American savers win regardless of the fiduciary rule’s future

As 2016 comes to a close and a new administration gears up to take control, uncertainty reigns in the financial services industry regarding the future of the Department of Labor’s new fiduciary rule, which was finalized in April.

The rule is slated for the initial stage of compliance next spring. For now, many investors, financial advisors and financial firms await the future of the rule under Donald Trump’s administration. The rule was designed to protect retirement savers and their investments by requiring any financial firm or advisor that provides advice to an individual retirement account (IRA), 401(k) or other retirement account to act as a fiduciary, which means always in the best interest of the consumer.

The rule also takes aim at unreasonable fees, unsuitable financial products and other potential conflicts of interest. However, some in the financial services industry have pushed back against the rule, stating that compliance and costs would be overly burdensome and that the rule could ultimately harm those very consumers it is designed to protect by raising the price of doing business in financial planning.

As far as the future of the rule, many Republicans in both the House and Senate have shown disapproval of the expanded regulations over the past year. If the Republicans make a repeal of the Labor Department fiduciary rule a priority, it is likely they could pass legislation to kill implementation of the rule before the April 2017 implementation date.

{mosads}However, it is unclear how high of a priority a repeal of the rule would be for congressional Republicans, since their priority will likely be making changes the Affordable Care Act. Moreover, while Trump’s choice for U.S. labor secretary, Andrew Puzder, has been a strong opponent of current labor policies, he has yet to take an open stance on the fiduciary rule.

That leaves an abundance of uncertainty even within the Labor Department. Any agency-driven delay or outright removal of the rule by next April would be extremely difficult to accomplish since the outgoing U.S. labor secretary, Thomas Perez, would not readily agree to any delay or change at this point. Without a court case or a legislation overturning the rule, the rule will probably be in place by next April. Its fate beyond that is anything but certain.

What does all of this uncertainty mean for financial advisors and financial companies? Peter Gulia, a lawyer with Fiduciary Guidance Counsel, which focuses on advising retirement plan fiduciaries and service providers, explained that businesses are working “full steam ahead” to meet the fiduciary rule as-is. He explained, “Even if a business believes it’s likely the rule will be changed or delayed, any risk that the rule’s applicability date is not delayed and the business isn’t fully ready by April 2017 is too much of a risk. For a business’s lawyer or compliance officer, allowing a systemic prohibited transaction on your watch is a career-ender.”

Gulia also explained another valid business reason, “Even if the rule is undone, the idea is out there and the world has moved on. Employers and retirement investors who weren’t thinking about it a couple of years ago now have heightened expectations about how advisors and other service providers ought to behave.”

The reality for financial services firms is that they must be ready to comply come next spring because non-compliance could shut their businesses down.

Whether or not financial firms and financial advisors will ever have to comply with the new rule, the regulations have already made a tremendous impact on financial planning. Merrill Lynch, one of the largest financial services firms, has already announced it will no longer give retirement savers the option of using commission-based trade accounts, instead moving them to fee-based accounts.

While this change was announced in response to the new fiduciary regulations, it was also a switch in compensation structure that will probably benefit Merrill Lynch in the long run. It was a move they may have wanted to make anyway, but the new regulations provided a practical catalyst for change. It is not expected that Merrill Lynch will reverse course, even if the rule is overturned at some point.

The Labor Department regulations are working as designed, as more and more firms dump commission-based compensation structures in favor of fee-based advisory accounts. The rule has already changed the way that financial services firms in the United States do business. It has focused a microscope on retirement advice and fees.

In many ways, the best possible outcome for consumers is what is unfolding currently. The rule has been passed and companies are preparing to comply come next April. This is causing some companies to change their products and services, reduce fees and remove potential conflicts of interest. Many companies have also started to figure out how to better train their advisors to meet the higher standard of care required under the new rule.

What this means is that many consumers will likely get better advice and services next year. However, if there is a repeal of the rule within the next year, that could also prove beneficial for consumers because the increased liability and compliance costs created by the Labor Department rule would also go away.

In the end, the rule has already helped financial services move down the road to provide better services to Americans planning for retirement. At the same time, the cost of these services cannot get out of hand with outrageous compliance and liability issues. A removal of the rule in 2018 could, in fact, turn out to be the best of all possible worlds for consumers and the financial services industry.

Jamie Hopkins is an associate professor of taxation at the American College of Financial Services and co-director of the New York Life Center for Retirement Income.

The views of Contributors are their own and are not the views of The Hill.