PANC 2017: The New Conflict of Interest

Speaking on the second day of the 2017 PLANADVISER National Conference in Orlando, Donald Stone, executive director, Pavilion Advisory Group, warned that there are many easy fiduciary hurdles to get tripped up by in the evolving regulatory landscape.

“The Department of Labor (DOL) has long been concerned about the fiduciary rule reform issue, and it has gotten tougher on this issue,” Stone observed. “As we all know by now, the department wants to provide a better set of guideposts for advisers and brokers to follow to minimize and disclose conflicts.”

Alice Palmer, managing counsel for Nationwide, agreed with that high-level assessment. Complicating the matter is the fact that the Trump Administration has signaled it wants to reverse the fiduciary rule expansion led by DOL, but it has so far not actually done so.

“And so it can be difficult to know where we stand,” Palmer observed. “In a sense, the tougher fiduciary rule reforms are in effect, but there is this ongoing delay in full enforcement. Overall, it’s very muddy, where we are right now.”

From her vantage point, Palmer said she agrees with the spirit of the fiduciary rule expansion, but she worries about its potential unintended consequences. Most concerning among these is that the rule expansion in some important ways gives more latitude and authority to states and state courts—and the plaintiffs’ bar—to potentially get more active on enforcement. Federal preemption issues aside, it’s a concerning picture. 

“Should the system as it stands right now come into full effect, there is little doubt there would be even more litigation than we already see today, and, worse, it would be spread out over the 50 state court systems—each with their own sets of precedence and standards,” Palmer speculated. “I think that situation would be very harmful in the long run, depending on how courts interpret federal preemption of retirement planning law. This is untested.”

NEXT: Seemingly endless regulatory uncertainty

Phil Troyer, vice president of compliance for Bukaty Companies, agreed that this would be a harmful outcome for both providers and clients in this industry. He commiserated with advisers in attendance who are clearly feeling confused and frustrated about the seemingly endless regulatory uncertainty.

“It’s like we’re playing in a basketball game and every five minutes someone changes the rules—or says they’re about to throw out the rulebook entirely,” Troyer said. “It is not easy to build a plan for the future in this environment. And for that reason, this is potentially a very difficult and damaging environment, in my opinion. If you have long been a fee-only adviser, you might not be as affected, but there are many, many people in the industry who remain very concerned and, frankly, confused.”

Given this situation, Palmer urged advisers to be hyper-diligent about conflicts, both real and perceived: “You just have to be as cautious and attentive and precise today as you can. If you are providing tailored advice, you are a fiduciary, so you have to understand any and all conflicts you may face across the different parts of the business.”

Troyer agreed, concluding that effective documentation and disclosure will go a long way, even in this challenging time, to protect an advisory practice and its clients from legal liability: “Of course, you also have to be careful about documentation when you’re thinking of protecting the sponsor. You don’t just document your choices. You have to document why you are making those choices. It is so crucial.”