Wealth Management
(New York)
Think about the financial advisor as you conceive it: an entrepreneurial professional driven by an eat-what-you-kill paradigm. For decades that has been the model, but it appears to be changing quickly. In what Barron’s calls the rise of the “advisor zombie”, many advisors are being moved to basic salary and bonus models. Since firms are exiting the broker protocol, it is becoming easier for them to lock advisors in place, and thus constrain their pay, leaving more margin for firms. The model attempts to make clients loyal to firms rather than advisors, much like a branch banker.
FINSUM: This is certainly a dystopian viewpoint, but if you take a look at changes going on in the industry, it looks like a pretty reasonable view.
(Washington)
The SEC has already faced some stiff criticism for its “fiduciary rule” that does not include the word “fiduciary” in it. The SEC’s proposal makes for a rule much lighter than many expected and it is viewed as very industry-friendly. However, Investment News has put out a piece defending the rule. Investment News thinks that both the SEC and DOL have the same intent, but used a different approach. In its own words, Investment News says “The SEC initiative seeks to raise standards and let investors understand the motivations of their adviser, without limiting choice”.
FINSUM: We think those very last few words really hit at the heart of the SEC effort: it does not limit choice. One of our big gripes with the DOL rule was that it effectively constrained product choice. We feel the SEC likely won’t do that.
(New York)
Nobody in the industry wants to hear it, but that doesn’t mean it isn’t true. Think Advisor has just published an article arguing that the DOL rule may still pose a comeback and that RIAs need to keep the DOL-guided compliance procedures they developed in place. The argument is that though the DOL let the May 1st appeal deadline to its Fifth Circuit Court loss pass, it still has until June 13th to escalate the case to the US Supreme Court. If it does so, a stay in the Fifth Circuit Court’s ruling is likely, meaning the rule would technically still be in place until the Supreme Court delivers its verdict.
FINSUM: Obviously no one knows what the DOL will do, especially because the motivation to escalate this seems to be lacking. That said, it still has the choice and so advisors must keep their compliance policies in place.
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(Washington)
Brokers who want to publish more of their own research will now find it easier. For the last several years, publishing research on individual funds has been a complicated and risky endeavor for brokers as rules meant some research work could be seen as a sales material, subjecting it to stricter scrutiny. The SEC is harmonizing rules to allow brokers to publish research on ETFs, mutual funds, registered closed-end funds, and business development companies under the same rules that govern other types of research.
FINSUM: This delineation had existed too long and we think this is a good change of rules.
(Washington)
The Trump administration may be on the verge of a large regulatory pullback in wealth management products. In particular, Trump is considering dropping the rule which limits variable annuities. The products have widely been considered too complicated for retail investors and have been limited alongside the DOL rule. Sales of variable annuities fell to $98 bn last year, the lowest figure in two decades.
FINSUM: These products only seem likely to rise again if any fiduciary-type rule disappear. As one advisor put it best, saying “If you are required to put clients’ interests first, they [VAs] almost never make sense”.
(Washington)
The DOL rule is on the way out and the SEC best interest rule is on the way in, but that did not keep the SEC from taking a parting shot at the DOL. Outgoing SEC commissioner Michael Piwowar, long a critic of the fiduciary rule, said yesterday “I think it was a terrible, horrible, no good, very bad rule … It set up an unworkable, impossible set of standards for people to comply with. The Department of Labor couldn’t have cared what we thought and what you all thought, didn’t listen to Finra, didn’t listen to state regulators or the insurance regulators, and went forward with a rule that proved to be unworkable”. Piwowar is expected to leave the SEC on July 7th following his resignation.
FINSUM: We could not think of a more comprehensive critique of the DOL rule. We think the SEC really “gets” it.