Is there any saving the fiduciary rule?
Can fiduciary advocates preserve what they see as an important investor protection before the Trump administration rescinds it?
Retirement advisers, whether pro- or anti-fiduciary rule, may be forgiven for thinking that the regulation's fate was already settled. It isn't.
While the rule's opponents, backed by an administration generally hostile to regulation, appear to have the momentum, nothing is final. The Department of Labor hasn't even officially delayed the rule's implementation, having only proposed such a move in order to complete a review of the regulation. And President Trump has yet to publicly mention the words “fiduciary rule.”
Fiduciary advocates and their allies in Congress are gearing up to defend the rule and pressure the administration not to touch it. And some proponents say that even if they lose this regulatory battle, they may have a trump card yet to play in the form of market forces.
Proponents of the rule will mount a defense during the comment period on the administration's proposed delay, which ends March 17. Indeed, some have been upping their criticism of attempts to delay and reverse the rule.
The Trump administration's move "gave financial advisers with conflicts of interest two extra months to cheat Americans saving for their retirement ― a delay that could cost hardworking Americans billions of dollars in lost savings,” says Sen. Elizabeth Warren (D-Mass.) in an emailed statement.
And the administration might change its course if enough pressure is applied in the coming weeks, says Bartlett Naylor, financial policy advocate at consumer advocacy group Public Citizen.
"At some point, the administration must decide that the barrage of adverse media, wherein average investors discover that Trump is siding against them and with brokers, is tough to explain away in 140 characters," he says.
Of course, it's not certain that the administration would adjust course under pressure.
It's also not clear to what degree Trump cares about this issue. He's never publicly spoken out explicitly in favor or against it. And even at the signing ceremony for his memo asking for a review of the rule, he never uttered the word fiduciary, instead giving the lead to Rep. Ann Wagner (R-Mo.), an opponent of the regulation.
"Why don’t you explain this," Trump said to Wagner, according to a transcript posted on the White House's website.
In the meantime, the regulation's opponents, including lobbying organizations and top executives, have been pressing the administration to move quickly to stop the rule from taking effect on April 10.
Responding to news of the proposed delay, SIFMA, a trade group, said the administration should move with haste.
"We are already seeing the negative consequences of the rule on the marketplace with some firms announcing that they will no long offer certain products, others no longer offering any IRA brokerage accounts, firms reducing web-based financial education tools, and others announcing that advice to clients with lower-balanced accounts will be discontinued," SIFMA says.
"The consumer has the ultimate vote and they vote with their pocket book," adviser Paul Pagnato says.
The Labor Department said that its proposed delay is necessary to complete its review before the regulation takes effect; in the event that it rescinds or revises the rule without having delayed implementation, then investors and the industry "might face two major changes in the regulatory environment rather than one."
A spokesman for the Labor Department declined to comment further.
'The likely outcome'
Fred Reish, a partner at law firm Drinker Biddle, says that the administration will soon "have the political leadership in place to impose its philosophy on the department."
"I believe that the likely outcome is that the DoL re-writes it in a way that reduces the burden on the financial services sector, but still maintains some of the investor protections. It will be a long, drawn-out process, perhaps lasting a year and a half or more," Reish says.
Meanwhile, the SEC is unlikely to create its own fiduciary rule. The agency has failed to produce such a regulation since it was authorized to do so under the 2010 Dodd-Frank Act. And Trump is likely to nominate new commissioners who are adverse to writing new regulations.
"At some point, the administration must decide that the barrage of adverse media, wherein average investors discover that Trump is siding against them and with brokers, is tough to explain away in 140 characters," Bartlett Naylor, financial policy advocate at consumer advocacy group Public Citizen.
Some observers are skeptical that a groundswell of support for the regulation will form similar to that seen recently at town halls where Republican congressmen have faced sharp questioning on their plans to replace Obamacare.
"I don't think you'll see anyone say, ‘my pension was saved by the fiduciary rule,’" Duane Thompson, senior policy analyst at fi360, who adds that legal challenges are possible if the administration rushes through the rule-making process.
One way or another
Of course, the political environment could shift again.
"Given that the courts have repeatedly upheld the DoL’s rule, it will be relatively easy to implement the DoL rule in a new administration," says Ron Rhoades, professor at Western Kentucky University. "It’s only a question of time, and the right political climate."
But even if the regulatory door is shut, a fiduciary standard might end up being imposed on the industry, as more clients insist on receiving fiduciary service from their advisers.
"That's where we come in, in terms of helping investors," says Knut Rostad, president of the Institute for the Fiduciary Standard, who emphasizes that investor education is critical in this process.
Indeed, public awareness of what a fiduciary is has risen in recent years.
"This entire debate has done a great deal to educate investors who are saving their money for retirement,” Maureen Thompson, vice president of public policy at CFP Board, says. “There are a lot of people who just assume that their financial adviser has to act in their best interest. Now that they do know, I think we are seeing marketplace shift."
Some advisers have been rethinking their strategy in light of this trend. Nearly half of all advisers, 47%, say that the RIA model will become more appealing post-fiduciary, according to a recent study by research firm Cerulli Associates.
Paul Pagnato, an RIA and former Merrill Lynch adviser, says he's recently met with four employee channel advisers considering switching to the RIA channel.
"All four of them have told me they have lost business because the prospective client said they would only work with a fiduciary," he says.
Rostad says advocates should not merely provide clients with questions to ask an adviser, but tell them to insist upon fiduciary-level service.
"Here's what you should demand. And if a broker or adviser isn't willing to do it, then you can get up and leave," he says.
In other words, advocates for a fiduciary standard think that even without the government's regulatory apparatus on their side, they could still triumph through the laws of supply and demand.
"The consumer has the ultimate vote and they vote with their pocket book," Pagnato says. "That will ultimately trump everything."