Broker-dealers have spoken candidly about the
industry-changing fiduciary rule. A majority think there is
still time to roll it back and the SEC is the frontrunner to
The US Department of Labor's (DoL) fiduciary standard
rule has been befuddling the financial services industry for
the past seven years. In its simplest form, it increases
accountability for the brokers, planners and insurance agents
that handle US retirement accounts. It introduces measures to
ensure they act in the best interest of their clients rather
than for their own financial gain.
And exactly what steps can be taken to best respond to the
rule are also polarising, even though much of the market agrees
with its basic principles. It is not solely the rule itself
that is under fire, but the way that it has been implemented,
and to an extent even the implementing agent itself.
In the words of the DoL, the rule states that:
'Financial Institutions and Advisers must adhere to
basic standards of impartial conduct. In particular, under this
standards-based approach, the Adviser and Financial Institution
must give prudent advice that is in the customer's best
interest, avoid misleading statements, and receive no more than
Recent suggestions by the Securities and Exchange Commission
(SEC) that it is looking into a best interest standard that
would be applied in a blanket fashion to the whole industry
have gained momentum this year, and many have questioned the
DoL's ability to enforce the rule once – or if
– it does finally come fully into force.
Originally intended to be phased in on April 10 this year,
the rule was preemptively delayed by 60 days, and quietly
rolled out on June 9. Following much deliberation however, full
execution of the rule was delayed for another 18 months
– until July 1 2019 – in August of this year.
This followed a court case at the US District Court for the
District of Minnesota where the DoL had filed a request for the
delay. Only the bravest would bet against it being pushed back
yet further when that date comes.
Lauded as a much-needed update to Employee Retirement Income
Security Act of 1974 (Erisa), the legislation requires that any
financial body that provides advice or works with retirement
plans is automatically deemed a fiduciary – and
therefore must strictly adhere to its imposed standards of
impartial conduct. This redefinition will have an effect on
much of the financial services industry, but will impact
broker-dealers most of all, whose costs are likely to
With this in mind IFLR has surveyed the broker-dealer market
on the fiduciary standard rule and its many facets. Perhaps the
most striking statistic uncovered in the research process is
that nearly as many as two in three respondents believe,
despite the advanced stages, that it would be practical to roll
back the fiduciary standard required by the DoL rule.
What is not clear is exactly how this could be managed, and
indeed if it even could or should at all. There would be
abundant implications if it were to be rolled back, from a
regulatory, legal and market perspective. While some see a
future without the rule, others suggest the current form should
be changed to fit, while others think it is too late to make
any widespread alterations.
"There have been so many firms that have taken on so much
expense, and have gone so far to meet the requirements of the
rule, that it is not really fair to them to roll it back," says
one broker at a US firm. "No matter what they do it can't be
fair to everybody at this point."
"They have to try to find a solution that is going to serve
the marketplace best without hurting the most firms out there
either financially, or resource wise," he adds.
Easier said than done. While other results in the survey
tend to point to firms not taking actions to remediate the
effects of the rule, it is widely reported that many firms have
already taken sizeable steps to comply. The line of best fit
remains uncertain, and this latest delay shows that no outcome
|Q1. Under the DoL fiduciary
rule, broker-dealers making investment recommendations
are now deemed fiduciaries, although the future of the
rule and the related best interest contract (BIC) and
principal transactions Exemptions remains unclear. What
do you believe should be the future of the fiduciary
|Q2. Do you think it is
practicable to roll back the fiduciary standard required
by the DoL rule?
|Q3. Have you made any changes to
your handling of smaller, retail retirement
An uncertain future
Under the terms of the fiduciary rule, broker-dealers that
make investment recommendations are now deemed fiduciaries.
Part of the initial proposal for the rule saw the introduction
of the principal transactions exemption (PTE) which requires
the completion of a best interest contract (BIC). The BIC is an
extensive agreement between a retirement investor and advisers
or financial institutions, which, if certain stipulations are
met, means that brokers are allowed to earn the conflicted
compensation that is banned under the new terms. The contract
will act as the guarantee that the broker will act in the best
interest of the client.
