Musings on the DOL Rule

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

Harold is a founding member of the Committee for the Fiduciary Standard and has served on its Steering Committee since its inception. The Committee was formed in June 2009 by a group of investment professionals and fiduciary experts who volunteer their time to advocate that all investment and financial advice be rendered as fiduciary advice and meet the requirements of the five core fiduciary principles. Harold and other Committee members have been to Washington many times to meet with regulators and legislators in support of a fiduciary standard. Most recently, the Committee has been particularly active in support of the Department of Labor’s Fiduciary Rule.

The Committee’s goal is to advocate for the authentic fiduciary standard. The Committee seeks to help inform and nurture a public discussion on the fiduciary standard. Its objective is to ensure that any financial reform regarding the fiduciary standard: 1) meets the requirements of the authentic fiduciary standard, as presently established in the Investment Advisers Act of 1940, or ERISA, and 2) covers all professionals who provide investment and financial advice or who hold themselves out as providing financial or investment advice, without exceptions or exemptions.

The Committee for the Fiduciary Standard believes that investors have a right to know whether their advisor is acting in their best interests. For those investors and firms that agree, the Committee has drafted a straightforward Fiduciary Oath declaring an advisor’s commitment to adhere to a fiduciary ethic and, in so doing, be accountable for the advice given to their clients. We call on all advisors to provide a signed copy of this oath every time they enter into an advisory relationship with a client. Similarly, we recommend that investors insist their advisors sign the oath before entering into a relationship.

By now it’s certainly no surprise that the Department of Labor has issued its long-awaited missive on Fiduciary Duty. With more than 1,000 pages there is a lot to absorb; however, I believe the DOL has done a Solomon-like job of streamlining, simplifying, and clarifying the Rule. Although like many other supporters of the fiduciary concept, I too would have liked to see something stronger, the thrust of the DOL presentation of the Rule(s) that resonated with me was:

“Today a loophole will be closed making the system more fair.” I agree; the actions of the DOL will absolutely make the system “more fair.”

I believe that given the realities of today’s political constraints, e.g., an SEC Governor who opines that the Rule “…seems to ignore the chorus of voices that questioned whether it will restrict middle-class families’ and minority communities’ access to professional financial advice by making retirement advice unaffordable” [Michael Piwowar], and the views of some legislators, “This fiduciary rule will harm countless Georgians who have worked hard to make sure they make wise financial decisions for their families’ futures…. For families across the country, this rule is essentially the Obamacare for retirement planning, and I will do everything I can to overturn this rule” [Sen. Johnny Isakson], along with the multiple millions of dollars spent lobbying against the implementation of a DOL Rule, the result is amazing and to be applauded.

Some of the issues that seem to fail to be addressed in the seemingly endless commentary on the Rule are:

  • That argument that small investors (e.g., “the countless Georgians”) will lose access to advice – balderdash. First, brokers DO NOT provide advice. If they did, they would have to do so as Investment Advisors and would already be held to a fiduciary standard. Second, there is a large universe of fiduciary advisors (RIAs) who are ready, willing, and able to provide substantive advice. Third, as we’ve already seen, traditional commission-based platforms traditional commission-based platforms will quickly find a way to continue to operate under the new Rule, e.g., “LPL Cuts Prices, Account Minimums Ahead of DOL Fiduciary Rule.”
  • Although few investors and, for that matter, few investment professionals understand the difference between rule-based regulation and principals-based regulation; the DOL does. As it noted, “Rather than create a highly prescriptive set of transaction-specific exemptions, the Department instead is publishing exemptions that flexibly accommodate a wide range of current types of compensation practices, while minimizing the harmful impact of conflicts of interest on the quality of advice.”
  • Rather than a checklist of rules, firms are provided significant latitude subject to the principal that the firms and their advisors act as fiduciaries. There’s no wiggle room here.
  • It’s still a lumpy playing field. While IRAs may be subject to fiduciary standards, the old “suitability” standard with all of the potential conflicts of interest will still hold true for non-IRA accounts.
  • Where does the buck stop? Under the current suitability standard, if there is a dispute, the ultimate responsibility for proving the claim rests on the shoulders of the client. Under a fiduciary standard, the responsibility shifts to the advisor. This is a distinction not lost on compliance departments. As a consequence, I believe the enforcement of fiduciary standards will not be a result of detailed rules and micro-managing regulators, but rather the actions of firm compliance departments and ultimately the results of arbitration and court rulings.

I believe the institution of the DOL Rule is a seminal event that will significantly improve the investment outcomes for individual investors for decades to come. My friend Bob Veres, publisher of InsideInformation and longtime industry observer, summed it up best:

But overall, the new rule fundamentally and with pretty much zero exception requires the broker or independent BD rep to act as a fiduciary, and it brings a lot of people into the principles-based universe, which is alien territory for the brokerage firms…. My take is that the DOL was a bit sly about its concessions, making it harder for the wirehouse arguments to prevail in court should there be (as I think there WILL be) a legal challenge to these provisions.

I said it’s a milestone for the planning profession, a stake in the ground further than anyone has gone before in the fiduciary requirement space.

Finally, as legislators, businesses, and the courts go about interpreting and implementing these 1,000-plus pages, individual investors might happily ignore the activity by simply having their advisor sign the Committee for the Fiduciary Standard’s mom-and-pop Fiduciary Oath. The simple commitment states:

I believe in placing your best interests first. Therefore, I am proud to commit to the following five principles:

  • I will always put your best interests first.
  • I will act with prudence, that is, with the skill, care, diligence, and good judgment of a professional.
  • I will not mislead you, and I will provide conspicuous, full, and fair disclosure of all important facts.
  • I will avoid conflicts of interest.
  • I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.

With that signed and in hand, you will at least know that, for you, the relationship, including for non-IRA accounts, is structured so that YOUR interests come first.

_FIDUCIARY OATH-GENERALFeel free to contact Harold Evensky with any questions by email: HEvensky@ek-ff.com.