DOL Fiduciary Rule: It’s Not Always Fun to be Right

When the Department of Labor (DoL) rolled out its fiduciary duty rule last year, I (and others) noted that its likely effect would be to harm the very people it purports to protect.  Unfortunately, it seems I was right.

The rule is intended to help individuals make good choices when saving for retirement.  Under the rule, brokers who sell retirement investments are to be held to a “fiduciary duty” standard.  This is often expressed in the legal world as the care a prudent person would take in managing his or her own affairs.  Those who hold positions of great trust, such as those who are given authority to act for another, are often designated fiduciaries under the law.  For example, corporate board members are fiduciaries of the company they serve, and lawyers owe a fiduciary duty to their clients. 

As I’ve discussed previously, the legal reality of being subject to a fiduciary duty standard is much more than simply deciding to offer good customer service.  And “more” in this case means more liability and more cost.  The risk is therefore that brokers may find it’s just not worth the risk or the cost to serve clients with only moderate amounts of money to invest.

It seems a recent poll of the industry shows my predictions may be correct.  According to a letter submitted to the DoL by the Financial Services Roundtable, its members have reported the following trends as a result of the rule:

 (1) less guidance and support to IRA owners and small plans; (2) increases in minimum account size; (3) limited product shelf; (4) shift to fee-based accounts; (5) moving clients with smaller accounts to self-service or robo-advice; (6) orphaning of smaller, less profitable accounts due to heightened risks; (7) reduced willingness to discuss or consider unmanaged assets with clients due to risks; (8) poor client service due to the time required to perform comparative analysis on the proposed account to the existing account; (9) disinclination to sell annuity products because of uncertainty surrounding the Rule and inability to launch new products because resources are tied up with Rule implementation; (10) additional disclosure documents and other changes to sales process make the sales process markedly longer in each client appointment; (11) less discretion on small accounts and compensation changes make working with small accounts more challenging and less cost-effective for financial professionals;  (12) higher manufacturing and distribution costs; and (13) new liability concerns.

Specifically, the poll found that 68 percent of respondents would be taking on fewer small accounts due to increased compliance costs and legal risks.  It also found that 63 percent expected that the new rule would limit the investment options or products the firms could provide to their clients.  And that 52 percent expected that higher compliance costs would be passed on to clients in the form of additional fees. Only 12 percent of respondents said the rule “is helping me to serve my clients’ best interests.”  Most notably, the poll report highlights the following: “Even advisors who say that the rule is ‘helping me to serve my clients’ best interests’ or has had ‘no impact on my ability’ say that there will be more complicated paperwork and fewer small accounts.”