With a major Obama rule that will reshape the financial planning sector set to start going into effect next week, the industry is plotting its options for lightening its burden.
To ease the impact of the Department of Labor fiduciary rule, which will require financial advisers to act in their clients' best interests, the Chamber of Commerce and other big industry groups hope to enlist Congress in pressuring the Trump Labor Department to revise the rule and for the more business-friendly Securities and Exchange Commission to write its own rule on the topic.
"This may end up being a three-legged stool," said David Hirschmann, head of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, referring to the prospect of action by Congress, the SEC and the Labor Department.
The financial industry lobbied hard over the past year and a half to stop the Obama administration from implementing the fiduciary rule, as it is known. Teaming with congressional liberals, Obama pushed the rule as part of his fourth-quarter, pen-and-phone regulatory agenda. He argued that the rule was necessary to prevent some advisers and brokers from bilking savers with tax-privileged accounts, such as IRAs. Conflicts of interest in the industry, with brokers steering clients into inappropriate high-fee investment products in return for kickbacks, cost savers $17 billion annually, the Obama White House calculated.
Industry groups, however, argued that the rule would make it unprofitable to maintain clients who are small savers or small businesses, resulting in many people losing access to investment advice.
President Trump gave them hope in January, when he issued an executive order requiring the Labor Department to review the rule before it was supposed to take effect, which prompted a brief delay from the agency. Although that was seen as the possible prelude to a much longer delay and possible walking back of the rule, newly installed Labor Secretary Alexander Acosta announced in a late May Wall Street Journal op-ed that part of the rule would be enacted on June 9. Administrative law prevented him from further delaying the rule, he explained.
Yet his agency is still reviewing comments it solicited during the brief delay and is expected soon to solicit more comments from businesses and advocates on both sides of the issue.
Some Republicans objected to the Trump Labor Department's letting the rule go through at all. Rep. Jeb Hensarling, the chairman of the House Financial Services Committee, suggested that Obama holdovers in the agency subverted the administration's will. In the meantime, industry groups aim to keep the pressure on Congress and the agencies by highlighting people who will be disadvantaged by the rule, even if outright blocking it is no longer a possibility.
"Our goal now is to work to mitigate that harm and to work with the regulator both at the SEC and at the Department of Labor," said Jill Hoffman, vice president of Government Affairs for Investment Management at the Financial Services Roundtable.
Some members of her trade group are still trying to calculate the effects of the new regulation and what they can and cannot live with, she said.
At issue is the threat of class-action lawsuits against advisers and brokers. While companies can usually conform to and plan around regulations, Hirschmann said, "that's such a jackpot justice arrangement that it simply makes it hard to understand what your costs are going to be, who you can serve."
In a 20-page report released last week, the Chamber of Commerce listed a range of problems that the fiduciary rule would create or has already generated for savers, according to industry sources who filed comments with the Labor Department. Up to 11 million people with IRAs through brokers could lose their brokers, according to the Securities Industry and Financial Markets Association. One survey found that nearly three-quarters of financial advisers plan to drop some low-balance clients.
Anecdotally, many firms have begun preparing for the rule by moving away from commissions and toward a flat fee for investment advice or by limiting human advice provided to small savers in favor of cheaper robo-advisers.
From the perspective of advisers, that is the problem. The harm is the "rule's bias against commission sales," said Howard Bard, vice president for taxes and retirement security for the American Council of Life Insurers.
In fact, a shift away from commissions was part of the Obama administration's design, and the changes that advisers, brokers and insurers are already making to comply with the rule represent a partial victory for industry critics. Obama Labor Secretary Thomas Perez touted robo-advisers such as Wealthfront as a model of low-cost fiduciary advice.
Yet those gains could be lost if the Labor Department's rule were to be rolled back, said Marcus Stanley, a policy expert with the left-leaning group Americans for Financial Reform. "There's money to be made by steering people into products that are the wrong products for them," he said, meaning that some brokers would return to bilking clients in the absence of enforcement.
As for legislative options, there is one set to hit the House floor this week, in the form of the Financial Choice Act, a sweeping revision of post-crisis banking rules offered by Hensarling that also would outright repeal the fiduciary rule.
That legislative package, though, is thought to have poor prospects in the Senate. Congressional action is more likely to take the form of leaning on the agencies rather than legislative changes.
To that end, fiduciary rule proponents fear the influence of the SEC under the direction of new Trump Chairman Jay Clayton, a former Wall Street lawyer. In years past, Stanley noted, the SEC has declined to write a fiduciary rule and has discussed only relatively watered-down proposals, such as more stringent disclosure requirements.
Republicans favor the SEC, however, on the grounds that it has more relevant experience with investor-client relations. Last year, House Republicans advanced legislation that would prevent the Labor Department from writing a rule until the SEC weighed in on the topic. Liberals criticized the measure as effectively blocking a rule, because action from the SEC would never happen or wouldn't set an effective requirement that advisers act in their clients' best interests.