The future of the rule, the BIC and PTE remains unclear,
(see question 1), and nearly 40% of respondents believe that it
should be revoked, at least in its current form. This leaves
around 60% who do not wish to see a fiduciary standard removed,
but with the qualification that it needs to be improved.
Donna DiMaria, chief executive officer of broker-dealer
Tessera Capital Partners, says that the intent is there, but
that the rule does not meet its original goal, and is bad for
smaller investors. "We have seen a lot of institutions telling
small clients that they have to take their business elsewhere,
or else they can go into an unmanaged portfolio," she says.
"That is very worrisome to me, especially being a small
business owner myself."
Another broker suggests that while convenient, the
exemptions themselves are too complicated for most of the
market to comply with. "A lot of firms are going to have to
follow the BIC exemption," he says. "You would think that an
exemption would be easier than following the rule, but most
firms can't even figure out how to implement it."
The rule, says DiMaria, was not properly thought through in
terms of how it would be implemented on a practical basis.
"I understand that the idea is to have disclosures and to
give investors an idea of any conflicts," she explains. "[But]
the rule's suggestion that institutions or their fiduciaries
sign off on a waiver saying that they agree with all of these
specific requirements is really an impractical solution."
Nearly 40% of respondents believe that the rule should be
retained as a principles-based requirement only, with the
securities industry given a level of freedom to develop
practices that are consistent with a fiduciary standard.
Twenty-four percent think that it should be retained with the
BIC and PTE in place.
|Q4. During the current
transition period, compliance with the BIC and principal
transactions exemptions only requires adherence to the
impartial conduct standards. What is the most
challenging aspect of complying with the impartial
|Q5. Have you made any changes in
the product mix that you will make available to retail
|Q6. Will you sell proprietary
products to retail retirement accounts?
|Q7. Have you revised your
internal compensation arrangements to accommodate the
Pass the buck
Revoking the rule might be a step too far, even for
President Donald Trump who targeted it early into his term. His
February 3 executive order instructed the DoL to review and
attempt to rescind the fiduciary rule, the extent to which the
subsequent delays to the Obama-era regulation come as a result
of this is uncertain.
While revoking the rule could be an unlikely resolution, a
striking 62% of respondents think that it would be practical to
roll the rule back to an extent (see question 2). Based on
conversations with the market, the consensus on how best to
roll back the rule at this stage would be to have the SEC draft
a best interest standard, (see question 10) versus calling it a
fiduciary standard that applies to the whole industry, and not
just qualified accounts.
While a drastic move, an SEC best interest standard would
apply to retirement accounts and non-retirement accounts alike,
and would solve many of the problems that have arisen in terms
of defining exactly what a fiduciary is. Newly-confirmed SEC
chairman Jay Clayton announced his intention to tackle the
problem of the fiduciary rule, to help bring some much-needed
clarity to the retirement sector.
Jeremy Reiland, an investment advisor at the Chamberlin
Group, fully backs the decision by Clayton and the SEC. This is
because the DoL only has authority over qualified accounts,
which is only half of total market volume. The other half is
non-qualified accounts which are technically exposed to no best
interest standards. It really isn't all-encompassing, but it
should be, he says.
"In my opinion, the DoL is the wrong authority to be
implementing the rule at all. It really should be a best
interest standard, you don't need to be a fiduciary to know
what is not in the client's best interest," he says.
"I think it should be the SEC, Finra and the DoL working
together to come up with an overriding best interest standard
that encompasses the entire financial industry," he says.
Fifty-six percent of survey respondents agree with him.
DiMaria agrees and is uncertain as to why the SEC did not
handle the rule in the first place, introducing a consistent
standard across all types of investments. "The intent was fine,
but the fact that it only applied to a segment of the
marketplace caused an uneven playing field, and businesses to
exit-like is happening with a lot of small investors in the RIA
[registered investment advisor] market," she says.
