Lauri Giesen
Lauri Giesen Mar 15, 2018

Fiduciary limbo: The struggle to get in step with the government’s new wealth management rule

Attorney Michael Dailey has tough decisions to make when he advises his bank clients how to adhere to the Department of Labor’s (DOL) regulations on fiduciary responsibilities. If he tells them to continue with compliance changes they’ve made thus far, he risks having them complete lots of work that they potentially won’t need. But if he tells them to dismantle what they’ve already done, he risks having them lose valuable accomplishments.

So as a partner in Louisville-based Dinsmore & Shohl LLP, Dailey advises his bank clients to “put things on hold but be ready to go back—and don’t scrap anything you’ve already done.”

Financial service firms’ wealth management departments find themselves in regulatory limbo when it comes to following regulation implemented under President Obama in 2016. And that means “limbo” in every sense of the word—whether waiting in that challenging, in-between space, or bending over backwards to clear an ever-moving bar.

Many financial firms thought they had the situation in control and worked toward a Jan. 1, 2018, deadline imposed by the Obama administration. But then in this past fall, the Trump administration extended that deadline—all the way to July 1, 2019—and said it would review the requirements and possibly make changes.

With the prospect of a watered-down or scrapped rule, some in the wealth management space might find themselves tempted to drag their fiduciary feet. But in all likelihood, financial service firms will still have to make some changes in how they do business—or will want to, lest they face the scrutiny of skeptical clients. Thus, bad PR might accomplish what regulation doesn’t: Does anyone want to be known as the wealth manager who blows off fiduciary concerns?

In essence, the ruling requires greater documentation of what financial service firms do to fulfill their fiduciary responsibilities—that is, always acting in the best interests of the customer when it comes to offering retirement planning advice and putting people before products.

The DOL wants evidence that wealth managers don’t put risk-sensitive seniors in high-risk investments—or promote products that get them the biggest commissions, regardless of performance.

Annuities, for example, often generate higher commissions for brokers, but can carry high fees or charges that may lower the return for the investor. There also have been reports of financial service firms that talked investors into rolling over 401 (k) accounts away from low-cost company plans to private investment plans with higher fees.

Under the new rule, advisors must reveal any conflicts of interest and spell out their fees and commissions—clearly—in dollar amounts.

Explaining the need for changes in a White House paper on “Middle Class Economics,” Obama administration members claimed that “Wall Street firms benefit from backdoor payments and hidden fees if they talk responsible Americans into buying bad retirement investments—with high costs and low returns.” The report estimates that even a 1-percentage-point-lower return could amount to hundreds of thousands of dollars of losses in the portfolios of middle class investors.

But based on his advising of clients before the regulation, Dailey believes most banks were already taking their fiduciary responsibilities seriously. That noted, some institutions—especially smaller community banks—did not put all their practices in writing, or at least in line with the language DOL wants.

“Banks need to take a look at their product lines,” Dailey adds. “They have to adopt new policies that address segregation of product lines and explain their duty in greater detail to their customers.”

Kathleen Stewart, family wealth strategist for BNY Mellon Wealth Management, agrees that banks generally complied with the spirit of the ruling. The biggest challenge now is to document fiduciary disclosures and policies in line with the requirements.

But to do this with exactitude, wealth managers and financial advisors need a clear understanding of exactly what those rules demand. The Trump administration left many final details pending when it slowed action.

Meanwhile, things have progressed on another front. “The DOL and Securities and Exchange Commission are now talking about this ruling, which is a good thing,” explains JoAnn Schaub, senior vice president for institutional wealth management for BOK Financial. “Before, there was some conflict between what DOL was asking and what SEC already required. We’re hoping by bringing the two together, we can resolve those conflicts.”

Regardless, “I don’t believe [the rule] is going to go away,” says Stewart. “But between now and July 2019, we should get some additional clarification and then we can move ahead.”

“We expect there could be simplification, clarification or changes in the ruling, so most financial institutions are taking a wait-and-see approach at this time,” says Larry Goldbrum, SVP and director of ERISA fiduciary services at the retirement strategies group of Reliance Trust, part of FIS.

Stewarts says that at Mellon, her compliance staff developed some rough drafts for the wording required in disclosure documents and on the bank’s website. But until clarification comes on exact language, the bank won’t finalize any changes.

Adding to the confusion: Large banks that own investment firms serve different regulatory masters. “Our bank operations have followed fiduciary standards since 1918,” says Scott Grauer, BOK’s executive vice president for wealth management. “But some of our brokerage operations operated under a Know Your Customer suitability standard, which is somewhat different.” Now both operations will follow the same regulatory standards when dealing with retirement assets.

Regardless of what the final ruling looks like, its spirit will likely remain the same. Smart wealth managers will go a step further. They already realize that to attract and retain clients, you don’t need a fiduciary rule to practice the Golden Rule.

“Most folks,” Stewart notes, “just want to work with someone they can trust.”

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Lauri Giesen, a contributor to BAI Banking Strategies, has spent more than 25 years covering banking technology and payments for many financial publications. 


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