More wealth management firms comment on the possibility that the Dodd-Frank legislation could be rolled back, and that the upcoming DOL Fiduciary Rule may not come into force, at least not yet or in its current form.

As already reported, the Dodd-Frank legislation of 2011 could be reformed or even pulled back completely by the Trump administration. There are also expectations that the Department of Labor Fiduciary Rule could be delayed (it is due to kick in by April.) So far, the industry appears pleased that legislation could, hopefully, be simplified, lifting heavy compliance burdens. (To see some comments and a previous report, see here and here.) The details of what exactly will happen are as yet unknown. Family Wealth Report has asked a number of organizations for their views. Here is a sample. For those who wish to add comments, they can contact the editor at tom.burroughes@wealthbriefing.com

George Clough, vice president of wealth management strategies at People's United Wealth Management in Bridgeport, CT
Dodd-Frank has impacted financial firms both large and small, however none more that those deemed “too big to fail”. The costs of compliance have been great. The argument is that Dodd-Frank will assure not only future profitability but also in times of great financial stress, solvency. No longer would government have to step in to rescue financial firms from their own folly as occurred in 2008. On the other side, most financial firms felt they were being unfairly penalized when they hadn’t been the bad actors. Overturning Dodd-Frank would significantly decrease compliance cost for all and potentially drive greater profit to the firm’s bottom line. There is no anecdotal evidence to suggest that these costs have led to higher wealth management fees or a reduction in client returns. However, a reduction in compliance cost with repeal of Dodd-Frank could conceivably result in lower wealth management fees going forward.

The major source of difficulty lies with the “too big to fail” financial firms. Not only have they carried the biggest cost of compliance in general, they have been further required to draw up a “living will” that documents the steps they could take to wind down their firms without taxpayer’s help in the event of an imminent failure of the firm. As you can imagine this “stress testing” has been a particularly thorny exercise that must meet with regulators’ approval. Another area perceived to be problematic is the CFPB (Consumer Financial Protection Bureau) which was created in concert with Dodd-Frank. Focused on issues around the mortgage, credit card, and student loan business, the cost of compliance again is a major complaint by financial firms.

It is more than likely that the industry will go in the direction of greater transparency. Several major firms including Merrill Lynch and Ameriprise have announced that even if the DOL [Department of Labor Fiduciary Rule] regulation are delayed or repealed entirely they will continue their transition to full disclosure of fees, commissions, or other costs to the consumer. So the question becomes which of these fee structures best benefits the individual investor. For some commissions may be fine, while others who may require more advice or planning may wish to pay a fee based on assets under management and upon which they are being advised. The value proposition regarding how you charge therefore will need to match the way you deliver your services and with greater transparency going forward.

In theory, Trump’s blocking of the enforcement of the DOL regulations beginning in April would leave the client/advisor relationship as it has been. That is, those advisors that are held to a suitability standard would remain under those regulations and fiduciaries would continue under the standard of care and loyalty acting in the client’s best interest.  In practice, we are seeing many large firms acting as if the DOL regulations had been implemented regardless of what may happen under Trump. Merrill Lynch and Amerprise, as an example have publicly announced that they will move to a best interest standard as they argue the client deserves a transparent relationship. It appears that, in reality, the fiduciary genie is out of the bottle. Finally, there are some who believe the delay of the DOL regulations by Trump is designed to give an opportunity for the SEC to form their own set of regulations less restrictive and removing such language as the right to class action status for the client.

I would keep it simple. For the advisor held to a suitability standard, I would simply point out to the client that you discussed the client’s financial situation as required under the need to know your client regulations and suggested suitable products to meet their needs. Fiduciaries can explain that they are required to know their client and then review all available solutions even if they can’t necessarily provide that product or service and only recommend those that are actually in their best interest. Under DOL the easiest to understand example would be a suitable investment may cause a client to rollover their 401(k) to an IRA. A fiduciary would have to point out that it may be less expensive to leave their 401(k) at their employer than any option available in a rollover. One is suitable; the other is an example of best interest.

Manuel Andrade, senior vice president of wealth management at People's United Wealth Management
A lasting benefit of the Obama Administration's DOL Fiduciary rule is that advisors and their clients have a heightened awareness of the need to put a client's best interests first. Even full repeal of the rule will not erase that.  At a minimum, advisors will inquire more about their clients' needs and goals, and their clients will ask more about the advisors' fees. 

Some financial advisory firms will likely continue down the path of acting more like RIAs and Trust investment advisors in putting a client's best interests first.  This is standard practice for our People's United Wealth Management clients.  Still, the work done so far by firms to prepare for the rule has helped raise the bar on investment advice and will benefit both retirement investors and the investment industry.
Advisors who are not already operating under the best interest standard in place for RIAs and Trust investment advisors need to be proactive in telling clients how the delay and potential repeal will affect their services.  Advisors should explain how they currently learn about a client's goals, make recommendations and add value for the fees paid.  Advisory firms were already taking steps to support their advisors with a more disciplined process for counseling clients, and should continue with some of these efforts.  For those of us who are trust investment advisors or RIAs, it may be more business as usual, but even we are moving towards additional discipline and disclosures.

Cliff Moyce, global head of financial services at DataArt
The Dodd-Frank Act was intended to reduce levels of systemic risk in the banking sector, such that we would never again see highly leveraged balance sheet positions causing the failure of banks, and those failures causing contagion in other institutions and whole economies. 

Unfortunately, the Act became an unintended assault on lending to businesses with capital adequacy provisions causing banks to stop lending for commerce. Loans were called in or withheld; overdrafts, materials financing and factoring agreements were not renewed; and, as a result, rates of business failures exploded.  In some regions, banks refusing to fund the growth (i.e. not the decline) of small and medium sized enterprises has become the biggest single cause of business failure. The Act and much of the other related regulation since the financial crash also caused banks to divert most of their discretionary project budgets towards regulatory compliance initiatives – including meeting the needs of more demanding regulatory reporting. 

Regardless of your personal and professional view on the value of increased regulatory reporting (Is anyone doing anything with the data?  What difference has it made?), diverting funding away from projects that could improve products and services to customers should be a concern for everyone. It is in no-one’s interests for our banks to become moribund. 

Another highly ironic unintended consequence of the whole explosion in regulation (including Dodd-Frank, Basel X, EMIR, MiFid etc) has been that it punishes small banks and financial institutions more than the big guys.  Ie the institutions that represent the biggest source of systemic risk are impacted less negatively than those that present almost no systemic risk. This is because the smaller institutions lack the resources (people, money, skills) to do the wholesale legacy system upgrades and rationalisations, and new systems developments to meet regulatory reporting and risk management requirements.  Review and reform is very much required, otherwise our western banking system, business environments and economies will be stuck in a nose dive that could become a death spiral. 

We should welcome a review of Dodd Frank and the Volcker Rule, and all other recent financial regulation.  We will not see proprietary trading in banks returning to the extent that it puts the whole institution at risk (when it does come back – and it will come back - there will be severe ring-fencing of assets at risk) but we should all want to see our businesses better financed with a wide range of financial products.