Keith Palzer, a wealth manager and strategy and operations
business consultant at Navigant, who spoke on behalf of his
clients, iterates that another reason it would be practical to
do so is because a lot of firms when they looked at the
fiduciary rule, decided to adopt fiduciary responsibility
"Rolling back the rule wouldn't cause undue hardship because
a number of firms have already decided that fee-only is the way
to go," he says. "It makes sense for them for business reasons,
and I think that that those firms will continue to approach it
that way regardless of any roll back."
|Q8. The principal transactions
exemption is currently available for only limited
categories of investment instruments. If those
limitations were to be relaxed, what do you view as the
most important to add to the list of instruments that may
be sold under the principal transactions exemption?
|Q9. Are you planning any changes
in the arrangements through which you distribute new
issues of your affiliates?
|Q10. The SEC has recently
indicated it is re-engaging on the question of a
fiduciary standard for all broker-dealers. What do you
think the SEC should do?
In too deep
While the majority of respondents believe it would not be
impractical to roll back the fiduciary standard required by the
DoL rule, it must be accounted for that 38% disagree that it
would, and a further third think that it is too late for the
SEC to make a meaningful contribution.
These respondents suggested that not only have firms already
gone too far in their means of implementing the rule to reverse
it, and that their clients already expect them to meet the
principle as standard in all of their actions.
"The process has taken over four years to develop and to
implement in stages," says the first broker. "We have already
implemented the very first stage of it, and there doesn't seem
really to be a rational explanation as to why it should be
rolled back, besides from the person sitting in the White
One of the reasons that it may be too late to reverse the
course of the rule is because it is the larger, more powerful
firms that have already made inroads. "The problem with the
early adopters is that many are big firms, and they have made a
lot of changes to systems and processes. Any kind of changes
now are going to cost them," says DiMaria.
"If you think about the uneven playing field for different
types of investor classes, the securities industry and these
government agencies' goal out there is to really protect
these investor classes."
At this stage it may be wise to accept that some form of
fiduciary standard is going to be around, inevitability, and
that to even suggest rolling it back entirely is out of
|The BIC exemption
- recognise the fiduciary status of the retirement
investor in writing;
- meet certain impartial conduct standards;
- give advice that is in the 'best
interest’ of the retirement
- charge no more than reasonable compensation;
- make no misleading statements about
investment transactions. compensation, and
conflicts of interest.
- confirm that the financial institution and its
advisers will work to comply with any process
designed to prevent abuse of such impartial conduct
- provide a disclosure to confirm the non-use of
incentives to act in a way not in the
customer’s best interests; and
- disclose all fees and compensation, as well as
conflicts of interest, and ensure that investor is
not paying the manager directly.
Time and tide
The poll also shows that a number of firms appear reluctant
to make wholescale changes to adapt to the fiduciary standard
rule. Some suggest that they are waiting to see its final form
(see questions 3, 5 and 7).
Slightly more than 80% of respondents have not made changes
to the handling of smaller, retail retirement accounts, while
64% have not made any changes in the product mix they will make
available to retail retirement accounts or revised their
internal compensation arrangements to accommodate the fiduciary
It is more likely that smaller brokers are yet to make
changes than their larger counterparts, who are closer to the
front line when the time comes for enforcement by the DoL.
Uncertainty regarding the rule's future, if it were
indefinitely delayed or rolled back, could also be factor
"We are dealing a lot with smaller investment advisers and a
lot with private placements, and both markets have not been as
pro-active as the bigger firms," says the second broker.
Sixty-two percent do not wish to see a fiduciary
standard removed, with the qualification that it needs
to be improved
"First of all investment advisers tend to think that this
doesn't apply to them at all because they are already
fiduciaries, so I think you've got a bit of a delay there. If
you are dealing with private placements, again I don't think
they really understand the implications of all of this."
The fact that some firms would already class themselves as
fiduciaries, and are in no rush to update fiduciary standard to
clients, could also be harmful to the constituencies, because
the first inclinations tends to be to consider not selling
retirement plans at all. In this outcome, retirement plans
would lose the opportunity to be in certain funds.
Referring specifically to the way that firms handle small
retail retirement accounts (see question 5), Palzer also
suggested that many firms are already operating to a fee only
"Each of them is set up to focus on bringing in clients at
the family level, and the small accounts that come in with that
are usually just family members who don't have a lot of wealth
yet," he says. "For this reason it would not be overly
burdensome to impose the same fee-only no-backdoor compensation
Compensation has also been a talking point (see question 7).
Like most of the respondents, DiMaria has made no changes
regarding internal compensation arrangements, largely because
most of her firm's arrangements are based on the compensation
that the managers they work for are earning.
