From Bank Stocks To Your Bank Account: Here's Everything You Need To Know About The Fiduciary Rule

The Rule

The Fiduciary rule put in place by former President Barack Obama's administration was meant to take to task financial advisers, who made recommendations based on the fees and the commissions they would receive. The final version of the conflict of interest rule, initially proposed in April 2015, was published on April 6, 2016.

The rule called upon those who advised on retirement savings plans to adhere to the fiduciary standards, as opposed to the suitability standard, in a bid to safeguard the interests of individuals saving for retirement through their employment-sponsored retirement plans or through Individual Retirement Accounts, or IRAs. The suitability standard calls for recommending products suitable to meet client's goal. Additionally, the advisors were also required to disclose any conflict of interest.

According to estimates, conflicts of interest lowered returns of participants by 1 percent a year resulting in a $17 billion loss annually.

How Does The Fiduciary Rule Impact Various Stakeholders?

1. Retirees

For participants in 401(k) plans, the fiduciary rule would have meant more transparency and relief, as this avenue of saving does not give the retirees much control over the relationship. They have to do with the advisor their employer chooses to manage their retirement plan.

2. Advisors

Advisors could be a broker, who is usually a registered representative of a broker dealer, or a registered investment advisor, or RIA. The broker is regulated by FNRA as opposed to the RIAs, which are regulated by the SEC. Brokers are paid commissions from recommended investments but RIAs are paid a fee based on percentage of plan assets under management.

Some of the top retirement advisors include:

• Ameriprise Financial, Inc. AMP
• Bank of America Corp BAC's Merrill Lynch.
• Goldman Sachs Group Inc GS's Investment Management Unit.
• JPMorgan Chase & Co. JPM.
• Morgan Stanley MS's Morgan Stanley Wealth Management.
• UBS Group AG (USA) UBS's UBS Financial Services Inc.
• Wells Fargo & Co WFC's Wells Fargo Advisors, LLC.

Advisors, whose compensation varies based on investment options they recommend, may now have to comply with the best-interest Fiduciary standard. The tendency with advisors currently is that they recommend to their clients expensive, complicated investment vehicles such as a variable annuity or non-traded REITs, as these fetch higher fees. However, most retirees may not need such products, which only go onto make the advisor richer due to the hefty fees involved.

Apart from the fee charged for their service, another way how fee-only advisors can fleece you off your hard-earned money is by putting you onto an actively managed mutual funds. These funds add about 1 percent or more to the fees charged. At the same time, index funds come cheap but is shunned by most advisors.

Employers Or Sponsors Of 401k Plans

If the advisor used by an employer is a broker, under the Fiduciary rule, employers may have to foot additional bill due to the additional paper work involved. The employers would now need to vet the advisor and their compensation structure.

Banks/Financial Institutions

Banks and financial institutions could have to bear compliance costs associated with the new rule. A bankdirector.com report, citing investment bank Keefe, Bruyette & Woods, said Morgan Stanley could face a two-year implementation cost of $2,500 per financial advisor and $600 per year per advisor for ongoing compliance. This may force banks making very little profit from its asset management business to sell or outsource their compliance. The rule may also force consolidation, as banks would want bigger operations to make the compliance cost worth it.

Schedule Gone Haywire

Compliance with the rule would have been mandatory in April 2017, a year after it was published in the Federal Register. With the executive order and the subsequent court ruling, it now looks adherence to the timeframe could be pushed back. Height Securities believes the effective date would be delayed by six months.

"During this time, Congress will work to pass legislation designating the Securities and Exchange Commission to take the lead in developing a fiduciary standard for all investment accounts; however, given the early contentious nature of the 115th Congress, legislation seems like an unlikely outcome at this point. This means that DOL will either rescind or materially revise its Fiduciary Duty rule based on its legal and economic analysis," the firm added.

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