The U.S. Department of Labor (DOL) continues to move forward with its review and implementation of parts of its fiduciary rule. The DOL’s “best interest” standard of care for investment advice went into effect June 9. But just last week, the DOL also announced its intentions to further delay the guidelines laying out the steps advisors must take to demonstrate compliance with the rule. These steps had been scheduled to go into effect in January 2018, but the DOL hopes to further delay implementation until July 2019.
These delays were in response to a directive from the Trump Administration that the DOL review the fiduciary rule and revise or rescind it if the DOL found that it would adversely affect investors’ access to investment information or financial advice.
In a recent conversation, Vanguard Chief Executive Officer Bill McNabb and Ann Combs, head of Vanguard Government Relations, discussed the latest developments pertaining to the rule, Vanguard’s most recent comment letters weighing in on this topic with the DOL on behalf of investors, and what is likely to happen next.
Where do things stand right now with respect to the DOL’s fiduciary rule?
Ann Combs: The general definition of fiduciary and the impartial-conduct standards requiring that advisors act in the best interest of their clients went into effect June 9. The other, more controversial requirements of the Best Interest Contract (BIC) and annuity sales exemptions are in the process of being delayed until July 2019.
Vanguard continues to advocate for investors
Read Vanguard’s thoughts on the fiduciary rule in full in our latest comment letter to the DOL, where we address the DOL’s definition of a fiduciary and make other recommendations to improve the rule.
So right now, financial advisors must ensure that (1) recommendations are in your client’s best interest, (2) your compensation is reasonable, and (3) no misleading statements are made. And if all goes as expected, Vanguard will take advantage of the next 18 months to work with the DOL on behalf of our investors to simplify and improve the rest of the rule.
What criteria is Vanguard using to evaluate the fiduciary rule?
Bill McNabb: The idea that individuals should always receive investment advice that’s in their best interest is unassailable. So is the idea that those who provide investment advice should be held to a fiduciary standard. So we support the DOL’s efforts to put these ideas into practice.
As the rule has moved through the regulatory process, however, we’ve weighed in with our concerns, feedback, and recommendations to ensure that investors still have access to the advice they need. A policy of this magnitude demands rigorous attention to detail. Every detail matters when we’re talking about helping investors make decisions about their financial future, and we’re committed to keeping advice accessible and affordable for everyone.
What are some of Vanguard’s recommendations for improving the rule?
Ann Combs: We believe the DOL should revise, not revoke, the rule, and we have several suggestions for improving it.
First, the definition of investment advice should be more targeted to protect investors’ access to investment education and advice, while ensuring that advice is still widely available. The current, broad definition of advice brings with it regulatory requirements that are unnecessary in some instances and may limit access to important information and education for investors. We recommend a streamlined, simpler approach that does not vary based on how advice is delivered or based on the client.
Second, enforcement of the rule should not depend on plaintiffs’ lawyers. Vanguard supports efforts to address conflicts of interest and taking action when violations occur, but the DOL should use the established and proven regulatory channels to do so. We oppose the creation of a state-based class action cause of action against fiduciaries.
Last, regulatory requirements should be harmonized across agencies to create a consistent investor experience in retirement and nonretirement accounts. The DOL rule focuses on retirement assets, but investors have nonretirement accounts as well and would be better served by a uniform standard for all their savings. The DOL should continue working with the Securities and Exchange Commission (SEC) to ensure that fiduciary guidance is harmonized across agencies to the extent feasible.
Bill McNabb: As an example of the simplification that is needed, the BIC exemption currently imposes different guidance depending on whether you offer advice online, i.e., robo-advice, or in person; whether you are talking to clients about a rollover or an investment decision; and whether you are dealing with a large or small retirement plan. This fragmented approach is confusing and will, ultimately, increase the complexity and cost of advice for investors.
How is Vanguard working with and advocating for investors in its efforts to improve the rule?
Ann Combs: We’ve shared our views with the DOL throughout this process and have filed two comment letters this year alone since the DOL announced it was reviewing the rule. The first asked the DOL to delay the remaining conditions of the BIC exemption scheduled to go into effect January 1 until 12 to 18 months after it finalized its review of the rule. It looks as though we got a good result on that one, with the DOL’s announcing its intention to delay this part of the rule for 18 months.
Our second comment letter raised concerns about the rule’s broad definition of a fiduciary, the complex conditions required to mitigate conflicts of interest if you are a fiduciary, and the BIC exemption’s inconsistent standards for plans of different sizes, methods of delivering advice, and types of transactions. We will encourage the DOL to make these changes and work with the SEC to urge a harmonized outcome.
How do you expect events to play out from here, and what will the final fiduciary rule look like at the end of this review period?
Ann Combs: The “best interest” standard will remain in place. The idea that investors should get advice that’s in their best interest is, as Bill said, unassailable. And Vanguard’s very supportive of that.
But the rest of the rule is really up for debate. I think they could look at a couple of things. One is the definition of what constitutes advice. We are also hopeful that they will relax the restrictions on using the BIC exemption based on the channel for delivering advice and plan size.
As it’s written now, the rule requires different compliance standards depending on whether the advice is delivered in person or if it’s robo or hybrid. It also differs now depending on the size of the plan that’s offered and the type of advice (i.e., rollovers versus investment decisions). We think the standards should be the same regardless of these differences. Harmonization makes the rule much easier to enforce and easier for advisors to comply with.
And then there are all the standards that come into play with the BIC exemption. That’s where a lot of the compliance burden falls on advisors, and we hope the DOL could step back and say: “Let’s take a more principles-based approach.”
Bill McNabb: The current transition period is a good sign that the DOL is interested in using this time to help advisors interpret what the rule means in order to comply with it. So we think more changes are coming in many of the areas that Ann just mentioned.
Could the rule be canceled altogether, or are we too far down the road?
Ann Combs: We think it’s unlikely the DOL would revoke the rule. Congress has made several attempts to eliminate the rule, but we don’t expect that any will be passed into law.
Bill McNabb: I agree. Now that a portion of the rule is already in effect, it will be difficult to go back.
The rule is intended to protect retirement investors’ interests, but changes are necessary to make it more workable. The DOL has the opportunity to revise the rule to promote better access to investment advice and education and support future innovations in the market. Vanguard is eager to continue working with the DOL to ensure the rule protects investors in an efficient and cost-effective way.
- All investing is subject to risk, including the possible loss of the money you invest.