Will DOL’s Softer Fiduciary Rhetoric Pan Out?

Industry consensus has it that the Department of Labor (DOL) significantly softened key aspects of the final fiduciary rule published earlier this month, especially those pertaining to commissions and revenue sharing, but one long-term adviser warns the department’s apparent step back may turn out to be more rhetoric than substance, especially over the medium and long term.

Anthony Domino Jr., an adviser with Associated Benefits Consultants LLC, started in the retirement planning advisory business during the 1980s, and during his 20-plus years in the business he has seen the regulatory paradigm shift substantially, with different agencies taking over the momentum and driving the compliance conversation at any given time. Right now the DOL is obviously at the fore, he notes, given its years-long effort to create a new and far stricter fiduciary rule for Employee Retirement Income Security Act (ERISA) plans.

“At other times SEC or FINRA have driven the conversation, and that will be the case again in the future,” Domino tells PLANADVISER. “What has most surprised me in recent weeks, watching the fiduciary rule publication play out in the trade press and the wider media, is just how successful the DOL has been at marketing this final rule as something that will be workable in the end for participants and for providers.”

According to Domino, the preponderance of industry press reports have concluded that the DOL has “pretty much entirely taken the teeth away from the most controversial aspects of this rule,” namely those that would restrict the compensation practices of non-fiduciary brokers selling to ERISA plans on commission. But Domino personally does not think that is necessarily the case, warning “there is still going to be some painful disruption for advisers and providers coming out of the hundreds of pages of final rulemaking, even with a more workable best-interest contract (BIC) exemption.”

In short, despite what the DOL says about how it has softened the rule’s requirements through various exemptions and other specific changes compared with proposed versions of the rulemaking, Domino expects more and more advisers and providers will realize they will have problems complying—or with remaining adequately profitable while complying. And even among those who can find a way to comply by using the BIC exemption, “it will be increasingly uncomfortable and burdensome to have to constantly present this to clients and explain why you are not becoming a fiduciary.”

“It goes back to the overall tone of the rule and to the longer-term intentions of the DOL,” Domino adds. “Even with the softened final rule, they clearly favor level-fee work and are doing whatever they can to make more advisers and brokers work under a level-fee arrangement, through this regulation and potentially more regulation in the future.”

NEXT: Unintended consequences 

Thinking generally about the rulemaking and the adaptability of the marketplace, Domino feels most firms will be able to shift and remain compliant in the short term with the new fiduciary rule, “but what worries me more than the short term is the long term,” he says. 

“I'm not worried about the impact this week, this month or this year. I'm wonder about my son taking over this business as the DOL implies that advice is inherently untrustworthy and that advice is not worth the cost,” Domino explains. “I worry that the DOL is creating an environment of distrust in the idea of a traditional adviser. Add this to the problems we have all talked about regarding the cost-versus-value equation and the ongoing fee compression issues, and you can see some real challenges ahead for the traditional way of doing business.”

Domino explains that many brokers and advisers who are not fiduciaries right now are generally open to the idea of becoming a fiduciary under the final rule, but what seriously complicates the matter is that no adviser is an island.

“Advisers are going to be limited in terms of how they can respond by the way their service provider partners decide to respond,” Domino explains. “I have heard from some of my fellow advisers that their brokerage platforms are not going to be interested in taking on fiduciary status for clients that have less than $100,000 or even $200,000 in their accounts. It just won’t be worth it from a risk-reward perspective.”

In this sense, Domino feels a lot of the potential unintended consequences the advisory industry had been discussing leading up to the publication of the final fiduciary rule “are still highly relevant.” In particular he will be watching to see how his firm and the competition can make the sale and service of individual retirement accounts (IRAs) work under the new fiduciary rule. “That’s one area in particular where compliance is going to be a real challenge, even with the softer final rule,” Domino warns.

He predicts one approach advisers may widely have to take will be to segment clients in new ways according to their assets and their willingness to pay extra fees—flat or otherwise—for fiduciary service. “So in our example above, clients with less than $100,000 are much more likely to be candidates for robo advice or call center advice,” Domino predicts. “This is the sense in which I worry the final rule may cut down on the type of one-on-one advice we know to be most effective in preparing people for retirement.”