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Adviser fiduciary rule deepens US battle lines

Adviser fiduciary rule deepens US battle lines

The US investment advice industry has found itself in the middle of the most heated political climate Washington has seen in decades.

You only need to take a cursory look at the presidential election primaries to realise these 'United' States are anything but right now. The tone of debate, both within parties and across party lines, is more vicious and pointed than perhaps we have ever seen, certainly in the modern era. Barbs have been exchanged, wives have been objectified and at least one reporter has been allegedly assaulted. They say politics is a blood sport, and the current contenders are doing their best to prove the adage right.

Given the heat levels emanating from the campaign trail, observers back home in Australia might be forgiven for assuming the actual business of legislating has gone on hiatus. But in reality Congress is still sitting, even in this climate, and the Obama administration is steadfastly working on its legacy.

Enter stage: the US financial advice industry.

Like other comparable markets since the GFC, policymakers in the US have been on the hunt for new regulatory targets and, needless to say, financial advisers are often top of the list. Having seen the previous Australian Labor government successfully push FOFA through the parliament, and similar provisions passed through the UK House of Commons culminating in the Retail Distribution Review, the Obama White House has sought to follow suit, with a plan to introduce a fiduciary rule for all advisers spearheaded by the Department of Labor.

After years of debate and intense lobbying and consultation from consumer groups and the financial services industry, today the DOL has released the 'Final Rule' outlining exactly how it defines a 'fiduciary' test for "investment advisers working with 401(K) and individual retirement accounts", ie, the equivalent of any Aussie adviser that advises on superannuation (ie, everyone). Mirroring similar wording in other jurisdictions, the Final Rule aims to reduce inherent conflicts through mandating a requirement to "put the client's interests first" overriding the traditional test of "suitability" here in the US.


For many US advisers – certainly the more client-centric professionals more akin to Australian practitioners – the new rule will have little impact. Those accredited with the federal Securities and Exchange Commission as Registered Investment Advisors (RIAs) are already subject to a fiduciary rule, as are Certified Financial Planners (CFPs) and members of the National Association of Personal Financial Advisors (NAPFA). The RIA channel – also described as the "independent advice" movement – has been growing in recent years and so more and more advisors have become immune from the legislative tinkering.

Those who will be affected are those "advisers" who operate in the grey space between sales, brokerage and advice, remunerated via commissions from the major Wall Street wirehouses. These advisers – often more accurately described as 'broker-dealers' or the spin-heavy and ambiguous 'independent broker-dealers' – are still the majority despite the rise in RIA numbers and the many scandals plaguing the US institutional advice sector (sound familiar, anyone?).

But while the new rules will only affect a portion of the industry, this has not reduced the controversy attached. Perhaps more so than Australia, the US business culture subscribes to the mantra of 'caveat emptor' and many see this as an overzealous regulatory over-reach that will result in higher fees for consumers and price them out of advice.

Speaker of the House Paul Ryan – who was Mitt Romney's running mate in the 2012 election and is still touted in the press as a potential 'white knight' to ride in and 'save' this election for moderate Republicans – has been particularly vocal in his opposition to the DOL proposals, as have a number of his GOP colleagues. They have vowed to "halt" the legislation before its slated effective date in April 2017.

On the other hand, influential Democratic power broker Elizabeth Warren – a former Harvard professor and long-time advocate of Wall Street reform – is throwing a party on 'The Hill' today to welcome the Final Rule.

Unsurprisingly, both Democratic presidential hopefuls Bernie Sanders and Hillary Clinton have voiced their support of the DOL fiduciary rule and race dropout Martin O'Malley formally listed it as a top priority.

On the Republican side, only former Florida Governor Jeb Bush – who also recently dropped out of the race – actively opposed the mandatory fiduciary rule as a bid to "limit consumers' choice".

The others, meanwhile, have been too busy taking swipes at each other to weigh into a debate, with vast implications for many American retirees and investors.

But given the debate still raging in Washington – not to mention the back-and-forth seen in other countries such as the 'FOFA Wars' – it is only a matter of time before they are forced to take sides.

Don't be surprised to see advisers become a political football yet again.


Aleks-Vickovitch-Headshot.jpgAleks Vickovich is contributing editor at ifa and InvestorDaily, based in the US




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