Proposed regulations from the U.S. Department of Labor (DOL) are aimed at reducing conflicts of interest between investment services providers and retirement plan participants without adversely impacting advisory business models, but many industry advocacy organizations have contested what the true impact of an expanded fiduciary definition would be.
Add to the list Fitch Ratings, which just published an analysis on the Fitch Wire credit market commentary page. The analysis contends in no uncertain terms that, as proposed, the new advice standards will dramatically impact the way almost all players in the financial services space do business with retirement plans.
First and foremost, the new proposals could curb the willingness of registered investment advisers (RIAs) to promote complex and higher fee products, the analysis suggests. Further, asset managers and insurance companies would take on far more responsibility for examining distribution policies and commission structures paid to independent and affiliated distributors that sell many of the investment products reaching retirement accounts, Fitch says.
“The proposed rules raise the risk of regulatory enforcement and/or trial bar litigation,” the analysis explains, “and will likely force RIAs to do more to prove that a client’s product choices indeed meet the individual’s best interests.”
According to Fitch Ratings, final implementation of the new fiduciary rule “is not envisioned until third-quarter 2016 at the earliest,” giving all affected parties meaningful time to prepare for and respond to the changes (see “Business Leaders Warn of Fiduciary Fallout”). A comment period on the proposals closes on July 21, to be followed by an extended public hearing on the subject.
Fitch anticipates service providers to argue that the rule’s limitations on commission structures “could have a disproportionate impact on the sale or fee structures of investment and retirement products sold in the middle market, which generally tends to have more fee sensitive customers.”
Effectively, Fitch Ratings says, the rules may encourage some brokers to adopt higher-fee for advice models for their advisers as a means of compensating them for the compression or elimination of their commissions.
“Annuity products, arguably viewed by some investors as costly relative to lower priced products, could see fees pressured and/or commissions reduced under greater scrutiny,” the analysis continues. “Adding to the challenge is the complexity of annuities, with guarantees that are difficult to value. Obtaining affirmations from clients that all features of any complex product are understood could become more common, but also burden the sales process and hurt volumes.”
Fitch Ratings also anticipates impacts on insurance providers. According to the analysis, “life insurance companies and asset managers would be contractually bound to enhance conflict risk management, publicly disclose fee practices and provide enhanced disclosures of compliance to regulators.”
The analysis concludes by noting the “political sensitivity of the issue,” which could impact the way this conversation plays out over the next year. For example, in June 2015, the House of Representatives' 2016 appropriation bill for the DOL was put forward with a provision that would block the agency from spending any of the annual funds on finalizing, implementing, administering or enforcing the proposed rules. Such a legislative maneuver has little chance of succeeding under a Democratic President fully backing the proposed fiduciary rule, but with elections in 2016, this could change.