Fiduciary Rule RFI Comments Suggest Split in Industry Outlook

Today is the second and final deadline for submitting responses to the DOL’s broad RFI regarding the fiduciary rule expansion under ERISA—but late comments will also be accepted for a short time. 

By John Manganaro | August 07, 2017
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The second of the Department of Labor’s aggressive deadlines for submitting responses to a crucial request for information (RFI) process regarding a possible additional delay or full-scale repeal of the fiduciary rule expansion has arrived today, August 7, 2017.

The RFI process included an earlier deadline for responses to the restricted question of whether or not the fiduciary rule implementation should be slowed or indefinitely delayed. This second deadline pertains to the full RFI issued only a short time ago by the DOL, in which the department asks a number of wide-ranging questions about ways the Obama-era rule expansion might enhance or impede the advice retirement investors receive, including whether firms are changing their business models in response to the rule; whether the rule will cause firms to de-emphasize small individual retirement account (IRA) investors; and to what extent firms are making changes to their investment lineups and pricing in response to the rule. The department also asked about new data or insights about class action lawsuits as an enforcement mechanism.

There were thousands of new comments submitted on these points by a variety of parties, from concerned individual investors to the largest retirement recordkeeping and asset management industry providers. It will take some time to do any kind of scientific analysis of the dense, voluminous commentary. However, even a brief survey makes clear that, for the most part, many providers seem to remain steadfast in opposition to the fiduciary rule. They worry that all of the questions/trends mentioned by DOL, as the full fiduciary rule implementation takes place through 2018 and beyond, will play out poorly for advisers and investors alike.

But the comments also make clear not all providers are fretting the accelerating fiduciary expansion. Morningstar’s commentary, for example, sums up the general arguments made in support of allowing the rulemaking to proceed, potentially with some modifications: “In general, we believe the early evidence suggests the rule will be positive for ordinary retirement investors. It appears that it will accelerate existing and largely positive trends for investors in the way that wealth management firms deliver advice by 1) encouraging firms to move from a commission-based model to offering advice for an explicit fee; 2) putting additional focus on investment product expenses which are borne by the investor; and 3) encouraging firms to use financial technology to create innovative advice solutions.”

Morningstar provides evidence that asset managers appear to be responding to the rule by “offering new share classes that should reduce conflicted advice.”

“In the long-run, we expect further innovation in share classes to provide more flexibility to advisers and better outcomes for investors,” Morningstar opines. “We also expect distributors to rationalize their investment lineups in response to the rule.”

Morningstar’s commentary goes on to argue that the fiduciary rule will not necessarily wholly do away with commission-based retirement account servicing, given the new best-interest exemptions also baked into the rulemaking: “In certain cases commission-based accounts may continue to better serve investors—particularly those retirement investors who wish to buy and hold investments for a long period of time—because these arrangements can be less expensive … For example, if an investor paid a 2.5% commission to purchase a fund and a trailer 12b-1 fee of 0.25%, he would be better off after holding the investment for around three years (depending on returns) than if he paid a typical 1% asset management fee annually, assuming all else is equal with regard to the investment, including the quality of advice.” Ultimately, Morningstar argues, it is the quality of advice that is more important than the form by which it is paid, “but making the cost of advice explicit is most likely to help retirement savers assess whether they get their money’s worth for the fees they pay.”

NEXT: Opposition remains as significant as ever