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The Fiduciary Duty Football

August 28, 2017 Blog

The new fiduciary duty rule, one of the most important developments in investor protection in decades, is bouncing awkwardly around Washington like a football after its kickoff.

Where will it land? And with the Republicans in control of the nation’s capital, will anyone pick it up and race across the goal line for investors?

Created by the Democrats and the Obama administration after the disastrous financial crisis of 2008, the first phase of the rule took effect on June 9. A second, final period was to have taken effect in January, but Republicans in the Labor Department this month proposed delaying it by 18 months, leading many to fear that a watered-downed version of the rule would ultimately emerge.

As regular readers of this blog know, the rule requires financial advisors to act in the best interests of retirement savers. Before, adviser brokers at Morgan Stanley or Merrill Lynch had a much lower standard of care to clients and sold products in IRAs that were merely “suitable” but could make brokers more money from high commissions.

For the past seven years, Wall Street firms have attacked the rule for supposedly limiting consumer choice and raising firms’ compliance costs and potential legal liability.

The rule’s proponents are anxious that the delay will give Wall Street’s opponents of the rule time to dilute it with numerous exemptions to its coverage. Firms are seeking to exclude from protection certain lucrative transactions such as IRA rollovers and high fee insurance products including annuities, beloved by unscrupulous brokers for their high fees and commissions.

The fiduciary rule “is likely here to stay, but its impact could be significantly reduced over the next few years if exemptions from the rule are significantly expanded,” said Jamie Hopkins, a professor at the American College of Financial Services, told the Wall Street Journal recently.

“The rule as written by the Obama administration included a provision that would allow investors to bring class-action suits against advisers they say violated their fiduciary duty,” according to the WSJ. “While such suits don’t typically yield big paydays for individual investors, the potential cost to advisers and firms was meant to prevent violation of the rule.”

And it looks like Wall Street is crying crocodile tears when it moans about the rule’s damage to their business. While the brokerage industry fiercely fought the new retirement advice rule, many firms have found compliance with the rule to be profitable, according to a WSJ report that followed a few days after the news that the Republican administration sought to delay when it would go into effect.

Adherence to the rule is “proving a positive,” according to the WSJ. “Firms are pushing customers toward accounts that charge an annual fee on their assets, rather than commissions which can violate the rule, and such fee-based accounts have long been more lucrative for the industry. In earnings calls, executives are citing the Department of Labor rule, known varyingly as the DOL or fiduciary rule, as a boon.”

“Bank of America Corp.’s Merrill Lynch has embraced the rule, even running an ad campaign around the idea of fiduciary advice,” the WSJ reported. “The firm, which for years has promoted fee-based accounts, last year gave its more than 14,000 brokers more flexibility to cut fees for clients moved onto its advisory platform without a reduction in their own pay. A big investment in adviser technology several years ago has aided the process by making it easier for advisers to convert brokerage accounts to fee-generating advisory account.”

Indeed, business is good at America’s brokerage houses, less than a decade after federal bailouts saved them from collapse.

“At Bank of America’s global wealth unit, which includes Merrill Lynch, fee-based assets rose 19% from a year earlier to $991 billion in the second quarter, or to 38% of client assets,” according to the WSJ. “More than two-thirds of Merrill’s advisers now have at least half of their client assets under a fee-based relationship. The firm is also moving some clients to its online, commission-based “Merrill Edge” platform.”

Where the fiduciary duty rule eventually lands in 18 months is anyone’s guess. Sadly, the concept of putting customers’ interest shouldn’t be a bouncing ball but a winning play for American savers and retirees. Tell that to Washington.

Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.