The future of fiduciary responsibility

By Fran Reed | 31 January 2017

Fran Reed, Global Regulatory Strategy, FactSet 

In early 2015, the Obama White House Council of Economic Advisors reported that high investment commission fees lead to conflicted investment advice which cost investors an estimated $17 billion a year.   With a broad surge in Google searches, investors previously unaware of conflicts associated with investment incentives are now seeking a fiduciary for their financial advice.

Factors driving the public conversation are clear. Americans are living longer past retirement age today than at any other point in history, but fewer companies are offering pension plans, combined with some 75 million Baby Boomers reaching 70 this year triggering mandatory retirement asset disbursements.  Social Security retirement benefits may not be sufficient for future retirees. 

85% of Americans are concerned about retirement savings, with 55% saying they are very concerned. A study conducted by the National Institute on Retirement Security found that, shockingly, 45% of U.S. working-age households (38.3 million households) have zero retirement account assets. Perhaps more surprising, of the 55% of working-age households with retirement assets, the average per household was only $50,000 (National Institute on Retirement Security The Retirement Savings Crisis: Is It Worse Than We Think?, June 2013).

Enter the DOL “fiduciary rule”

In April 2016, in response to growing consumer concern, the U.S. Department of Labor (DOL) Employees Benefits Security Administration finalised a rule to address conflicts of interest for investment advice on Individual Retirement Accounts (IRA); this has become commonly known as the “fiduciary rule.” With more than $24 trillion in retirement savings in the U.S. alone (Sources: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, and Internal Revenue Service Statistics of Income Division. See investment Company Institute, The U.S. Retirement Market, Fourth Quarter 2015), the fiduciary rule has been highly controversial from the start.

The new guidelines extend the reach of the fiduciary rule that currently applies to advisers working with 401(k)s and other workplace plans to apply to advisers speaking with individuals about existing IRAs and possible rollovers of money from a 401(k) or other workplace plan to an IRA. Under the rule, every firm that interacts with retirement investors – even those who firmly comply with the safe harbor exemptions – will have to create documentation of their policies and procedures to ensure their investment process and compensation practices are compliant.

The single most contentious aspect of the DOL’s fiduciary rule is the Best Interest Contract Exemption (BICE), which mandates fiduciary advisors providing retirement investment advice for a fee, directly or indirectly, must act in the best interest of all clients.

Fiduciaries providing advice which results in variable compensation (i.e. commissions associated with the investment) are engaging in a ‘prohibited transaction’ which requires an exemption in the form of a signed and properly documented best interest contract exemption. BICE becomes an enforceable contract, as the exemption provides for enforcement of the standard it establishes. Retirement investors will possess the mechanism to hold financial institutions accountable, and sue for breach of contract if they do not adhere to the standards established in the exemption. 

Financial firms, industry associations and policy-makers have expressed unprecedented opposition to the BICE. Despite the rule stating that investors will not be able to use this enforcement mechanism simply because they don’t like how an investment turned out, the industry concern of BICE being used to create baseless class action suits due to losses is significant.

How is the industry responding?

Strong resistance to the initial DOL fiduciary proposals led to a near industry-wide embrace of the spirit of the revised fiduciary rule. Most firms have invested heavily in complying with the new higher fiduciary standards, given the costs of compliance to the final rule are outweighed by the larger costs of non-compliance. Additionally, they have heard loud and clear that investors want a fiduciary that puts own interests put above their advisors’ financial incentives.

Ironically, this new public paradigm mirrors the trillion-dollar investment industry-wide migration into index-tracking mutual funds and exchange traded funds – a tectonic institutional shift away from active management to passive management that has been under way for years.

Most big firms have now migrated to a fee-based model of assets under management (AUM). The largest U.S. investment firms feel they have the ability to fair better under a fee-based model through adding AUM due to increased investor trust and confidence, thereby pleasing both regulators with compliance and shareholders with more predictable revenue streams. Morningstar estimates that fee-based account model can yield revenue as much as 60% higher than commission-based model (Financial Services: Fiduciary Standard Rule Could Have Drastic Impact, December 2015 While at least one big firm is prepared to keep commission-based IRAs under the new regime, maintaining compliance by developing new disclosures and documentation systems and using BICE for prohibited transaction exemptions.

What’s the future of fiduciary responsibility?  

We expect the DOL final rule will be delayed.

Firms do not want the litigious liability of the BICE. The Trump administration wants less regulation.  Recently, the new Republican Congress introduced legislation titled ‘The Protecting American Families’ Retirement Advice Act,’ to delay the final DOL Rule for two years.  This two-year re-evaluation period delays the BICE while providing time for the SEC and the Trump administration to develop an alternative plan.

However, the evolution of greater transparency into investment advice and disclosure is inevitable – most notably needed for individual investors, particularly with retirement assets. However, the dangers of an industry working under a separate set of rules for non-retirement investment advice are well-founded with substantial implications of perpetuating a lack of investor trust and confidence with financial advisors and in the markets.  Futile as trying to hold back the incoming tide, this runs counter to global market trends, like those happening across the European Union with the upcoming revised Markets in Financial Instruments Directive (MiFID II) regime taking effect in January 2018.

For more on upcoming regulations and their impact on the financial industry, visit

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