Fiduciary Rule Shows Washington Compromise Can Still Happen

Count Russell Investments directors Jean-David Larson and Sam Ushio among the financial services industry professionals who were grateful to see the Department of Labor (DOL) dial back some elements of its new fiduciary standard.

The final rule isn’t perfect, they stress, but they view it as a genuinely positive next step for the financial services industry and its clients, to be understood in the context of the Obama Administration’s wider effort to boost consumer protections and the stability of the U.S. economy after the 2008 credit crisis. This is clearly becoming one cornerstone of the president’s attempts to solidify his legacy during the waning months of his final term. 

Larson is director of regulatory and strategic initiatives, while Ushio focuses on the firm’s advisory practice management support business. Like others interpreting the final fiduciary rule language emerging this week from the DOL, the pair say it appears that DOL and Labor Secretary Perez made effective use of the nearly 400,000 formal written comments and hundreds of hours of public testimony to shape the rule into an acceptable final form.

“At Russell Investments we really strive to have a global focus,” Larson tells PLANADVISER. “And from that perspective, we have seen this rule change as a matter of when, not if, for a long time now. The U.K. and Australia have similarly moved in recent years to strengthen advice standards, and it truly was only a matter of time before the movement took hold here.”  

For this reason, Larson says Russell Investments was able to “engage early and often” with the DOL and other stakeholders inside and outside government. “Going from what was proposed to where we are now, it’s a big step,” he says. “It’s a real victory for both the industry and the DOL.” A growing list of financial services firms have echoed this sentiment, such that there has clearly been much less initial criticism of the final rule compared with the two proposed versions from 2015 and 2010. 

Ushio adds that the DOL’s new presentation of the final rule “clearly has adjustments that are going to help mitigate unintended impacts on both the retail and institutional advice markets. The final rule is much more clear that, rather than prescriptively requiring one business model or another, the DOL is interested in assuring advisers adhere to the best-interest standard when dealing with clients. That is the North Star the Secretary has talked about.”

As Ushio and Larson read the final rule, “obviously there’s still going to be a benefit from the regulatory compliance perspective to doing more level-fee and flat-fee business.” But, they say, it also appears that “commissions and sales fees will still absolutely be a viable way of doing business, so long as the best-interest standard is maintained.” Ushio adds: “There may very well be cases, based on the factors such as the size of the client or their particular interests, where a commission-based fee is the right way to go. The final rule makes this clear. Commissions will not be disappearing overnight.”

NEXT: CFA Institute weighs in 

Speaking with PLANADVISER, Jim Allen, head of capital markets policy in the Americas at CFA Institute, also voiced support for the flexible-but-determined approached embodied by the DOL under Secretary Perez.

“I think from our perspective at CFA institute, the most important part in all of this rulemaking and the associated debate is that we maintain a direction towards ensuring that the end investors are given the primary place in our industry,” Allen says. “That is the most important message we have, and it really seems that the DOL and Secretary Perez share that goal. So overall this is a good step, we’re very happy to see that the number of fiduciary advisers will substantially increase.”

Allen agrees with the others that “many of the technical changes we felt may have been needed have apparently been made,” for example increasing the implementation period to 21 months and cutting some requirements that brokers provide forward-looking performance projections on certain products.

“The eight month implementation people were talking about before the final rule language came down was going to be really tight for a lot of firms,” Allen explains. “They were feeling that they would simply have to turn on a dime and make some really challenging decisions really quickly. Now, with the longer implementation period, there is much more space for firms to come up with a thoughtful response.”

Allen also agrees with Ushio and Larson that a lot remains to be seen in terms of how firms will comply and how the industry will ultimately deal with new basic standards for how advisers can get paid and speak with clients. 

“We had some issues with the complexity of this rulemaking, and that complexity is obviously still there,” Allen concludes. “The complexity is probably unavoidable, given the DOL’s objectives and the interests of the industry to avoid complete disruption. It’s a function of trying to improve the standards of client care while simultaneously permitting entities with potentially conflicted models to keep doing business. The complexity comes because there is still a legitimate role for both fiduciary and non-fiduciary advice, and the DOL knows this.”