- The drama around an embattled set of new investor protection rules is far from over.
On Tuesday, the Department of Labor won an 18-month delay on the implementation of the remaining portions of the so-called fiduciary rule—the set of regulations requiring financial advisors to act in your best interests.
While the fiduciary standard is in effect, much of the fine print is still uncertain. “The delay means that a number of disclosures won't be required during the transition period,” says attorney Fred Reish, a partner with Drinker Biddle specializing in fiduciary issues. That transition period will now extend into 2019.
The uncertainty stems largely from the rule's two-phase rollout. While the Obama administration pushed through the long-awaited rule last year, the agency in charge of the regulation—the Department of Labor—gave the industry some time to implement the new standards. The first phase of the rule rolled out in June 2017, and the second was slated to go into effect in January 2018.
What Doesn't Change
The first part, which is still in effect, sets up the general obligation to act as a fiduciary.
Anyone who handles retirement assets and gives advice—this includes financial professionals of all types, whether they call themselves brokers, financial advisors, financial planners, or wealth managers—must adhere to a new “impartial conduct standards.”
Those standards now require advisors to charge reasonable rates—and bar them from lying to or misleading you about the products (such as mutual funds, ETFs or annuities) they’re recommending.
What Does Change
The second phase—the part that's been delayed—focused on how these standards would be upheld. It included a provision that would allow investors to bring class actions—a measure that was considered the “teeth” of the rule, allowing investors to band together to address systemic injustices.
The second portion of the rule also detailed how certain specialized products using a commission structure could still be sold—even when those products created conflicts of interest. A provision called the “Best Interest Contract Exemption” (often referred to as BICE) would require that advisors disclose any of their conflicts and get their clients to sign a contract acknowledging that they've received and understood the disclosure.
With Tuesday’s approval of an 18-month delay from the Office of Budget and Management (which oversees all regulatory reviews), those enforcement and disclosure provisions won’t roll out until 2019—if at all. Labor Secretary Alexander Acosta and the Justice Department have already indicated that they are open to overhauling the rule.
Impact on Investors
So what does that mean for you? Well, more waiting for one thing. “Given the delay is so long, there will be some more market settling,” says lawyer Jamie Fleckner, a partner in Goodwin Procter's financial industry practice. Many firms have already rolled out new accounts and products to comply with the rule, but there could be some additional shifting that occurs because of the longer timeline.
Some consumer advocates estimate the wait could result in tangible losses for investors. The Economic Policy Institute said that an additional 18-month delay could cost retirement savers an additional $10.9 billion dollars over the next 30 years because of the longer timeframe in which they'd potentially be getting conflicted advice.
But it’s important to reiterate that the first phase—the portion that actually expanded the scope and responsibilities of an advisor—is already in effect. The Labor Department has said it won’t penalize anyone who doesn’t follow the new standards until they are completely finalized—which now won’t be until 2019. Yet that doesn’t mean you’re without recourse. Investors can still bring claims through the industry's arbitration process.
“It’s really important to remember that the regulation is in effect,” says Scott Webster, an ERISA law specialist with Goodwin Procter. "The definition of a fiduciary changed two months ago, and that’s there."
Individuals can already rely on that expanded definition, Webster adds. “That’s where you’ll see the impact,” he says.
Drinker Biddle's Reish also expects that other regulators who oversee financial advisors, including the Securities Exchange Commission and the Financial Industry Regulatory Authority, will enforce the new standards.