All eyes on looming fiduciary standards rule (updated)

As local firms make changes, Vancouver-area financial advisors weigh in on possible impacts

VBJ File

Update: In a May 22 Op-Ed for the Wall Street Journal, Labor Secretary Alexander Acosta confirmed that the fiduciary rule will take effect on June 9. However, analysts say the rule may eventually be altered by the Trump administration.

Financial advisors across Southwest Washington are making changes in advance of a potentially industry-disruptive decision currently in the hands of federal regulators.

Earlier this year, President Trump delayed a rule issued by the Department of Labor (DOL) during the Obama administration that said financial advisors must abide by a fiduciary standard when handling IRA and 401K accounts. That is, advisors must offer investment advice that puts the clients’ interests ahead of their own.

Prior to the President stepping in, the rule was set to be implemented last month. The fiduciary standard is now scheduled to take effect on June 9, unless a second delay is issued.

While the rule itself remains in flux, area financial advisors we spoke to say the inevitable is being delayed.

“We’ve really seen a lot of changes in our industry around coming into compliance with this rule,” said said Todd Pisarczyk, an investment consultant with Sustainable Wealth Management in Vancouver. “The problem was that the implementation date was April 17, so firms were really forced to get into a place where they were in compliance. We’ve seen a lot of announcements from major brokerage firms, for example, that have already made changes to comply with the rule even though they don’t have to.”

Craig Limoges, president of Vancouver-based Limoges Investment Management, suggested the delay may be the result of an effort to buy time for commission-based analysts who stand to be more affected by the rule.

“I think it’s an attempt to soften the blow of the fiduciary rule,” he said. “That delay I believe was initiated by the current administration as a result of financial pressure from the commissionable industry and probably the insurance industry also. They’re trying to figure out whether the implementation of it would result in a lack of adequate service to investors, especially small investors that some claim would be adversely affected. They’re also looking at whether or not the entire retirement services industry in general would be disrupted and adversely affected – especially the small retirement investors.”

Because commission-based financial advisors stand to take a big hit from the rule’s implementation, they have been among those voicing the loudest opposition, noted Michael R. Burgoyne, president of Laurus Wealth Management in Vancouver.

“Every single transaction with a client is a highly-commissionable product, and so by creating this it puts those products at risk; it changes their model significantly,” he said. “They (commission-based advisors) are used to getting 7 percent commissions on every transaction they do with a client and all the sudden you tell them you can’t do that anymore and maybe you could earn a 1 percent advisory fee on that. They’re looking at losing 85 percent of their revenue with enhanced regulatory requirements.”

Commission-based advisors aren’t the only ones who stand to be affected. Limoges said all financial advisors should carefully examine any iteration of the rule that comes to pass.

“What strikes me is that part of the delay is due to the ‘devil in the details,’” he said. “There are aspects that could present a compliance issue that aren’t obvious – both for fee-only and commission advisors. Part of the delay is to assess the hidden compliance pitfalls that result from this well-intended legislation. Compliance is a huge issue in the investment industry.”

A key component of the rule in its current form is the BICE (Best Interest Contract Exemption) portion, which offers a compromise of sorts by way of prompting commission-based advisors to behave in a fiduciary-like manner.

“If the rule goes into place without being amended you would have the option to work as a fiduciary or BICE, which is a contract you’d fill out with your client that would explain all of the fees and potential conflicts of interest involved in certain transactions,” Pisarczyk explained. “What this BICE seeks to do is require advisors that choose to work this way to disclose everything and have it out in the open. So if you’re paying a commission to buy a certain investment product it’s going to be disclosed.”

One critique of the rule, from those in favor of it, is that it doesn’t go far enough.

“I think the Department of Labor was the wrong place for this rule to come from, partly because they really don’t have an enforcement arm that can manage enforcement of it,” argued Burgoyne. “But partly because, why should only your retirement accounts be held to a best interest standard? Why shouldn’t all of your investment accounts – college saving accounts, etc.? The rule doesn’t go far enough from that aspect, because it only deals with retirement accounts.”

Despite the looming June 9 deadline, local sentiment is that it’s simply too soon to tell what the outcome will be.

“Right now it could go any which direction,” said Pisarczyk. “All these things are speculation. It might be that the whole thing is overturned come [June]. I think there’s a good chance we’re going to see something that’s in the spirit of the same rule – more open and more transparent. I think it would be good for people to realize that this thing has already zigzagged so many times since April. What ultimately happens we don’t know.”

With the spotlight thrown on the financial services sector, financial fees have come under greater and more public examination. For some clients, the fact that a standard of best intention was not inherent came as a shock.

“When I talk to clients – and I’ve been talking to everyone over the last year just letting them know what it (the fiduciary standard rule) means – I tell them that the DOL has passed a new rule requiring me to act in your best interest. When you tell them they look at you like, wasn’t it already like that?” said Pisarczyk.

Similarly, Limoges has experienced an increased awareness of the term ‘fiduciary’ in contrast with the mindset of traditional, but increasingly less-prominent methods of financial advising.

“I don’t know if it’s going to be a fleeting thing or not, but there’s more awareness now of what is a fiduciary and, ‘What do you mean my advisor isn’t giving me advice in my best interest?’ That’s not standard suitability. As long as it meets their client’s objectives and their needs then it is okay – even if there might have been alternatives that might have cost the client less. That’s kind of an interesting shift,” he said.

Embracing change

The increased scrutiny of the financial services sector in conjunction with increasing digital transformation across all sectors has elevated alternatives to traditional financial advisement. Looking ahead, automated financial advisory services appear to be a blessing and a bane for consumers and analysts alike.

“It’s causing a big shift in our industry which is extremely beneficial for clients because we have seen a lot of pressure to reduce fees because there’s more attention on that now. We’re seeing a lot of moves to make things more efficient, platforms and ways of doing things that were outdated are being forced to change. It’s all for the good of the client and I think it’s great,” said Pisarczyk.

For Burgoyne, technology brings about great change and opportunity for clients and his business.

“[The industry shift is] more positive for the consumer than it is for me as a business owner,” he said. “It will lead to more fee compression, but at the same time it should create for us some additional economies of scale because of technology utilization, so we [are] actually embracing it.”

Drawing an analogy between the growing number of services available on demand to another ubiquitous brand, Burgoyne offered, “I think it becomes like Starbucks. You’ve got a broad menu. You’ve got to embrace it.