Allowing investors to pursue class actions against advisors, broker-dealers and insurance companies under the Labor Department's controversial fiduciary standard rule is almost certainly the loudest objection voiced by its foes in the industry. Consequently, that critical issue warrants close attention, Skip Schweiss, managing director of advisor advocacy and industry affairs at TD Ameritrade Institutional, tells ThinkAdvisor in an interview.
The firm, strongly in favor of the rule, has been immersed in the fiduciary debate on behalf of independent advisors and investors for more than a decade. Today it remains in the thick of the discussion, talking with legislators and regulators, and meeting with trade associations and other groups.
In studying potential revisions to the rule — at President Donald Trump's directive — Labor is perhaps focused most heavily on the component that lets investors join class action suits, according to Schweiss. Scrapping it would likely mean dispute resolution by arbitration only.
Full implementation of the rule is due Jan. 1, 2018; but, in view of Trump's order, that date probably will be pushed back.
Meantime, some legislators continue to fight for the rule's repeal. For example, the House Committee on Education and the Workforce passed legislation in July approving the Affordable Retirement Advice for Savers Act, introduced by Rep. Phil Roe, R-Tenn. The bill now goes to the House floor.
At the other extreme, the state of Nevada passed legislation to apply a fiduciary standard to advisors on all investment accounts, effective July 1, 2017. And the Certified Financial Planner Board of Standards has proposed an addition to its Standards of Professional Conduct that extends a fiduciary standard to financial advice — on top of financial planning.
ThinkAdvisor recently interviewed Schweiss, who, concurrent with his role in advisor advocacy, serves as president of TD Ameritrade Trust Company. By phone from his Denver office, he noted an early effect of Labor's rule: brokers moving, increasingly, to fee-only compensation. Here are highlights of our conversation:
THINKADVISOR: Is the fact that the DOL rule allows investors to join class action suits one reason that some firms and industry groups are calling for its repeal?
SKIP SCHWEISS: That may be the reason. And it could be the major factor that the Department of Labor looks at with regard to possible revisions of the rule: Should it allow investors to join class action suits, or should it [require] arbitration with the mandatory dispute resolution mechanism? This will be the area to watch most closely in coming months.
So people opposing the rule focus on that issue a great deal.
Yes. In a lot of the comment letters, discussion and speeches, that's been an issue, if not the major issue of concern expressed about the rule from broker-dealers [and others].
Do you think the full implementation date will be pushed back from Jan. 1, 2018?
That's likely. The DOL would like to do the work that President Trump has asked it to do in terms of taking a fresh look at the rule. The industry will have a lot of input as to what should happen, and that will take time [to discuss].
Exactly where does the DOL stand right now?
No. 1: We have a comment period that's asking to delay the Jan. 1 compliance date. No. 2: Should there be other changes to the rule? I think there's a high probability there will be. But I do think that, in some shape or form, the rule is going to be with us.
So you don't believe it's in jeopardy, even though some are still trying to kill it?
It's already partially implemented. Yes, there are movements afoot on various fronts, primarily legislative, to stop or kill it. But I don't think those will succeed.
One of the arguments, from the beginning and which persists today, is that the rule will hurt small investors. What's your opinion?
I don't feel that way. We know that RIAs are typically serving higher-net-worth investors, and they often have minimum account sizes that are quite a bit larger than smaller investors' accounts. But brokers can still serve the $50,000 investor just as they do today — the rule doesn't ban commissions. Brokers can still charge those for their advice. And there are also the robo-advisors out there, most of which have very low account minimums.
Is the best-interest contract exemption (BICE) a loophole for brokers who receive commissions?
I wouldn't call it a loophole. It's designed to be an exception to the rule that the department granted to allow brokers [to receive] commissions. Labor said it has nothing against commissions and that in fact many consumers are better off paying for their advice that way versus a flat fee. That's why they carved out [BICE] because ERISA [the Employee Retirement Income Security Act] didn't allow for commissions to be received by fiduciaries.
Are most registered investment advisors taking the rule seriously, or do they brush it off?
I've done dozens of talks with advisors around the country in the last year, and most are taking it seriously. We're filling rooms every time. People are taking lots of notes, asking lots of questions. There's the isolated shrugging off; but for the most part, they're taking it seriously. They know that in the IRA rollover recommendation, there are processes they need to go through to make sure that that recommendation is in the client's best interest. So they need to pay attention.