"We haven't really changed anything yet, because we haven't
seen any managers change anything yet, and we get a percentage
of their fee, so it pretty much stays the same," she says. "It
is going to depend on what that final percentage is, and then
we might have to change our percentage accordingly."
Setting the standard
In line with this, another interesting data point (see
question 4) centered on the most challenging aspect of
complying with the impartial conduct standards – the
obligations that the rule determines investment advice
fiduciaries must adhere to in order to meet the exemptions.
Of the four options, half of the respondents suggested that
determining what constitutes reasonable compensation was the
"The requirements of the rule, even though easy to
articulate in words, mean that it is going to be very difficult
to have a uniform standard of approach over time, because of
how many different products and fee structures there are," says
The abundant choice of products and funds, data providers
and reporting services that each have their own specific
taxonomies, means that you have to be very comfortable that you
are being comprehensive in your analysis. "In today's world it
is already so difficult to get a good sense of what similar
products are," he says.
The struggle to define what is and what isn't classed as a
proprietary product has also been widely discussed, and there
have been suggestions that it should be reclassified as a
principle-based requirement only.
As a true fiduciary, everything that the individual, adviser
and firm should always be focused on seeing what is in the
client's best interest rather than what is in the firm's
interest for profit, says Reiland, who suggested that training
was proving to be challenging.
"The firm should put the client's best interest first. It's
difficult for a client to know the difference between
broker-dealer firms and investment advisory firms, whose
fiduciary responsibility per se, is completely different," he
notes. "I feel the number one propriety is to have a best
interest standard that focuses on the client's needs regardless
if the advice is coming from an advisor who is licensed under a
broker-dealer or registered investment advisory firm."
A problem of enforcement
Another problem that has been mooted is whether or not the
DoL would even have the ability to enforce the rule if it were
to avoid a class action provision. Compared to the number of
employees at the SEC, an agency itself under duress due to
budgeting concerns, the DoL has a significantly fewer staff in
its enforcement division.
Whether or not the DoL would be up to the task is arbitrary,
as all indicators point to a future where it no longer carries
the torch alone.
The market consensus is for a unified rule of best interest,
with all the regulators, including the SEC, DoL, the US
Commodity Futures Trading Commission and others, working
together for an outcome that suits the whole industry.
What aspects a uniform best standard interest would keep of
the fiduciary rule as seen in its current state, if any, is
uncertain, but as it stands the rule is overly technical.
During the Obama administration, those who devised the rule
were trying to build on fiduciary principles outlined in Erisa,
but it was overcomplicated.
"Rather than create hyper-technical exemptions from the
prohibition, just for IRAs and 401k and the like," says Palzer.
"It would make more sense from a market efficiency perspective
and a uniformity of treatment perspective to have the federal
agencies enunciate a few principles of conduct with respect to
revenue shares and advice and then have the firms conform to
Whether the rule is repealed, or abandoned, or fiduciary
based principles that have been applying to separately managed
retirement accounts for years are applied across the whole
industry, or the current form survives its most recent delay
and is fully enacted, is not clear. There are many routes.
What is clear at this stage, is that it is going to be a
rocky year and a half.
IFLR’s Fiduciary Rule Poll was compiled
with the help of the poll’s sponsor firm,
Morrison & Foerster.
With input and insight from partner Anna Pinedo and
senior of counsel Hillel Cohn, poll questions were
devised and targeted to best address the issues faced
by broker-dealers and gain the market’s
views on the US Department of Labor’s
Using recommended contacts from the editorial team and
Morrison & Foerster, the poll was distributed to
broker dealer firms across the continental United
Responses were obtained from a representative cross
section of those firms. The poll provides the financial
services industry with an anonymous forum to learn how
broker-dealers are viewing, and adapting to the
To ease the concerns of the participants, anonymity was
offered to all respondents that requested it. To that
end IFLR will not name some of the firms that agreed to
Responses and comments were obtained via on and off the
record telephone calls during September 2017. While the
more structured responses to the poll questions
provided interesting statistics, a real sense of
broker-dealer’s concerns emerged from
their explanatory comments. The topics raised in those
interviews formed the basis of the conclusions drawn
out of the main body of IFLR’s