While DOL Delays, State Fiduciary Cops Find First Prey
February 19, 2018 by Scott Martin
Massachusetts versus Scottrade pushes the long battle over fiduciary duty to the states, where it looks like the regulators have sharpened their teeth. Expect turbulence.
If your firm invested substantial time and money trying to get ahead of the abortive Labor Department “fiduciary rule,” those resources may not have been completely wasted after all.
Under Donald Trump, the federal regulators have been supremely indifferent to enforcing the rule, rolling the official start date on some provisions back from last April to June and then to next year.
But with parts of the rule still on the books, state regulators are charging into the gap. Massachusetts just went up against Scottrade — now a unit of sprawling TD Ameritrade — for failing to respect the “impartial conduct standard” after the June deadline.
It’s a relatively trivial complaint with deeper implications for the future. Scottrade let a few internal sales contests that applied to client IRAs run past June 9. Because reps were offered prizes to sell into those accounts, the contests ignored client interests.
We’ll see how the firm treats retirement accounts now that its ownership has changed and the political landscape keeps evolving.
For now, if the regulator has its way, the whole affair looks like a simple “fine and forget” lapse. You abstract the retirement accounts from your sales culture. You revert to the rules you were already preparing to follow before the election hit the brakes.
And if other states pile on, the cumulative fines can get expensive. Scottrade does business nationwide so in theory its activities are vulnerable to scrutiny from 50 different angles at once.
Massachusetts, home of regulation-friendly Elizabeth Warren, is only the first state to speak up. California could easily step forward next, followed by Washington State, Oregon, Illinois and others.
Firms that celebrated when the Trump administration kicked federal enforcement down the road now need to keep an eye on the map. It’s arguably an even bigger regulatory headache than complying with a single federal rule across all offices and all accounts.
I’ve been saying for years that voluntary compliance is a marketing advantage for firms willing to promote themselves as somehow more client-friendly than competitors who dragged their feet. Perversely, injecting state-by-state uncertainty into the mix opens up a new edge for advisors that only do business in a few “friendly” jurisdictions, while multiplying risk for nationwide networks.
A generation of advisors grew up in a world where state distinctions receded in the face of more unified federal rules — after all, the bigger you get, the more likely you are to trigger SEC registration minimums, at which point chasing a cross-border clientele starts looking like a more reasonable proposition.
But if some states enforce big rules that others ignore, it’s not hard to imagine that process reversing. Wealth management could become more localized, more like trust services or insurance. That’s obviously a more fragmented world, creating inefficiencies within the industry as a whole as well as opportunities for niche players to prosper in the gaps.
Of course, it remains to be seen. Massachusetts, at least, is a notorious old money center with disproportionate AUM at stake. If this is an isolated bit of grandstanding, file it under “fine and forget.”
Within the state, at least, this isn’t the last word. Local regulators are ready for war. They’re blaming the Labor Department for refusing to follow its own rules and they’re plunging into what they see as a breach.
Labor can always simply retract the rule for further debate, pulling the rug out from under the states. But as we’ve seen, all it takes is a shift in the political wind to reverse that scenario and raise the fiduciary flag as high as ever.
And next year the part of the rule advisors really hate — the class action lawsuits — is currently scheduled to take effect. Once again, the clock is ticking. It’s been ticking at various volumes since 2010 at this point.
If the regulators and Congress won’t provide permanent clarity, I guess it’s up to the industry to assert leadership and set its own de facto standard.
You know your competitive sweet spot. You know what your clients and prospects want and what they don’t care about.
Give them that. Brag about it. Voluntarily prove that you’re that promise.
If the free market is your ultimate regulator, comply with its dictates. Be transparent. Show your work to the people who pay your fees. Build trust.
It sounds hard. At this point, it’s probably easier than rolling with the waves for another decade.
