A game-changing federal regulation on retirement investmentadvice may be overturned by the Trump administration, but many inthe HR industry expect the spirit of the law to remain, even if theletter of the law is repealed.

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The fiduciary rule, put into place by the Obamaadministration, was designed to require that financial advisors actin the best interest of their clients, to ensure that commissionsand other considerations do not sway advisors to promote inferiorproducts.

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On Feb. 3, President Trump delayed implementation of the ruleand ordered the Department of Labor to review it. Hisadministration is highlighting the fiduciary rule as one of several Obama-eraregulations that they say are too burdensome and should be undone.Yet among industry insiders, there is a feeling that it may be toolate to go back — and some suggest that the change in approach willbe popular with consumers.

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What has changed

In the past, employers have had a fiduciary responsibility toact in the best interest of the employees when creating andmanaging company-sponsored retirement benefits. With the new rule,financial advisors who help employers and employees pick plans mustalso meet the “best interest” standard. The new rule is designed toprevent conflicts of interest caused by some commission-basedarrangements.

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Many in the industry are generally supportive of the new rule.“I believe the genesis of this law is a good faith effort to ensurethat investment options are being managed and evaluated based ontheir performance,” says Brandon Scarborough, senior vice presidentof Cobbs Allen.Scarborough adds that with some commission arrangements, advisorshad a financial incentive to recommend plans that weren'tperforming as well for the plan holders.

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According to Scarborough, a switch from the old “suitability”standard to the fiduciary rule's “best interest” standard will putthe interests of consumers first. “All these commissions have to beclearly spelled out, and that's been a long time coming,” he says.Brandon notes that the best interest contract exemption provides aless restrictive arrangement for some investors, but even thatrequires advisors to outline any conflicts of interest.

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The consumer protection elements of the rule may make it popularwith plan enrollees, according to Reed Smith, senior vice presidentand employee benefits practice leader at CoBiz Insurance. “We view it as a potentialcompetitive advantage,” he says. “Why wouldn't your employees want[those protections]?”

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Not a perfect solution for everyone

Still, the industry hasn't universally embraced the rule change.Some have raised questions about the effect that switching tofee-based plans, which can be more expensive that commission-basedproducts, would have on smaller investors.

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“The fear is that some advisors are not going to want to take ona fiduciary role for smaller accounts who might not be able toafford it,” says Tyler Brocato, senior retirement plan consultant,also with CoBiz.

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That concern is echoed by Juli McNeely, who is owner andpresident of McNeely Financial and a past president of the NationalAssociation of Insurance and Financial Advisors (NAIFA). She saysthat the rule changed the landscape for the small businesses thatshe works with. “Being in rural Wisconsin, I work with a lot ofsmaller accounts,” she says. “These individuals weren't candidatesfor a fee-based plan.”

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However, despite being a commission-based brokerage for 45years, McNeely says her company is now committed to meeting the newrequirements. “We thought the time was right,” she says. “We weremoving that way, but we still don't think it makes sense foreverybody.”

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The Trump administration steps in

On Feb. 3, President Trump issued a memorandum directing the DOLto review the fiduciary rule (called the Fiduciary Duty Rule in hisstatement) and recommend whether it should be repealed or revised.The DOL has six months to issue its recommendation.

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“One of the priorities of my administration is to empowerAmericans to make their own financial decisions, to facilitatetheir ability to save for retirement, and build the individualwealth necessary to afford typical lifetime expenses, such asbuying a home and paying for college, and to withstand unexpectedfinancial emergencies,” Trump said in the memorandum. “[Thefiduciary duty rule] may significantly alter the manner in whichAmericans can receive financial advice, and may not be consistentwith the policies of my administration.”

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The industry reaction was mixed. NAIFA and some other advisor groups madestatements in support. “NAIFA has expressed a number of concernsabout the rule, which would impose burdensome and costlyrestrictions and requirements on advisors and would limit middle-and lower-income retirement savers' access to services and advice,”says NAIFA President Paul Dougherty. “We look forward to offeringthe administration any information or assistance they may requireas they review the rule.”

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But other investment experts continued to say the fiduciaryrule's impact was already made. In a Forbes commentary, DavidBahnsen, chief investment officer and managing director of The Bahnsen Group, part of HighTower Advisors, saidthat regardless of governmental actions, the market will ultimatelyvalidate the move toward more transparency.

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“In the end, those registered investment advisors bound by thefiduciary standard can claim exclusivity in the marketplace as towho actually must act in their client's best interests, who mustavoid conflict of interests, and who has provided totaltransparency to fees and compensation,” he wrote. “A fiduciarystandard of care will be good for the financial services industry,and total clarity and transparency around compensation will buildfaith and credibility in the financial advice profession.”

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What it means for employers, brokers andadvisors

Terry Connerton, an attorney who specializes in employment lawand a spokesperson for the Society for Human Resource Management, notesthat the rule has already had a wide-ranging effect. “Since thepublication of the new regulations, and even before, a lot ofcompanies operating in the retirement space have devotedsignificant time and resources, and changed their businesspractices and pricing models, to comply with the regulations,” shesays. “Whether the new fiduciary rules go into effect or not willlikely not change their new business operations.”

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Others agree that advisors who have switched from the“suitability” to “best-interest model” are not likely to switchback. “Most companies prepared for it, and the ones that weren'tgot out of the market,” notes Brocato. “I think anytime you put insomething that is more consumer-friendly, and then you take itaway, that raises some red flags.”

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Connerton says the change will require companies to look closelyat their policies and plans. This can include discussing withproviders their fiduciary status, fees and compensation, and areview of what plan options are available, as well as how plans areselected. She says, “I had many clients in 2016 conduct anabbreviated request for proposal to determine market rates for feesand expenses; suggested portfolios; and new services.”

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