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What Will the Fiduciary Standard Look Like in Five Years?

What Will the Fiduciary Standard Look Like in Five Years?
September 11
00:04 2018

(The third part in a series of three installments)

Phyllis Borzi is the former Assistant Secretary for Employee Benefits Security of the United States Department of Labor. As the official in charge of the Employee Benefits Security Administration in the Obama administration, she helped draft the now vacated DOL Fiduciary Rule. When asked to consider where the industry and regulators will be on the fiduciary issue, you can understand her pessimism “Where I think we’ll be on a fiduciary standard in 5 years is sadly in a worse place than we are today,” she says. “I hope I am wrong.” For her complete answer, including the specific reasons why she feels we’ll be worse off, read “Why Phyllis Borzi is Now Pessimistic On the Plight of a Uniform Fiduciary Standard,”, September 12, 2018).

It’s complicated. It’ll only get more complicated in the future.

That being said, it helps to fill in the story with a few more details. “We live in an increasingly complex world,” says Fred Reish, Partner/Chair of the Financial Services ERISA Team at Drinker Biddle and Reath in Los Angeles, California. “While that applies to life generally, it is specifically true of financial services. As a result, people who work on financial services, such as broker-dealers and investment advisers, have the advantage of ‘information disparity.’ In other words, they have so much information about investments and financial services that investors need to rely heavily on their recommendations. As a result, those advisors necessarily hold a position of trust and confidence relative to investors, including fiduciaries of small retirement plans and participants in retirement plans. ‘Trust and confidence’ is, in a sense, the definition of ‘fiduciary.’ Because of that, my ‘fiduciary hope’ for five years from now is that advisors in the financial services world will be held to a standard that investors can justifiably place their trust and confidence in those advisors.”

This is the trouble with predictions. Too often the predictors, especially when they’re politicians, try to get by on platitudes and bromides. Reish recognizes this and warns us thusly. He says, “While ‘trust and confidence’ are noble words, they also have specific definitions. For example, the advice would need to be of high quality; the costs should be reasonable; and the compensation of the advisor should be reasonable; and any conflicts of interest should be properly managed or mitigated. By the way, my concern about conflicts is that many investors, particularly in the world of 401k rollovers, are relatively unsophisticated and they’re not in a position to evaluate conflicts of interest. As a result, the concept of disclosure as a salve is problematic. Instead, the financial services sector should be required to manage and mitigate those conflicts for the benefit of the investor. That’s my hope.”

The future, then, spans the gap between hope and reality. “I’d like to see a clear delineation between sales and advice and investors demand the fiduciary standard in the Institute’s Best Practices,” says Knut Rostad, President of the Institute for the Fiduciary Standard in McLean, Virginia. “But what I expect to see is greater confusion from SEC Regulation Best Interest – before turning a corner and greater acceptance of digital guidance complimenting real fiduciary advice and market forces slowly force sales brokers off the stage.”

Reish also sees a measured evolution towards the ideal. “Unfortunately, my experience is that change comes much more slowly than I hope it will,” he says. “As a result, I believe that the reality is that we will be only be part way towards that goal in five years. Nonetheless, the trend line is established. The expectations placed on providers of financial services are increasing and becoming more demanding, both in terms of the quality of those services and the management of conflicts of interest.”

In fact, thanks in part to the now-vacated DOL Fiduciary Rule, some small evolutionary steps have already been taken. “I think the trend to a higher standard for advice was moving ahead long before the DOL rule via marketplace demand,” says Duane Thompson, Senior Policy Analyst at Fi360 in Pittsburgh, Pennsylvania. “Investors are increasingly aware of the pitfalls associated with conflicted advice; survey after survey shows they want and expect their advisor to act in their best interest. Firms are increasingly recognizing the reputational value and branding opportunities associated with the fiduciary standard. We can see that in part by the steady growth in investment adviser representatives. NASAA recently estimated there are now 350,000 IARs affiliated with state and SEC advisory firms. I would guess within five years this number will draw even closer to the current 629,000 registered representatives overseen by FINRA and eventually exceed that total.”

It could be we already have the future now, it’s just not readily apparent. “We have confidence that the service models that exist to help Main Street investors flourish are already more beneficial than harmful; and that they will be even more improved in five years’ time,” says Korrine Kohm, Director of Retail Wealth Management Services, Compliance Solutions Strategies in the greater New York City area.

