DOL = Frustration and, Maybe, Hope

By Merriah Harkins

Merriah Harkins

At almost every financial and insurance conference we’ve attended in the past year, sessions to discuss the Department of Labor (DOL) Fiduciary Rule have been among the most popular. Earlier this year, the sessions focused on speculation about when and if the rule would go into effect and what it would look like.

For many, the election of President Trump presented the potential the rule would be delayed or even nixed. The President has challenged law and rule makers to pay close attention to costs, benefits and job creation when implementing any new law, regulation or rule. But, after seven long years of government consideration, on June 9, the ‘revised and temporary’ DOL Fiduciary Rule went into effect and is expected to be presented in final form on or before Jan. 1, 2018, when the Department of Labor is set to begin enforcing the rule.

Even as it went into effect, there has been some hope raised about a key element of the rule. The Wall Street Journal reported on July 10, 2017, that the Labor Department may be considering the elimination of the best-interest contract from the fiduciary rule as it conducts the economic-impact review ordered by President Trump in February. As it is currently written, the best-interest contract holds the regulation’s main enforcement mechanism: it allows investors to bring class-action lawsuits against those they say breached their fiduciary duty. Eliminating that capability would go a long way toward easing one of the industry’s greatest fears.

Beyond that, many believe the real answer is to move monitoring and enforcement in this area away from DOL to the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority, Inc. (FINRA), the agencies most familiar with the industry’s issues.

The DOL Fiduciary Rule came out of the formation of several proposed rules related to investor protections considered seven years ago as a result of the Great Recession. But implementation delays, that often last years, make many rules outdated when they are finally put into practice. Many feel this is the case with the DOL Fiduciary Rule.

Within the financial services industry, the SEC and FINRA have strict suitability standards and most advisors are already offering advice focused only on investments that are suitable for their clients. And while clients sign arbitration agreements when opening up investment accounts, this rule opens an advisor and their broker dealer to lawsuits. The unfortunate result is a fear that the rule is vague enough to attract lawyers who may go after anyone whose investment recommendation didn’t deliver as well as expected.

The confusion and the extra burdens placed on advisors and broker dealers, as a result of this rule, has led to higher compliance and oversight costs. This will likely contribute to unintended consequences that could negatively impact consumers and making it difficult for advisors to do their jobs. One of the biggest issues is the cost of monitoring and compliance, an issue that may drive smaller firms out of the marketplace. The smaller investor could also be hurt, as the costs associated with offering advice may only make financial sense for an advisor of clients with larger investment accounts. These two consequences run counter to the rule’s initial intent.

Another major component of this rule is reasonable compensation related to the investments being offered to clients. This is one of the most confusing components of the rule because ‘reasonable compensation’ has not been defined in percentage or dollar amounts, leaving it up to the broker dealers and advisors to determine what they feel is reasonable.

As a financial services firms focused on investor needs and wants, we always consider what is best for our consumers and their representatives. As a public company with common stock that trades on NASDAQ, we are proud of our transparency and what we consider a reasonable compensation structure related to the hold periods in the investments we offer.

We also offer unique investments. Another major component of the DOL Fiduciary Rule is the necessity to consider similar investments and to choose the lowest cost, suitable option among those similar investments, so the uniqueness of an investment is a big plus.

We all must live with the DOL Fiduciary Rule in its current form, while we wait for the final version to emerge. And we can never lose sight of the important reasons we chose careers in the financial services industry in the first place.

We need to continue with confidence to provide investment vehicles and choices that are in the best interests of our clients and enable them to meet their financial needs and goals. And, it’s more critical than ever that we find ways to ensure our valued clients have enough saved to enjoy comfort and security in their post-retirement lives.

Merriah Harkins, Executive Vice President of Sales and Business Development at GWG Holdings, is a  registered representative of Emerson Equity LLC, Member FINRA/SIPC.

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