Sat, 19 Sep 2015
The large group of investors who have already migrated to fee-based from commission-based advisors should see little impact, says Morningstar's Scott Cooley.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Scott Cooley--he is our director of policy research. We're going to look at the proposed fiduciary rule from the Department of Labor and see what impact it could have for investors and also for the fund industry.
Scott, thanks for joining me today.
Scott Cooley: Thank you.
Glaser: Let's talk about this new fiduciary rule the Department of Labor is talking about right now. What are they considering? Where are we in this process?
Cooley: The Department of Labor proposed a rule that's really intended to clamp down on conflicted advice. In a lot of cases, the Department of Labor fears that people are being induced by brokers to invest in higher-fee commission-paying products. So, that's really at the root of this rule, although it also has implications for retirement-plan providers and others in the industry.
Glaser: What would the big impacts be? Let's start with investors. What kinds of changes could they expect if the rules were to be implemented as written right now?
Cooley: I think a lot of financial advisors who currently rely on commissions might move to more of a fee-based model. So, I think that's one thing that, if you're a small investor, I do think it might make it somewhat more difficult for you to access any financial advice. Now, the counterargument is, "What is the quality of that advice?" If you're a small client and you're investing in a commission-based product, you might not be getting great advice right now to begin with--just to be completely candid. So, I think that's probably one impact. A lot of people who are working with a financial advisor--and most fund investors do work with an advisor--will probably find themselves in an account where they are paying a percentage of assets instead of commissions.
Glaser: And then for the advisors themselves, for brokers, would you expect any wholesale industry changes or just a shift in how the payments happen?
Cooley: I think there has been a migration over the last couple of decades away from commission products anyway, and I think this will hasten it. So, there will still be some people in the commission fund-sale business, but I think it'll just hasten that trend toward fee-based accounts.
Glaser: And although it's hard to look at the industry in a singular way, it does have some objections to this rule. What are some of the things that they're concerned about.
Cooley: I think there are some people in the industry who are very against the rule, and the letters that they wrote to the Department of Labor reflect that. A variety of concerns have been raised. One is that a lot of people would like to see the SEC draft the fiduciary rules. Under the Dodd-Frank Act, the SEC has the authority to issue a fiduciary rule that would apply to all client assets. The Department of Labor only has authority over retirement assets. So, some people are saying this makes for a very complicated regulatory environment because a client could see an advisor and be advised in one way for retirement assets and still be able to be in a commission-based account if they want to for nonretirement assets. So, I think a lot of the large fund managers and retirement-plan providers have raised some interesting and compelling objections to how the rule is implemented. I think many of them have accepted that the Department of Labor is going to draft such a rule, and they are trying to come up with suggestions to make it work a little bit.
One example is, right now, the way the rule is written, it appears that if someone called their retirement-plan provider and said they want to take a distribution of their assets, for the person in the call center to give them advice or guidance about their specific situation--to say, "Hey, you know you're talking about withdrawing $30,000; did you know your plan permits partial withdrawals, so you can only take out $10,000 if that's all you need"--that's guidance that that rep would not be able to provide without getting the individual to sign a contract beforehand. So, you can imagine somebody calling the call center saying, "I want to take out $30,000," and rep saying, "I'd like to talk about some options with you; I'm going to send over a contract--sign it, and then I'll talk to you." So, there are a few things with the rule that I think the Department of Labor has acknowledged need to be clarified or potentially changed to make it workable in the real world.
Glaser: How does this play out from here? How long will this comment period last?
Cooley: I think the Department of Labor will open up comments for a couple more weeks, and their plan is to issue a final rule in the second quarter of next year. There will be a few efforts, I think, to derail the rule. One will be potential Congressional actions. I think everyone realizes if Congress passed a bill forbidding the Department of Labor from enacting this rule that President Obama would veto it, but there may be some efforts to attach a rider to an appropriations bill, for example, denying the Department of Labor the funds to implement the rule. So, we'll have to see how that plays out. It's hard to handicap. I think there is also a high likelihood of a lawsuit.
The Investment Company Institute wrote a pretty scathing critique of the economic analysis that the Department of Labor did before issuing this rule. It's actually required under the law that that kind of economic analysis be done. There could be an effort to contest that in court. I'm not suggesting that the ICI would necessarily file that suit, but it raised some very, very substantial objections to the analysis, I think. Beyond that, to the extent that those who are very fiercely opposed to this rule can just tie it up for a while, it might actually go away. So, as opposed to a Congressional action, this is just a rulemaking of the Department of Labor, and that means the next president could instruct the Department of Labor to take a different path--to repeal the rule altogether or to tweak it significantly. And the feeling is if the next president is a Republican, this rule would be changed pretty significantly or rescinded.
Glaser: So, for the average individual investor who is watching this play out, is this something that they need to be concerned about or have on their radar screens, or is it probably not going to make a huge difference for them from where we are today?
Cooley: I think, for most investors, it will not be a big deal. Most people are already in fee-based accounts. If you went back 15 years ago, about 40% of fund assets were in commission funds. Now that's down to about 20%. So, there's already been this migration away from commission accounts. I do think the Department of Labor is committed to taking onboard some of this feedback from the industry and figuring out ways to make the regulation easier to implement and make it work in the real world. So, I think if I were an investor, I'd just keep an eye on things as they play out but not expect a huge impact.
Glaser: Scott, I certainly appreciate your analysis on this.
Cooley: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.