant RIA which manages over $100 bn, remains steadfastly in support of the rule, saying "A robust conflict-of-interest rule will help to promote the trend toward high-quality, low-cost, technology-based financial services and products that will make unconflicted advice increasingly cost-effective for advisers and accessible for investors of all means”.
FINSUM: It is very obvious why broker-dealers are in support of a delay, but less obvious why RIAs are against one. Our own view is that RIAs should be happy the rule is being delayed, as the imposition of a weaker fiduciary standard would water down the brand the industry has collectively built for itself.
Investing in private equity has long been the exclusive domain of the very wealthy. Over the last decade, the sector has handily outperformed the stock market (9.9% annualized versus 7.5% including dividends), but because it is so hard to invest, many have missed out on those gains. There might be a way to get those returns much more cheaply. The way to do this is to use borrowed money to buy ETFs which hold stocks that are cheaper and smaller than average. Doing so over the last decade would have returned 8.4% per year. The companies in those ETFs tend to be bought by private equity firms.
FINSUM: Considering how low fees are in ETFs, sacrificing a bit of return by using this strategy will ultimately give much higher returns when you count private equity’s fees (~3.5% per annum).
The fiduciary rule is definitely on its back foot. The rule has been delayed 18 months and the DOL is now trying to get rid of its key enforcement mechanism—the private right of action clause. Now, Congress is going for a knockout punch. The new spending bill in the House contains a so-called rider that would kill the rule entirely. The $1.23 tn spending bill is certain to pass the House, but its odds in the Senate could be long. That said, a new Congressional measure to kill the DOL’s rule is back in play, and given current wrangling, anything could happen.
FINSUM: The Democrats really want Trump to reverse his position on Dreamers, which means they might be willing to trade a lot to make that happen. Could a swap for the fiduciary rule be on the cards?
The Fiduciary Rule has been delayed 18 months and the DOL is seeking to modify the terms of the rule. Doing so would leave the rule very exposed, as its primary enforcement mechanism was the ability for clients to bring suit if advisors broke the best interest contract. However, what if there were no contract to break? In that situation, there would be no way for clients to seek recompense should their advisor give them bad advice. For the next two years, this is likely to be the status quo, as the full implementation date has been pushed out to July 2019.
FINSUM: The current situation is okay for advisors, bad for clients, and great for firms. Firms get all the fee benefits of a fiduciary rule, but none of the risks. Advisors have lower risk but fewer options and lower compensation, and clients have few choices and no enforcement ability. We need a new rule.
Some states are very unhappy with the recent efforts to undue the fiduciary rule. The DOL is just about to finalize an 18-month delay of the full implementation of the rule, and wants to scrap the private right of action clause altogether. This has sent the likes of Nevada, Connecticut, New York, New Jersey, and California up in arms, as they had already been planning to strengthen the rule in their states. Some are planning to push ahead with their own rules regardless of what the federal government does, which threatens to create a patchwork system of rules across the country, which would be inefficient.
FINSUM: This could create some onerous burdens for advisors who do cross-state business, especially because some states aren’t just talking about fiduciary duty for retirement accounts, but all assets.