This give some a degree of confidence when it comes to what a fiduciary standard might look like in five years. “Five years from now I believe the fiduciary standard will be generally accepted and embedded in the construct of every financial services transaction,” says Mike Walters, CEO of USA Financial in Greater Grand Rapids, Michigan area. “I predict that many advisors, reps and agents not adhering to a proper fiduciary standard will have been pressured out of the business as institutions refuse to accept the extra liability for those not upholding such standards. Conducting business under a ‘fiduciary standard’ will become the generally accepted business model as opposed to today’s common suitability standards.”

Given the vagaries of politics, a fiduciary standard based on government regulations, however, can’t be stable. “The fate of the fiduciary standard depends, in large part, on the political future and next administration,” says Tad A. Devlin, a partner at Kaufman Dolowich & Voluck in San Francisco, California. “The Trump administration (ultimately) refused to back the DOL’s Fiduciary Rule due to its encumbrances on transacting business. The Fiduciary Rule clearly did not synthesize with the Trump administration’s deregulation goals. However, future administrations, with opposing political views, may revive the fiduciary rule in the interests of increased regulation and transparency.”

We’ve seen in the last two years how a change in leadership in Washington can rewrite all previous assumptions. Complicating (there’s that word again) matters are the “oil and water” interplay between the lead regulatory agencies. “The SEC and the DOL have different mission statements,” says Marcia S. Wagner of The Wagner Law Group in Boston, Massachusetts, “and the Court of Appeals decision limited the extent to which the DOL could define fiduciary, but to the extent possible, 5 years from now there should be consistent guidelines from the SEC and DOL that are realistically enforceable. With class action waivers permissible, individuals may have difficulty obtaining counsel to represent them in arbitrations. The DOL lacks the resources to do so, so reliance would need to be placed upon FINRA. In 5 years, if there were to be a change in administrations, my concern is that whatever action that is taken by the Trump administration will be expanded to some degree. I think this would be comparable to what we have seen with respect to environmental, social, and governance factors (“ESG” – the criteria that socially conscious investors utilize), with Republican and Democrat administrations, agreeing upon certain core principles, placing different emphasis upon those principles.  The point is not whether a narrower or more expansive emphasis is superior, but rather the difficulty it presents in advising as to compliance.”

As a result, predicting what the fiduciary standard looks like in five years may require one to have the ability to predict the outcomes of national elections. “The answer to that question is best answered by the trend in the political climate in this country,” says Robert Johnson, Professor of Finance, Heider College of Business, Creighton University, Omaha, Nebraska. “If there is a blue wave and the Democrats control the House and Senate – and perhaps even the presidency, I believe we would see a resurgence of the call for greater regulation of the advisory industry. On the other hand, a second Trump administration with a majority in at least one house in Congress would argue for the status quo.”

Those with a more jaded view on reliance of government regulations suggest the frailties of the system will produce an inevitable result. “In five years, all points of differentiation between advisors, brokers, money managers and service providers will disappear – no firm will be willing to take the regulatory risk of standing out,” says Don Trone, Co-founder & CEO 3ethos in Stonington, Connecticut. “Every firm will be offering the same products, at the same price, and with the same caveats and disclosures. Every investor will be receiving the same rate of return – and the Social Democrats will finally be happy.”

Still, if one has confidence the marketplace will drive the industry towards focusing on the best interests of clients, then a de facto fiduciary standard can emerge organically, without overt reliance on regulators. “At the end of the day, individual investors deserve a high standard of care from their financial advisors so they can be confident the investment advice they receive is in their best interest,” says Skip Schweiss, Managing Director at TD Ameritrade in the greater Denver area. “It’s never easy to predict what will happen in Washington from week to week, let alone five years, but we hope the advice provided to all individual investors will be subject to a best interest standard – something we think is likely to happen.”

Not only is the fiduciary world complicated, it appears to be in a state of flux. It may be that we’re beginning to see a movement away from a government-based solution and towards a market-based solution.

We’ll know in five years.

Last Week: The SEC’s “Best Interest” Proposal – A Step Forward or a Set Back? |
First Week: DOL Fiduciary Rule Post-Mortem: How Long Will the Taste Linger? |

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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