The Department of Labor’s final rule should be easier to implement and drive more dollars to low-cost investments, says Morningstar’s Scott Cooley.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The Department of Labor has released its final rules on the new fiduciary regulations. I'm here with Scott Cooley, Morningstar's director of policy research, for his first take.
Scott, thanks for joining me.
Scott Cooley: Thank you.
Glaser: We've heard a lot about the DoL and these fiduciary rules, regulations, and responsibilities. Can you demystify this? What are these new regulations?
Cooley: In short, these regulations are intended to ensure that if someone gives you advice on a retirement account, he or she is acting in your best interest. That person could be a broker, a registered investment advisor, or a plan provider on the 401(k) side.
Glaser: What's the bar for "working in your best interest"? How is that determined?
Cooley: One way an advisor can meet that standard is by charging a fee, a flat percentage of assets that will not vary depending on what product is being sold.
Another way to do that is to sell products that might have a commission, but to enter into a contract with the individual saying that you will act in his or her best interest.
Then the enforcement mechanism is, if you are an advisor or a broker-dealer that is consistently not acting in people's best interest, there is a high likelihood of a class-action lawsuit being filed.
Glaser: These rules have gone through a couple of different iterations. Now we are at the final one. What's changed? What are the major differences?
Cooley: The first proposal from the DoL that came out last year actually would have been very difficult to implement. It would have raised costs for the industry, and those costs would have been passed along to investors. So, in some respects, it was kind of impractical. In this version of the rule, the DoL has really listened to feedback and attempted to come up with a pro-investor way of implementing the rule.
Glaser: What are some of those changes that are more pro-investor?
Cooley: One that I like a lot is that there will be a higher bar for a broker to switch a client from being in a commission account to being in a fee-based account. You can imagine a situation where a client just paid a big commission earlier this year, and then wouldn't really be on the hook for high payments to the broker in the future, but then they would be switched over to an account where they are probably paying 1% of assets.
So the Department of Labor is going to make it so that brokers who move people over into those types of accounts actually have to act in the best interest of the client.
Glaser: From an investor's perspective, do you think these rules are going to make a big difference? Is there going to be a lot of positive impact from this? Or is it too early to say?
Cooley: If you are a self-directed investor, this rule probably won't have a lot of impact on you. This will really affect more the people who work with financial advisors, or who rely on their plan providers for a lot of advice.
I do think one impact of the rule will be that more money will stay in 401(k)s. It will be harder for an advisor to justify rolling it over into an IRA. I think for everyone who is in the 401(k), that's a good thing because as those assets go up, the expenses usually go down.
Glaser: What about the industry? Do you expect that there are going to be any large changes? I know there were objections before this final rule came out. Would you expect any big changes on that side?
Cooley: We do believe that low-cost providers are going to be net winners on the fund management side. If you think about Vanguard and ETF providers like BlackRock, they'll probably be net winners.
We do think this makes it harder to write commission business. There are lots of broker-dealers who are going to continue to write that sort of business. In fact, we have been in discussions with many of them about ways they can comply with the rules. But on the margins, it will probably continue that migration away from load funds to lower-cost products.
Glaser: This Department of Labor rule really deals with retirement accounts. What about non-retirement accounts? Will they not be regulated under these new rules?
Cooley: They will not be regulated under these rules. The SEC does have the authority given to it by Congress to write a uniform fiduciary rule that would affect retirement and non-retirement accounts. But so far, it has been unable to achieve a consensus within the commission about how to proceed. In fact, the chair of the SEC has said that is not likely to happen during her tenure.
Glaser: Overall do you see this rule as a game-changer for investors and for the investment community? Or is it more of an evolution of what's already been happening?
Cooley: I think it hastens some of the trends that we we've already seen toward lower-cost investment products, for example. I think the DoL listened to feedback. I need to do more analysis of the proposal, which is quite long, but at first glance, it actually did a very good job of listening to that feedback and trying to rewrite the rule in such a way as to make it even more pro-investor in some respects.
Glaser: Scott, I appreciate your early take on these new rules.
Cooley: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.
