Trends and Implications of Upcoming Regulations

Speaking on a Webcast sponsored by Principal Financial Group, James Delaplane, a partner at Davis & Harman LLP, examined the three major regulations coming out of Washington this year, and identified recurring trends they share and what implications they will have for financial professionals.  

The three regulations discussed were:

  • new disclosure requirements for service providers to give to clients,
  • requirements for plan sponsors/fiduciaries to disclose more information to participants, and
  • the proposed changes to the definition of a fiduciary adviser (Delaplane stressed how this last one is in the earliest stages of consideration, while the first two are nearly finalized).

Delaplane sees several trends repeated throughout these regulations. Policy-makers want to make more “discriminating” customers out of plan sponsors and participants, he said. These disclosures are intended to make plan sponsors and participants better-educated consumers, and give them more leverage in decision-making.   

He also said that the Department of Labor (DoL) is giving the impression with these regulations that it wants to impose higher standards of care on financial professionals. This would involve heightening scrutiny of fees–by plan sponsors, participants, and regulators. These new regulations would bring a spotlight on levels and sources of compensation from third parties, Delaplane said.

A third trend from these regulations shows a growing concern over the retirement readiness of Americans. Policymakers will continue to watch the industry; scrutiny is not going to go away, believes Delaplane. He noted that the Obama administration has repeatedly demonstrated that it is paying attention to the treatment of plan participants by the industry.

Delaplane discussed five overarching implications these regulations may have for financial professionals.For one thing, advisers need to clarify for themselves whether their business model makes them a fiduciary. Once this is clear to the adviser, they need to make sure their clients are aware of their fiduciary (or non-fiduciary) status. Additionally, these regulations will lend themselves to formalizing service agreements, if this has been unclear in the past.

Also, regulatory outcomes may impact an adviser’s compensation. Sponsors or participants may react differently if an adviser’s fees are generated from the plan, from participants’ balances, from the plan sponsor, or any number of different ways. Because of this, the regulatory outcomes may lead some advisers to reconsider their business model.  And lastly, those advisers with the clearest and strongest value propositions will come out on top. Delaplane suggests tackling this as soon as possible, so it doesn’t appear to clients as though it’s only because the government said to do something a certain way.